Overview

Key points

• Financializing value in this context means capturing things considered as intrinsically valuable, such as some artistic or social value, in units of financial value capable of being allocated. This contrasts with the traditional definition of financialization as the expansion of the financial sector, which we cover elsewhere.

Steel-manning subclaim 1: more financialization of non-financial value is itself desirable

• Financialization is useful as it allows us to effectively direct resources towards the things we care about.
  • The dysfunctionalities present in our current financial sector are not inherent to financialization itself. Financial value can be a powerful enabler of other types of value creation, without any of the negative impacts on other values (e.g. a well functioning environment) currently associated with money and finance.
  • Besides, whether we like it or not, we live in a financialized world; our only recourse is to embrace the reality of hyper-financialization and try to make it work for everyone.

Steel-manning subclaim 2: the current monetary and financial systems are deficient in their ability to capture what we think is really valuable

• Value can be better or more extensively financialized than is possible under the current system.
  • This is shown by the funding shortfall for things that matter to us e.g. education and climate change prevention; and there are cases where significant resources are devoted to things that don’t have social value e.g. the whole host of financial instruments totally detached from the productive economy.
  • Left to their own devices markets won’t create a socially optimal allocation of resources, as market prices won’t naturally “internalize” externalities such as environmental damage.
  • Positive social impacts, e.g. of art, are often not internalized into market prices.

Steel-manning subclaim 3: Web3 technology the route to addressing these deficiencies

• Web3 offers new means of financializing value through tokenization. We're not touching on those targeting public goods funding, as we've explored these elsewhere.
  • NFTs: By locking artistic value into the NFT format and selling this directly to buyers, the true value of art can be better financialized as artists receive financial compensation for their work that is actually commensurate with its value.
  • Alternative currencies: Communities can come together and decide on the rules for how they represent value. This can be done by creating tokens to represent all sorts of value and, in turn, better manage resource flows between them.

Evaluating subclaim 1: more financialization of non-financial value is itself desirable (likely false, either totally or mostly)

• There are many reasons to be skeptical of this claim.
• In trying to financialize all that we hold valuable we risk losing touch with what makes it valuable in the first place. The essence of some value isn't reducable in this way; can we really capture all of the value of the natural world in financial terms, for example? This depends on one's philsophical understanding of what value is, or certain values are.
• More financialization may lead to a world we find undesirable, irrespective of the level of non-financial value it generates
  • Financialization may perpetuate self-serving dynamics we see in today’s society as people seek to game the system to optimize for the rewards for value generation rather than value itself.
  • There is concern about becoming a “market society”, where the mentalities, relations and incentives of the market come to dominate all areas of our lives.
• There may be opportunity costs to more financialization. It may just be a suboptimal route to generating more non-financial value, compared with alternatives.

Evaluating subclaim 2: the current monetary and financial systems are deficient in their ability to capture what we think is really valuable (true)

• There is clear evidence of this in the world, with the unfolding environmental catastrophe being the most obvious.

Evaluating subclaim 3: Web3 technology is the route to addressing these deficiencies

