This is an article about Open Source Finance. It's an idea I first sketched out at a talk I gave at the Open Data Institute in London. By 'Open Source Finance', I don't just mean open source software programmes. Rather, I'm referring to something much deeper and broader. It's a way of framing an overall change we might want to see in the financial system. To illustrate this, I set up an analogy between computer systems and economic systems, and I then explore what financial 'code' might be. I then sketch out the five pillars that could underpin an open finance movement.
Computer systems as economies
Computer systems are great metaphors for economic systems. That's because, in a sense, a computer is a microcosm of our economy, albeit one that is a lot more predictable and controllable. Economies, at some basic level, are based upon people using energy to extract useful stuff from the earth, using tools, procedures, systems of rules and labour to activate the earth's productive potential. Likewise, computer systems rely on taking inputs of energy (the computer plugged into the electricity grid) and combining it with software code (a kind of abstraction of human organisation), in order to activate the assemblage of physical hardware (signifying a latent productive potential) towards productive tasks, when willed to do so by a user of the computer.
We constantly interact with computers, but most people in the world do not perceive themselves as programmers of computers. They mostly perceive themselves as users of computers that others have programmed. And even if they wanted to dig deeper, they'd find that much of the software they use is proprietary, locked up in secretive, opaque, even obfuscated formations. Windows looks like a friendly interface, but you cannot see what it does, or how it does it. It's a useful intermediary interface between you and the inner workings of your computer, but it's also a hard-shelled barrier.
The Financial Status Quo: Power concentrated in intermediaries
code is the organising rule system that steers energy into activating hardware
towards particular ends. So, extending this as an analogy, what might financial
'code' look like? A financial system, in a basic sense, is supposed to arrange
for surplus resources (extracted from the earth), to be redistributed (in the
form of money) via financial instruments (often created by financial
intermediaries like banks and funds), into new economic production activities
('investments'), in exchange for a return over time.
Here, for example, is a rough financial circuit: A person manages to earn a surplus of money (a symbolic claim on real things in the world), which they deposit into a pension fund, which in turns invests in shares and bonds (which are conduits to the real world assets of a corporation), which in turn return dividends and interest over time back to the pension fund, and finally back to the person.
Shares and bonds are extractive financial conduits that plug into a corporate structure, but if you look for how they are coded, you'd discover they are built from legal documents that are informed by regulations, acts of parliament, and social norms. They are supported by IT systems and all manner of payments systems and auxiliary services.
But it takes more than clearly-worded documentation to be able to create financial instruments. The core means of financial production, by which we mean the things that allow people to produce financial services (or build financial instruments), includes having access to networks of investors and companies, having access to specialist knowledge of financial techniques, and having access to information. It's these elements that banks and other financial intermediaries really compete over: They battle to monopolise relationships, monopolise information, and to monopolise specialist knowledge of financial techniques.
And indeed, that's why production of financial services mostly occurs within the towering concrete skycrapers of the 'financial sector', spinners of the webs of the code that is mostly unknown to most people. We have very little direct access to the means of financial production ourselves, very little say in how financial institutions choose to steer money in society, and very little ability to monitor them.
We have, in essence, a situation of concentration of power in financial intermediaries, who in turn reinforce and seek to preserve that power structure. And while I may be happy to accept a concentration of power in small specialist industries like Swiss watchmaking, a concentration of power in the system responsible for redistributing human society's collective resources into new investments is not a good thing. It's systematically breaking our planetary hardware by steering money into destructive activities, whilst helping to fuel a culture of bland individualistic materialism in increasingly atomised communities.
The Open Source movement started with software - and in particular with the concept of copyleft and free licensing - but the principles extend far past software. At core, Open Source is a philosophy of access: access to the underlying code of a system, access to the means of producing that code, access to usage rights of the resultant products that might be created with such code, and (in keeping with the viral quality of copyleft) access to using those products as the means to produce new things. Perhaps the ethos is best illustrated with the example of Wikipedia. Wikipedia has:
- A production process that encourages participation and a sense of common ownership: We can contribute to Wikipedia. In other words, it explicitly gives us access to the means of production
- A distribution process that encourages widespread access to usage rights, rather than limited access: If you have an internet connection you can access the articles. We might call this a commons
- An accountability model that offers the ability to monitor and contest changes: An open production process is also one that is more transparent. You can change articles, but people can monitor and contest your changes
- A community built around it that maintains the ethic of collaboration and continued commitment to open access. It's more than just isolated individuals, it's a culture with a (roughly) common sense of purpose
- Open source code that can be accessed and altered if the current incarnation of Wikipedia doesn't suit all your needs. Look, for example, at RationalWiki and SikhiWiki
You can thus take on five conceptually separate, but mutualistic roles: Producer, consumer, validator, community member, or (competitive or complementary) breakaway. And these same five elements can underpin a future system of Open Source Finance. I'm framing this as an overall change we might want to see in the financial system, but perhaps we are already seeing it happening. So let's look briefly at each pillar in turn.
