In Defense of Trust: On Mutualist Crypto-Banking

In a previous article, an outline on the currency in a possible mutualist crypto-economy was made, with the question of banking left to be answered. It had been left in the air whether a Mutual Bank would be necessary at all. One finds that the answer comes down to what the bank is left in charge of.

In regards to the actual issuance or creation of the currency (an essential feature for any bank, but especially for the Mutual Bank(1) ), it would not be inherently necessary to create a bank. All that would be needed in that regard is a programmer or team of programmers that know their way around making cryptocurrency. Intrinsically, a bank is not needed to create a currency; however, it is in its other functions that a Mutual Bank is relationally necessary for currency in a Mutualist economy, especially in the crypto-economy.

As Proudhon states, “…citizens have the right to found, for their common advantage, a Bank, with such capital as they choose, for the purpose of obtaining at a low price the currency that is indispensable in their transactions…” (2) The Mutual Bank, as envisioned by him and later Mutualist thinkers, is controlled by the people, either as a public utility or as a cooperative business. In either case, it is not an outside source, such as the State or organized Capital, but the community itself that controls the bank, with a promise of reciprocity, in itself based on trust.

Trust: that is the main root of the issue. The State and traditional Capital have abused the trust of those who rely on their currency on multiple occasions. One such impactful occasion, the 2008 recession, was the background event influencing Satoshi Nakamoto to create Bitcoin. Bitcoin and other prevailing proof-of-work(3) cryptocurrencies utilize what is called a trustless system: Nakamoto says that “The root problem with conventional currency is all the trust that’s required to make it work(4);” and, not trusting any third party, it was intended to act as a peer-to-peer service, with transaction history recorded in the blockchain as a way to solve the problem of double spending(5).

A bust dedicated to Satoshi Nakamoto, found in Budapest. His identity is still unknown.

However, the supposed solution has caused its own problems, perhaps greater than the ones it aimed to solve. These newer systems are not fully “trustless”: while it does cement the idea that we shouldn’t trust any third party, even close friends, it instead has placed trust unto a hidden third party, a stranger, and unto a system made of ones and zeroes, a truly inhuman system. The object of trust has been moved away from the traditional Capital embodied in a Morgan to the newer Capital of a Thiel(6). The rich still control the currency: it is the person who can afford the most and best computing software and hardware for mining that controls systems based on proof-of-work; it is the person who can buy and own the most crypto that controls the systems of proof-of-stake(7); it is a changing of the guard, but Capital still controls the currency, not the people. It is in the lack of trust, one that further degenerates an individual into a cog of our modern system of Capitalism, that only makes everything worse. No freedom is gained: it is, indeed, a greater loss than anything.(8)

Nakamoto saw the flaw in the amount of trust we give the forces controlling our modern banking system, yet he created another flaw with his “trustless” system. The problem is not that we trust: the problem is whom we trust. If we take back the idea of trust and reutilize it so as to give power to the individual and the community, to the people, then we may create a banking system for the crypto-economy, one based on the principles of Mutualism, one that can truly lead to greater individual and social freedom.

In one respect, the Mutual Bank shall act, as stated earlier, to provide currency (in this case, cryptocurrency) at low cost, as understood through the principle of reciprocity. They may also do the other functions needed for banking, such as creation of credit, on the loaning of money, etc. The Bank shall, however, keep to mutualist principles: either as a public utility, it will be controlled by the community it is serving, through a form of direct democracy, perhaps similar to that of the Paris Commune of 1871; or as a cooperative, perhaps in which every user of the currency acts as part shareholder, creating another form of direct democracy. All the while, the principle of reciprocity, as well as a foundation of mutual trust between all members of the community, shall be the cornerstone of such organizations; the community shall then be able to use and change the Mutual Bank, and in turn the currency, to fit the needs of that community. The establishment of a fluid and adaptable environment, for the needs of those affected most.