• NFTs
  • NFTs do not guarantee artists better remuneration for their work.
    • Minting NFTs costs many smaller artists more money than they make and there is still a reliance on centralized marketplaces.
    • The technical complexity of NFT creation means that many artists are excluded or forced to partner with more tech-literate others in often extractive agreements.
    • The apparent pop of the wider crypto bubble, which was the source of high rates of return for some artists using NFTs, has been accompanied by a slump in the NFT market.
  • Digital marketplaces may help artists reach new audiences but are not unique to web3 and in fact already exist.
  • NFT markets are a private market just like any other, open to the same exploitation by middle-men and “whales”.
  • We must distinguish between the social value of art and “the arts”. The positive externalities of the arts sector are to some degree nonexcludable, creating a public goods problem which cannot be addressed through markets.
  • Centralized arts funding is a far more promising solution to this problem than tokenization.
• Alternative Currencies
  • Past a certain point of complexity, every state has coalesced on a single, state-backed numeraire. We always end up with exchange problems otherwise.
    • Many societies in history have had systems where alternative currencies could be created, but these did not work well. They were highly susceptible to fraud, failure, and created difficulty trying to trade between regions which used different monetary systems.
  • Using tokens to represent goods such as reputation has the potential to turn dystopian, as the social credit system in China shows.
  • The utility of atlerantive currencies requires they have a material impact on obtaining other things we value. This means we either need something akin to the social credit system, where non-tradeable tokens impact access to other goods in a potentially dystopian manner, or a tradeable market for tokenized currencies which leads us to the exchange problem above.
  • Something needs to underpin the value of a currency for it to be meaningfully worth something. In traditional currency terms the value of a currency is underpinned by the fact that the state collects tax in that currency. The state’s monopoly of violence can also backstop trust for trade, as it can enforce the terms of contracts.
    • Either alternative currency systems rely on radical shifts in individual ways of being such that everyone becomes entirely trustworthy and cooperative all the time, or they must rely on some state-like entity to underpin them.
      • The former case is such a radical shift that if it were to take place, the nature of our currency system would pale as a source of impact.
      • The latter (more likely) case has huge implications; it requires either massive political action such that existing states adopt new currency systems or secession by small groups to use their own currencies.
        • If we can get a state to act so radically as to shift its entire currency system, then why not just get it to unilaterally legislate away our problems by other means?
        • States don’t tend to view secession very kindly; the community enforcement activity required to monopolize violence and underpin a stable currency system would inevitably violate the laws of existing nations. Plus, they'd still need to e.g. pay tax in mainstream currency.
  • Even if alternate currencies were the answer, there’s no need for the blockchain. All currencies which do not serve the purpose of direct exchange can be tacked onto existing monetary systems without the need for blockchain.
  • The idea of internalizing externalities has existed in orthodox economics for some time. There are lots of “traditional” mechanisms for doing this e.g. taxes and subsidies. They're not used enough because of political will, not technological shortfall.
  • A further reason why traditional currencies fail to capture so much non-financial value is that much of what we deem valuable is incredibly hard to measure. The measurement problem is the hard part. If we can solve this, how we then represent value i.e. traditional or alternative currency is incidental.
  • Alternative currencies partly seek to address the lack of democratic rules for recognising diverse value. But doing this doesn't need blockchain. Remuneration rights funds and participatory budgeting methods fix this issue more easily if well designed.
  • The reason our current monetary and financial systems don’t adequately “financialize” the totality of social value is not a technical question of the medium of value representation (i.e. money) they use, but is more of a political and social question of how they are structured and governed.

Evaluation: Largely false (medium-high confidence)

Web3 does not seem to provide many plausible means for better financializing value. NFTs have failed to live up to their promise regarding value distribution in practice, and even the theory behind them is spurious upon closer examination. Both the economics and political economy of alternative currencies appear highly questionable such that we have a low confidence in their capability to work in practice. There may be room for them to act as a complementary layer on top of traditional currency systems, for example as enhanced versions of eBay seller ratings carried through wider society. This in one sense might be understood as financializing value better. But, as China’s social credit system shows it is questionable whether this would even be desirable at all, and such systems certainly do not appear to require Web3 tokens to function.

The main reason we are giving our evaluation “medium/high” confidence rather than simply “high” is that we have had to grasp our understanding of how alternative currencies are meant to function in practice from publications by alternative currency projects, which we have found lacking in the meaningful detail required for a deep understanding of how they are intended to function at the social scientific level. Rather than cynically assume that this is because such detail does not exist, we instead wish to acknowledge that we are evaluating an incomplete picture and express our desire to engage those working on alternative currency design in productive discourse.

Evidence of claim being made

CoinDesk. ‘The Financialization of Everything: DeFi-Ning the Next Era of Financial Services’, 19 May 2022. https://www.coindesk.com/sponsored-content/the-financialization-of-everything-defi-ning-the-next-era-of-financial-services/.

“One of the key elements of DeFi is that it can go into areas that aren’t covered by TradFi. One is that it can create an underlying value for assets that were previously untouched by finance. It can make these assets liquid and fungible and so be used for transactions in the traditional sense, such as collateral for loans or margins for trading.”

Macdonald-Korth, D., V. Lehdonvirta, and E. Meyer. ‘The Art Market 2.0: Blockchain and Financialisation in Visual Arts’, 2018. https://ora.ox.ac.uk/objects/uuid:a4c8847c-6755-4781-ba9c-9c0864608201.

“Art market liquidity and value are likely to soar if digital ledger technologies are successfully introduced, creating new side industries, such as a boom in art-based lending, and making art an integral part of the financial industry.”

Deloitte Private and ArtTactic ‘Art & Finance Report 2021’ https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/lu-art-finance-report-2021.pdf

“Tokenization, however, has the potential of transforming non-bankable assets into liquid assets, making them accessible to a much wider audience.

[...]

[Distributed ledger technology] can not only improve the way art is traded by keeping a secure digital record of every owner, but it can also enable new forms of ownership and introduce smaller players into the market...This will shift the paradigm of art investment and the regulations tied to them, creating a more accessible, fair, and democratized art ecosystem.”

The MetaCurrency Project 'FAQ’ https://metacurrency.org/faq/

"Entire communities — people, villages, cities, regions, companies, NGOs, public services, countries — are undermonetized. They do have wealth –competencies, resources, time, love, genius, assets, entrepreneurship skills, culture– but exchanges don’t happen. Not because of lack of wealth, but because of lack of transactional units: money...Open currencies allow for sufficient, non-scarcity based systems for tradable wealth."