Very few of us perceive ourselves as offering financial services when we deposit our money in banks. Mostly we perceive ourselves as passive recipients of services. Put another way, we frequently don’t imagine we have the capability to produce financial services, even though the entire financial system is foundationally constructed from the actions of small-scale players depositing money into banks and funds, buying the products of companies that receive loans, and culturally validating the money system that the banks uphold. Let’s look though, at a few examples of prototypes that are breaking this down:
- Peer-to-peer finance models: If you decide to lend money to your friend, you directly perceive yourself as offering them a service. P2P finance platforms extend that concept far beyond your circle of close contacts, so that you can directly offer a financial service to someone who needs it. In essence, such platforms offer you access to an active, direct role in producing financial services, rather than an indirect, passive one.
- There are many interesting examples of actual open source financial software aimed at helping to fulfil the overall mission of an open source financial system. Check out Mifos and Cyclos, and Hamlets (developed by Community Forge's Matthew Slater and others), all of which are designed to help people set up their own financial institutions
- Bitcoin: There’s a reason why there is so much hype around Bitcoin. It’s a currency that people have produced themselves. As a member of the Bitcoin community, I am much more aware of my role in upholding – or producing – the system, than I am when using normal money, which I had no conscious role in producing
- The Open Bank Project is trying to open up banks to third party apps that would allow a depositor to have much greater customisability of their bank account. It's not aimed at bypassing banks in the way that P2P is, but it's seeking to create an environment where an ecosystem of alternative systems can plug into the underlying infrastructure provided by banks
Pillar 2: Widespread distribution
Financial intermediaries like banks and funds serve as powerful gatekeepers to access to financing. To some extent this is a valid role - much like a publisher or music label will attempt to only publish books or music that they believe are high quality enough - but on the other hand, this leads to excessive power vested in the intermediaries, and systematic bias in what gets to survive. When combined with a lack of democratic accountability on the part of the intermediaries, you can have whole societies held hostage to the (arbitrary) whims, prejudices and interest of such intermediaries. Expanding access to financial services is thus a big front in the battle for financial democratisation. In addition to more traditional means to building financial inclusion - such as credit unions and microfinance - here are two areas to look at:
- - Crowdfunding: In the dominant financial system, you have to suck up to a single set of gatekeepers to get financing, hoping they won’t exclude you. Crowdfunding though, has expanded access to receiving financial services to a whole host of people who previously wouldn’t have access, such as artists, small-scale filmmakers, activists, and entrepreneurs with no track record. Crowdfunding can serve as a micro redistribution system in society, offering people a direct way to transfer wealth to areas that traditional welfare systems might neglect
- - Mobile banking: This is a big area, with important implications for international development and ICT4D. Check out innovations like M-Pesa in Kenya, a technology to use mobile phones as proto-bank accounts. This in itself doesn’t necessarily guarantee inclusion, but it expands potential access to the system to people that most banks ignore
Pillar 3: The ability to monitor
Do you know where the money in the big banks goes? No, of course not. They don’t publish it, under the guise of commercial secrecy and confidentiality. It’s like they want to have their cake and eat it: “We’ll act as intermediaries on your behalf, but don’t ever ask for any accountability”. And what about the money in your pension fund? Also very little accountability. The intermediary system is incredibly opaque, but attempts to make it more transparent are emerging. Here are some examples:
- - Triodos Bank and Charity Bank are examples of banks that publish exactly what projects they lend to. This gives you the ability to hold them to account in a way that no other bank will allow you to do
- - Corporations are vehicles for extracting value out of assets and then distributing that value via financial instruments to shareholders and creditors. Corporate structures though, including those used by banks themselves, have reached a level of complexity approaching pure obsfucation. There can be no democratic accountability when you can’t even see who owns what, and how the money flows. Groups like OpenCorporates and Open Oil though, are offering new open data tools to open up the shadowy world of tax havens, ownership structures and contracts
- - Embedded in peer-to-peer models is a new model of accountability too. When people are treated as mere account numbers with credit scores by banks, the people in return feel little accountability towards the banks. On the other hand, if an individual has directly placed trust in me, I feel much more compelled to respect that
Pillar 4: An ethos of non-prescriptive DIY collaboration
At the heart of open source
movements is a deep DIY ethos. This is in part about the sheer joy of producing
things, but also about asserting individual power over institutionalised
arrangements and pre-established officialdom. Alongside this, and deeply tied
to the DIY ethos, is the search to remove individual alienation: You are not
a cog in a wheel, producing stuff you don't have a stake in, in order to
consume stuff that you don't know the origins of. Unalienated labour
includes the right to produce where you feel most capable or excited.