In another respect, we may create a network for decentralization in the currency: instead of the verification of transactions for users of the cryptocurrency being concentrated into the Bank, we may mold it so that outside third parties, such as trusted individuals or even businesses centered on transaction verification, can be chosen by the users. A web of connections, with each person’s transactions being verified by another, allows not only for solutions such as the double spending problem, but also makes it so that no one central point is overwhelmed, and that the failure of one point will not put the whole system at risk. The Bank would not have the extra price burdens inherent in needing to process so many transactions, helping to keep costs low, and the somewhat centralized solutions of standard cryptocurrencies are replaced with a cheaper, less energy-consumptive solution. It becomes a truly decentralized system, and one more secure than the current ones provided.

The proposed system has not found a physical model as of yet; however, it is not a far-fetched idea. Those with the know-how may just as well create such a system, utilizing the knowledge and code for verification systems available to us. They may either use the foundations of already existing cryptocurrency systems (with a few changes) to implement such a system, or start from the ground-up a new network of crypto-exchanges. On the practical levels of verification expenses, programs can be created to run on the agreed devices, and contracts and deals can always be set between the parties, though the costs would become quite small. Arbitration companies can deal with disputes that arise. The only limit that blocks us is that we have not created it yet.

The basis for the banking system, and finally the total basis of the cryptocurrency, has thus been laid out. Based on mutualist ideas and theory, we may then move on to the next steps for creating a new crypto-economy: that is, the creation of the economy, the goods and services to be traded with the currency itself, and in such a way to stay consistent with the ideas of the new Mutualist society.

(This article is the third in a series of articles, building upon the theory of a possible system of mutualism utilizing cryptocurrencies. The previous article may be found here, and the next article in the series may be found here. Comments and criticism are wholly welcome.)

1. “Mutual Banking Associations shall be formed to do a general banking business and to issue paper money for the use of their members.” Clarence Lee Swartz, What Is Mutualism?, Anarchist Library PDF edition, p. 45. Swartz outlines multiple essential features of the Mutual Bank, with the first point being referred to here. Swartz speaks of paper money specifically here; his book was written before the Second World War, long before the invention of the telephone even, let alone cryptocurrency.
2. Pierre-Joseph Proudhon, General Idea of The Revolution of The Nineteenth Century, Anarchist Library PDF edition, p. 97
3. Proof-of-work is a method used by early cryptocurrencies, like Bitcoin, in which transactions are verified through computers solving a complicated equation to determine that the transaction going through both was made by the actual holder of the account and only goes through once. The computer system that does so first is rewarded. As computers are able to process data quicker, the system makes the required equation to solve harder, so as to keep a stable and constant time limit for transaction verification.
4. Satoshi Nakamoto, in the release notes for Bitcoin version 0.1.0
5. Double spending is a problem in which, on electronic exchange services, a certain transaction is processed twice. The standard solution is to use third party services, such as banks like CapitalOne.
6. Just as J.P. Morgan gained great amounts of power through investments in the industrial age, Peter Thiel has consolidated much in the technological age: his co-creation of PayPal, as well as the tremendous amounts of data he sells to governments via his company Palantir, helped him to invest in many firms and businesses, such as Ethereum, further increasing his reach and power. This article is no good place for in-depth information on his doings: if you wish to learn more, journalists such as Barrett Brown have been investigating into his many dealings, and my friend Jeremiah Harding has written before about his deeds and connections, such as with the Bilderberg Group.
7. Proof-of-stake is a method being utilized or planned to be utilized by more current cryptocurrencies such as Ethereum. To decrease the computer processing cost of proof-of-work systems, transaction verification is done by those with the greatest proportion of currency in the system.
8. That is without mentioning the many other problems with cryptocurrencies today: the ever-increasing computational costs of proof-of-work create greater energy usage and pollution; the recent technology of Non-Fungible Tokens promotes merely a new version of Art Gallery money-trading than create greater opportunities for artists; Ponzi scams galore and more abound. Too many flaws to count in the current crypto-space.