Full analysis

Some preliminary notes

What is “financializing value”? Here we use the term to refer to capturing things considered as intrinsically valuable, such as some artistic or social value, in units of financial value capable of being allocated. In other words, attaching financial value to forms of non-financial value. For example, a project might create tokens designed to capture the social value of land that is free from debris and pollution, or the value of a piece of artwork. This analysis brackets deeper philosophical questions around how we should understand value as a concept and what should count as valuable. It focuses on things whose value is fairly uncontroversial, such as creating beautiful art and avoiding climate breakdown). This definition contrasts with the traditional definition of financialization as the expansion of the financial sector, which we cover elsewhere.

We use ‘monetary and financial systems' to refer to the economic infrastructure underpinning how we represent and exchange value. We also assume that these claims refer to economically developed countries unless otherwise stated; as these are where monetary and financial systems are supposed to work best they are the most appropriate contexts in which to evaluate the strongest versions of the claims.

Subclaims:

• P1: More financialization of non-financial value is itself desirable
• P2: The current monetary and financial systems are deficient in their ability to capture what we think is _really _valuable; we could financialize value better or more extensively
• P3: Web3 technology is the route to addressing these deficiencies

Steel-manning the claims

P1: More financialization of non-financial value is desirable

Financialization itself is a useful thing, as it allows us to effectively direct resources towards the things that matter in our societies. Financialization creates a common value metric for making allocation decisions; when we can think of everything in financial terms it allows us to more easily divide resources between our social priorities. It also allows for financial instruments to facilitate investment into valuable activities, for example as means to allow long term borrowing to fund investment. It is exactly these mechanics which underpin modern economies, and they have seen economic development give rise to huge increases in living standards. Note, this holds not just under a conception of markets being the primary driver for development, but financialization is also required for governments to make effective allocation decisions. Governments need to know how to trade-off investment in health versus education or between certain industries given finite resources, and financialization is a means of doing this.

It is of course true that financialization has become somewhat of a dirty word to many in the modern era. It is associated with vast financial sector profits divorced from productive economic activity in the real economy, and the instability of financial bubbles and crashes. However, the problem isn’t that money or financial assets are being used as a numeraire to mediate between other forms of value, the problem is how. None of these dysfunctionalities are inherent to financialization itself, as can be seen by historical examples such as the investment-led approach to economic development favored by the “Asian Tiger” economies in the late 20th century, where governments used financialization as a tool to direct resources to the areas required for economic development (and without the bubble dynamics we saw in the West in the lead up to the 2008/9 financial crisis)¹. We can live in a world where financial value is a powerful enabler of all other types of value creation, without any of the negative impacts on other values (e.g. a well functioning environment) currently associated with money and finance.

An alternative argument in support of this claim is, whether we like it or not, we live in a financialized world. Pandora's box has already been opened, and retracting simply isn’t an option. Under these circumstances our only recourse is to embrace the reality of hyper-financialization and try to make it work for everyone. We can’t fight against the tide, we can only steer it for our benefit.

P2: The current financial system is deficient in its ability to capture what we think is really valuable

We could financialize value better or more extensively than is possible under the current system. This claim can be supported both intuitively and through more academic concepts. First, basic intuition. We might ask ourselves, is there currently enough monetary and financial support for the whole spectrum of what we think is valuable? In the inverse, are there cases where significant monetary and financial resources are devoted to things we don’t think have much social value?

We can very plausibly answer no to the first question. As an example we might see the shortfalls of funding for education², the arts or even climate change prevention³ common even in many rich nations. We can just as plausibly answer yes to the second. Consider the complex financial derivatives of subprime mortgages which underpinned the 2008 financial crash⁴ and the host of other financial instruments totally detached from the productive economy which exist today⁵. In sum: there’s a gap between where our current monetary and financial systems direct resources, and where we’d intuitively think resources should go if we only cared about the things that are truly valuable in life. This can be seen as powerful evidence that our societies are not adequately financializing value. If they were, this gap would not exist.

We can also draw on economic concepts, particularly that of externalities. Externalities refer to indirect costs or benefits accruing to third parties from the activity of other actors. They can be positive, for example the benefits to my neighbors of me making my front garden look beautiful, or they can be negative, such as the air pollution resulting from car use. It is commonly accepted across even orthodox economics that markets have negative externalities which can lead to market failures; left to their own devices markets won’t create a socially optimal allocation of resources, as market prices won’t naturally “internalize” externalities. This is because, as externalities don’t show up as direct costs to firms, they have no incentive to price them in (even if they could measure and incorporate them easily, which is another matter entirely).