This ethos of individual responsibility and creativity stands in contrast to the traditional passive frame of finance that is frequently found on both the Right and Left of the political spectrum. Indeed, the debates around 'socially useful finance' are seldom about reducing the alienation of people from their financial lives. They're mostly about turning the existing financial sector into a slightly more benign dictatorship. The essence of DIY though, is to band together, not via the enforced hierarchy of the corporation or bureaucracy, but as part of a likeminded community of individuals creatively offering services to each other. So let's take a look at a few examples of this
- BrewDog's 'Equity for Punks' share offering is probably only going to attract beer-lovers, but that's the point - you get together as a group who has a mutual appreciation for a project, and you finance it, and then when you're drinking the beer you'll know you helped make it happen in a small way
- Community shares offer local groups the ability to finance projects that are meaningful to them in a local area. Here's one for a solar co-operative, a pub, and a ferry boat service in Bristol
- We've already discussed how crowdfunding platforms open access to finance to people excluded from it, but they do this by offering would-be crowdfunders the chance to support things that excite them. I don't have much cash, so I'm not in a position to actively finance people, but in my Indiegogo profile you can see I make an effort helping to publicise campaigns that I want to receive financing
The right to dissent is a crucial
component of a democratic society. But for dissent to be effective, it has to
be informed and constructive, rather than reactive and regressive. There is
much dissent towards the current financial system, but while people are free to
voice their displeasure, they find it very difficult to actually act on their
displeasure. We may loathe the smug banking oligopoly, but we're frequently
compelled to use them.
Furthermore, much dissent doesn't have a clear vision of what alternative is sought. This is partially due to the fact that access to financial 'source code' is so limited. It's hard to articulate ideas about what's wrong when one cannot articulate how the current system operates. Most financial knowledge is held in proprietary formulations and obscure jargon-laden language within the financial sector, and this needs to change. It's for this reason that I'm building the London School of Financial Activism, so ordinary people can explore the layers of financial code, from the deepest layer - the money itself - and then on to the institutions, instruments and networks that move it around.
access to this source code though, we need the ability to act on it. A core
principle of OpenSource movements is the Right to
Fork. This is the ability to take prexisting code, and to modify it or
use it as the basis for your own. The Right to Fork is both a check on
power, but also a force for diversity and creativity.
In the mainstream financial system though, there are extensive blocks on the right to fork, many of them actively enforced by financial regulators. They won't allow new banks to start, and apply inappropriate regulation to small, new financial technologies. The battle for the right to fork therefore, is one that has to also be fought at the regulatory level. That's why we need initiatives like the Disruptive Finance Policy program.
The Right to Fork needs to be instilled into the design of any alternatives to mainstream finance too though. I don't want to replace a world where I'm forced to use national fiat currencies with one in which I'm forced to use Bitcoin. The point is to create meaningful options for people. (To the credit of the original designers of Bitcoin, the right to fork has indeed been built in, and there has been significant use of the original Bitcoin sourcecode to create other cryptocurrencies, albeit it takes more to create a currency than merely deploying new code).
Ahoy! We set sail for the Open seas
We may be in the early phase of a slow-moving revolution, which will only be perceptible in hindsight. As projects within these five pillars emerge, the infrastructure, norms and cultural acceptance for more connected, creative, open financial system may begin to emerge and coalesce into reality.
*This article was crossposted with thanks to The Heretics Guide to Global Finance: Hacking the Future of Money