Environmental damage is one prominent case of negative externalities not being fully internalized into prices. As we note in our analysis around the Web3 and the public goods problem, the price of carbon does not reflect the environmental damage of emissions. This also holds for almost every product utilizing carbon intensive inputs. For example, a McDonald’s Big Mac would cost considerably more if the environmental impact of intensively farming cows were fully internalized⁶.

Art provides another interesting economic case that something is amiss. Art generates significant social value, and yet many artists remain poor even as they become reasonably well known. At one level we may consider this to be a further failure to internalize externalities, with the positive social impacts of artistic creation not being internalized into the prices artists are paid for their work. We can also draw on the Marxian notion of surplus value extraction⁷, to point to another economic failure. When applied to creative value, this notion lays the blame at the door of the middlemen such as record labels in the music industry, who buy up intellectual property and extract the monetary gains from its consumption while only passing a fraction of this onto the original producers⁸. Here, inadequate financialization of value is less an issue of value not being captured, but of a system which does not see it captured by the correct actors. One may argue that this is not really a problem of inadequate financialization; in many areas of, for example, the overall music industry, financial value generation does seem to reflect broader social value generation even if this financial value isn’t shared with artists to what many would deem a fair degree. However, given discussions of Web3’s power to benefit artists through fairer distribution is treated as a matter of financialization by proponents⁹ we will avoid getting bogged down by semantics and follow in the same vein for our analysis. Note here that, whatever one’s view of Marxian economics or the notion of surplus value extraction, the seeming disconnect between the relative impoverishment of many artists and the huge value we attach to art at the social level should be an indicator that something is going wrong with respect to the financialization of this value.

P3: Web3 technology is the route to addressing these deficiencies

Web3 offers new means of financializing value through tokenization. This refers to creating digital representations of value (tokens) on the blockchain. The two forms of tokenization which we’ll focus on for this analysis are NFTs and alternative currencies. Note, much of the Web3 work around public goods funding is also a matter of financializing their value, however we won’t deal with them here as we give this area its own analysis elsewhere.

NFT stands for “non-fungible token”. These are unique digital assets stored on the blockchain. Most tokens are fungible, meaning one token is the same as the next; they’re interchangeable. NFTs, in contrast, have a unique digital signature cryptographically encoded into them. This means that even two qualitatively identical NFTs will not be numerically identical. Two identical pictures can become distinct digital assets, for example.

NFTs are best known for their use in creating tradeable digital artwork. The major purported advantage here is that NFTs can be traded in a peer-to-peer fashion, meaning that they allow artists to retain all of the financial value of their artwork. Artists can lock artistic value into the NFT format and sell this directly to those who recognise the true level of this value, receiving the entirety of the proceeds from the sale. In this manner, the true value of art can be better financialized as artists receive financial compensation for their work that is actually commensurate with this value.

Second is the design of alternative currencies, as embodied by groups such as the MetaCurrency project. At the outset we should note that such groups may take issue with the specific term “financialization” given that they are actively trying to shift away from money as the only representation of value and director of resources, and financialization can imply that we’re just trying to better _monetize _value¹⁰. This is understandable, but again to get bogged down in semantics would be a mistake. We can reconfigure the claim in line with these aspirations to argue that Web3 will allow value to be better represented and for resources thus to be directed more effectively towards what is valuable. This core idea appears very much shared by alternative currency projects and so we will still discuss them here, acknowledging that “financialization of value” is a perhaps imperfect shorthand for their aspiration.

The idea behind alternative currencies is that communities can come together and decide on the rules for how they represent value. This can be done by creating tokens to represent all sorts of value and, in turn, better manage resource flows between them. To take some toy examples, my community might decide to create reputation tokens which are allocated to individuals on the basis of their trustedness by others, or joy tokens which people can receive for making others smile and laugh.

Alternative currencies provide a means to deliberately engineer economic systems to better capture what we think is valuable in society, and to direct resources towards this. We can create new rules of the game for what we want to be recognised as valuable and for how we want to distribute our resources. We can create token-based currencies for just about anything, and can intentionally guide the establishment of the rules for their creation and distribution by our sense of what matters in life. This is a marked contrast to traditional monetary and financial systems, whose dynamics default to extraction and accumulation even while many of us would not actively desire this. To borrow an analogy, you can be incredibly wise and ethical and yet experience the same outcome when playing a game of monopoly: one person ending up with everything and everyone else ending up with nothing¹¹. Escaping this trap requires rewriting the rules, and alternative currencies allow us to do this.

Evaluation: Largely false (medium-high confidence)

P1: More financialization of non-financial value is itself desirable (probably false, totally or mostly)

Whether finance is the right means of supporting non-financial value creation is a highly complex issue, and one’s conclusions will depend to a large degree both on one’s broader philosophical commitments as well as assessments of the outcomes of financialization. Each of these contingencies could be the subject of their own analysis and so we will deliberately give them only a brief treatment here. The core point is simply that it is far from obvious that more financialization of non-financial value is desirable.

At the outset we might think that, as long as financialization leads to more of what we value then it can only be a good thing. This is not a given, and one can make the case that in trying to financialize all that we hold valuable we risk losing touch with what makes it valuable in the first place. We should consider the type of societies and ways of being which result from such systems; they might superficially create non-financial value while, in their reductionist efforts towards financialization, lose a lot of what makes this value valuable. To take an admittedly crude example, monoculturing as a form of greenwashing can be seen as the result of a highly financialized approach to environmental preservation, where all plant life is reduced down to a common metric irrespective of its form¹².

Relatedly, we may worry that such financialization will foster ways of behaving and seeing the world which are undesirable. It is hard to envision a world where all value is financialized divorced from a world which is also intensely marketized. We may worry that the path to simply trying to optimize financial incentives to generate value is a dead end, leading us further down the path that got us into our current state of deep inequity and decline. We might argue that while we should of course set up our economies to provide for people’s basic needs and respect planetary boundaries, we would be better placed to then focus on creating cultures which foster human flourishing and the pursuit of peoples’ gifts and passions out of intrinsic motivation.

Trying to make value generation simply a matter of extrinsic incentives risks continuing the harmful social mindset we see currently. It may even perpetuate the self-serving dynamics we see now as people eventually seek to game the system to optimize for the rewards for value generation rather than value itself. This is akin to “reward hacking” in AI training - optimizing for a proxy of what we want has the potential to lead to unintended outcomes¹³. This can hold irrespective of our philosophical position on the “true nature” of the value we’re financializing, which is what’s at the heart of the first worry above. Concerns of this flavor relate to the work of thinkers such as neuroscientist Ian McGilChrist, who posits that Western society has become overtaken by a “left brain” mode of thinking (analytical, logical, reductionist and goal-orientated) and has lost touch with a more gestalt mode of engaging with the world characterizing the right brain hemisphere¹⁴. The financialization of all value appears paradigmatic of a left hemispheric approach to problem solving. You can read our summary of The Master and His Emissary here, which gives more detail. Similarly, while we acknowledge that hyper-marketization may not be intended to go along with this financialization (although we find it hard to see how the two detach), Karl Polanyi’s dire warnings about the “market society”, where the mentalities, relations and incentives of the market come to dominate all areas of our lives, should also provide pause¹⁵. A final such worry comes from the idea of “technological solutionism” popularized by Evgeny Morozov’s To Save Everything, Click Here¹⁶_. _

Solutionism, in his view, takes for granted that social issues can be recast in the form of clearly described “problems” with easily computed “solutions.” It assumes that there are always multiple possible solutions to any given problem, that some solutions are better or worse than the others, and that the criteria for evaluating them are self-evident. In reality, of course, the terms of public conflicts are always complex and contested: different stakeholders may have wildly different criteria for evaluating acceptable solutions, and some may deny that a solution is needed at all. The ideal solutionist scenario bulldozes this plurality in favor of a kind of Schumpeterian marketplace in which a progression of novel “fixes” continually disrupts existing solutions. Morozov cautions that this “never-ending quest to ameliorate” favors short-term tweaks over systemic change: “It very well may be that, by optimizing our behavior locally […] we’ll end up with suboptimal behavior globally.” The danger of solutionism lies not its solutions, but in how narrowly it defines its problems.

…

“Most public institutions should not be held to the same standards as their private counterparts,” since “their mission is to provide goods and services that markets cannot or should not provide.” Such institutions will almost inevitably appear “broken” when judged according to the bottom-line economic measures favored by business-minded solutionists: efficiency, for instance, or productivity.¹⁷_ _

Again, the parallels are clear. The question may not be whether financialization “gets results” but whether it casts all that is valuable in human existence as a matter for technical optimization problems. If this is as insidious as Morozov argues, then we have a problem irrespective of success on the former metric.

Finally, we should note that all of the above worries are based on financialization in some sense “working” - that the value capture aimed for is possible to an adequate degree and that it will at least at some level increase the generation of non-financial value and lead to better social outcomes for value generators. This claim itself can be countered: the financialization of non-financial value is undesirable because, even if it might do _something _(see sub-claim 2 below) it will be ineffective at leading to the level of non-financial value generation required. This is an argument from opportunity cost¹⁸ - beyond the lowest hanging fruit we’re better off focusing our efforts elsewhere if we want to support the creation of non-financial value. This relates to the point about fostering intrinsic motivation above, but is a more technical economic argument which doesn’t rest on any philosophical claims on the nature of society or the good life. It simply says that, beyond a point, more financialization isn’t the most effective tool to get what we want. We’ll explore why this is the case in our evaluation of sub-claim 3.

P2: The current financial system is deficient in its ability to capture what we think is really valuable (true)

As we note in our reference to carbon pricing above, this claim is quite obviously true. Current monetary and financial systems do not sufficiently internalize economic externalities and as such are leading to dire environmental consequences and material resource distributions which do not at all reflect social value creation.

P3: Web3 technology is the route to addressing these deficiencies (almost certainly false)

NFTs

We will evaluate NFTs and alternative currencies in turn. There are two glaring things to note with NFTs. First, in practice NFTs do not in any way guarantee artists better remuneration for their work. Evidence shows that minting NFTs costs many smaller artists more money than they make¹⁹ and there is still a reliance on centralized marketplaces to sell them who often extract large amounts of value and leave the artists with little direct remuneration (just like the so often critiqued middle-men of traditional marketplaces)²⁰. Further, the technical complexity of NFT creation means that many artists are excluded or forced to partner with more tech-literate others in often extractive agreements which mirror the dynamics of the traditional artworld. All of this is aside from the slump in the NFT market which has accompanied the apparent pop of the speculative bubble, which was the source of high rates of return for some artists in the first place²¹. Digital marketplaces may help artists reach new audiences but are not unique to web3 and in fact they already exist. They certainly do not enable better financialization of value if this is understood as better compensation for artists.

One of the major problems here is that NFTs are a private market just like any other. Private markets favor those with high levels of resources, leaving the market open to the same exploitation by middle-men and “whales” regardless of whether it is digitized or not. Small artists will have very little market power wherever they are. More importantly, however, is the distinction between the social value of “the arts” and an individual work of art. The arts sector is more than the sum of its parts. Individuals may value a flourishing arts sector far more than they value a given piece of art in a marketplace. Even as a society we predominantly care about the sector as a whole rather than any individual contributor to it (save a few major figures, who are already well compensated). The problem is that the positive externalities of the arts sector are to some degree nonexcludable; I can benefit from living somewhere “cultured” whether I individually buy art or not, and this benefit often far exceeds the benefit I get from owning a piece of art directly. We thus have somewhat of a public goods problem, which as we have explored elsewhere cannot be addressed through markets. Ensuring the social value of a flourishing arts sector is passed on to the artists underpinning it can almost definitionally never be a matter of better financialization of individual pieces of art. This is why centralized arts funding exists, and is a far more promising solution to this problem than tokenization.

Alternative Currencies

We should flag at the outset that, to our knowledge, there’s little detailed technical documentation as to how economies reliant on alternative currencies will function nor case studies of them underpinning value generation and exchange to a meaningful degree in the “real economy” on the technical definition of the term²². Thus our evaluation is necessarily addressed towards the somewhat vague descriptions we have found online. We would welcome the opportunity to speak with those involved in alternative currency projects to gain a better understanding and hear responses to our concerns.

First, we should examine why we have the current monetary and financial systems we do. Even conceding the role of corruption, greed and undue influence in creating certain specific circumstances, one fact remains clear: every state has, past a certain point of complexity, coalesced on a single, state-backed numeraire. There are reasons for this, the main one being that exchange problems will always rear their head otherwise. While we may want to expand the definition of currency to a broader notion of value representation, the primary purpose of currency remains directing resources to securing the things we think are valuable in life. Given this, we will need to be able to exchange currency. This is both because what I value and what you value might be different, and because some degree of division of labor within societies remains valuable (requiring us to be able to somehow exchange the fruits of our labor). These tenets of classical economics hold almost irrespective of one’s ideology, with the only real, yet undesirable, alternative being standardized, centralized provision of everything in life in equal proportions to everyone.

So we need a way of comparing value. How many of your cabbages is my chicken worth? Or even how many cabbages is my painting worth? Traditional money universally emerges because it is massively more efficient than direct barter exchange of valuable items, and this efficiency requires it to be universal.

Many societies did historically have systems where alternative currencies could be created. To say these systems of private money did not work very well would be an understatement. They were highly susceptible to fraud (there’s little to stop me just printing huge amounts of private money, exchanging it for something valuable and then running off), failure, and created headaches trying to trade between regions which used different monetary systems²³. Even if our aspiration is a society full of micro-communities each run by their own rules–a la the libertarian ideal of Anarchy, State and Utopia²⁴–it would still make sense for them to agree to use a shared currency system if they wanted to economically interact with one another at all.

We acknowledge that projects such as MetaCurrency explicitly state that they intend for currency to extend beyond just money as we know it today, and for currency to be more than just a medium of exchange. However, it is hard to see what this might look like in practice, much less how this might add meaningful value to society. One example which has been raised is representing goods such as reputation. We might see one’s reputation as a value beneficial to capture in currency form, which might impact one’s treatment in a community (e.g. via terms of trade or resource access). This even seems a potential solution to the fraud risk from private money outlined above.

This tokenization of reputation is possible and may be useful, as the example of eBay seller ratings shows. However, there’s real potential for these to slide into dystopia, as the social credit system in China shows.²⁵ Even under democracy there is potential to persecute certain groups; we only need to look at how perceptions of those claiming unemployment benefit show up in much mainstream Western media to see the dangers of such a system, let alone the repeated concessions of systemic racism by major institutions. When systemic bias exists within populations, an uncontroversial fact in most reasonable circles, then democratic control of the rules by which reputation tokens are allocated is no defense against dystopia.

Further, as in China, these alternate “currencies” can exist perfectly easily alongside regular money, and, as in eBay, there’s nothing that needs the blockchain. All currencies which do not serve the purpose of direct exchange can be tacked onto existing monetary systems without issue. China’s example should give us pause as to whether this would risk shifting society for the worse.

Further, while such systems may technically financialize otherwise uncaptured value, it appears unlikely to move the needle on the huge gaps in value generation in things that matter. We might allocate “joy tokens” to those people who make us smile, but how much extra joy will this really foster unless these tokens can be exchanged for something else we value? There doesn’t seem to be a benefit for representing certain values as tokenized currencies unless this has a material impact on our access to other things we value. This either means something akin to the social credit system, where non-tradeable tokens impact one’s access to other goods in a potentially dystopian manner, or a tradeable market for tokenized currencies which leads us again to the exchange problem outlined at the start. If the idea is that alternative currencies are going to somehow facilitate value exchange, then the tendencies which led to our current monetary system will again likely cause convergence into a single numeraire nearly indistinguishable from what we have now.

Putting all this to the side, let’s say we can make a system of alternative community currencies work with respect to exchange, and that these systems are worth replacing or even meaningfully complementing existing currencies with. We are still presented with a further problem which has again led us to the current currency systems we have today: something needs to underpin the value of a currency for it to be meaningfully worth something. Otherwise, I might say one unit of currency is worth one orange, and you may say it is worth two. Or, I might think my joke is worthy of one joy token being allocated and you may disagree. Even if we initially agree on terms of valuation, what’s to stop me changing my mind and refusing to honor them? In general, how can I be sure that the currency we’re using today will be worth anything tomorrow, such that I can plan my life around how much of it I possess?

In traditional currency terms this is where the state comes into play. The value of a currency is underpinned by the fact that the state collects tax in that currency, the knowledge of which means it will always be worth something to everyone living under state jurisdiction²⁶. And the state’s collection of tax comes from its monopoly on violence; the state is the actor with the police and the army who can compel people to pay up and respect the commonly accepted value of a currency. Individuals can rely on this monopoly of violence as a backstop to trusting trade. I can happily agree with you on a shared value for a unit of currency via a contract (e.g. that it’s worth the one chicken I’ve given you) on the understanding that if you suddenly change your mind, I can ask the state to intervene and enforce our agreement on my behalf. So, I always know the currency will be worth something tomorrow such that I can plan and I can be confident that I have recourse should others deviate from agreed understandings of how value should translate to currency.

Alternative currency systems seem to rely on communities coming together and agreeing on terms for the system e.g. what should be represented by token/currency? How much certain values should be “worth” in new currencies/tokens? And so on. But how does this work in practice? Either they rely on radical shifts in individual ways of being such that we all become enlightened and wholly cooperative or they must rely on some state-like entity to underpin them. The former case is such a radical shift that, were we to reach such a world, the nature of our currency system would pale as a source of impact. If we could all just get along and cooperate in absolute trust without any worry for self-interested defection then basically all our problems are solved there and then. Suffice to say, such a world sadly remains unlikely for the time being. That means we must probably need something like a state. This is both to stop things descending into chaos, disagreement and uncertainty and because, as game theoretic evolutionary modeling shows, even if everyone does behave well it only takes one hawk in a system of doves to destroy the harmonious order²⁷.

If we do need a state then this has huge implications. It will require either massive political action such that existing states underpin new currency systems or secession by small groups. If we can get a state to act so radically as to shift its entire currency system, or even meaningfully support a complementary one to a significant degree, then why not just get it to unilaterally legislate away our problems by other means? For example by stringently enforced legal minimums for pollution, or massive taxation of immovable capital and wealth to fund the arts. This level of political action is so far from our reality and so utopian that, again, our currency system of choice becomes incidental.

Alternatively, if the idea is that small groups use these currencies internally instead of regular money, then if this is to happen in today’s world it requires a form of secession. Groups would have to not only agree to use these currencies, but agree on sanctioning and enforcement mechanisms to underpin their value and use. In the real world, this necessitates force. Excluding people from the group is not as simply as a vote to do so in a DAO, and extracting unfairly gained material resources from a resistant party may require physical violence. Not only is such a system difficult and costly to enact, states don’t tend to view secession very kindly; the community enforcement activity required to monopolize violence and underpin a stable currency system would inevitably violate the laws of existing nations. Such communities risk being bulldozed by the states they exist in at the point their hosts inevitably find out about them. There would also be the challenges of still needing to do things like pay tax in regular currency while one still exists inside a broader nation state. It would seem that under any reasonable conception there still needs to be a place for normal money, and, given this, there needs to be an impressive commitment to not simply drift back into the use of the dominant currency. This drift can be seen in the failure of complementary community currencies such as the Bristol Pound to really gain traction²⁸.

The above arguments present significant difficulties for alternative currency systems. But, there are further concerns stemming from the reasons traditional currencies don’t adequately reflect the true value of the things they’re used to represent. To reiterate, the idea of internalizing externalities has existed in orthodox economics for some time, with lots of “traditional” mechanisms for doing this (e.g. taxes and subsidies). The reason this hasn’t happened adequately isn’t a matter of the technical limitations of existing currencies, it's a matter of political will. One only has to see the perpetual watering down of succeeding COP agreements to see the role of politics in action. We expand on this point in our related analysis of Web3 and the public goods problem.

A further reason why traditional currencies fail to capture so much non-financial value is that much of what we deem valuable is incredibly hard to measure. It is in some sense tacit; we might be able to describe all the features of a Kandinsky painting that make it a great work, but there is an element of how we are made to feel which is not amenable to being reduced to these technical features. Some significant part of the value just isn’t able to be explicitly outlined, just as the experience of seeing the color red can never be truly understood by someone who is colorblind. Given this, finding a way to fully financialize or capture this value in a unit of currency will always be doomed to extreme difficulty if not impossibility.

Similarly, we might wish to compensate or recognise someone creating joy in the community. Creating collective joy is not something we can easily put a number on. It’s fitting these tacit values into a quantitative frame that’s the crucial problem. If we can solve this then the particular unit we then allocate on this basis, be it an alternative currency token or unit of fiat money is secondary.

Part of the problem with existing monetary and financial systems that alternative currencies are seeking to solve is that there aren’t democratically agreed rules for recognising diverse forms of value. This may be true, but again lots of this seems fixable through a more democratic traditional economy. For example, we can create remuneration rights funds²⁹ to compensate creators of value, and democratically agree the formulae by which these funds make allocations. We can similarly envision certain participatory budgeting setups to similar ends (e.g. the community decides to earmark a pot of funds of X amount for joy, and then the fund is allocated on the basis of who gets the most peer votes). The technical tools are already available to fix the issue, they’re just not being used. The problem is not the technical features of existing currencies, but how they’re used and allocated.

As has become a recurring theme in many of our web3 evaluations, the deficiency of alternative currencies as a solution is that they use technology to try to fix a problem which does not require, and in fact is not particularly amenable to, a technological solution. Even aside from the severe difficulties we envision these alternative currency systems would face in practice, the reason our current monetary and financial systems don’t adequately “financialize” the totality of social value is more of a political and social question of how they are structured and governed than it is a technical question of the superficial medium of value representation (i.e. money) they use. Reform at the level of political economy and culture appears far more plausible as a route to better financialization of value than trying to bypass these highly difficult processes through tokenized currencies.

Related content

Deep dives and notes

• Analysis: Web3 Can Solve the Public Goods Problem
• Deep Dive: A Macroeconomics Perspective on Cryptocurrencies
• Deep Dive: Market Fundamentalism
• Notes on Dan Olson's 'Line Goes Up'
• Notes on Münecat's 'Web3.0: A Libertarian Dystopia'

Concepts

• Art
• NFTs
• Cryptoasset
• Predatory inclusion
• Externalities
• Bandwagon bias
• Fictitious commodity
• Fiat money
• Finanical asset
• Price formation
• Assets
• Private money
• Fundamental value
• Governance token
• Public goods problem
• Blockchains
• Bubble
• Liquiduty
• Speculation
• Commodity
• Market value
• Market
• Cryptoasset
• Currency
• Value
• NFT
• Whale

FAQs

• Are NFTs good for artists?
• Is Web3 decentralized?
• Are crypto assets predatory investments?

Notes