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High finance is often, literally, high.

Fifteen years ago, when working in the financial sector, I’d stand on the street looking up at these skyscraper behemoths. Then I’d push through their rotating glass doors, check in, pass through the security gates, enter the elevators, and press the button. I’d watch the floor indicator lights ticking up into the double digits.

Then the lift would stop, ding, and the door would open into an investment bank division, or an open-plan fund management office, or a real estate finance company. I’d walk past desks with traders and analysts, and enter meeting rooms. Once in there, I might be greeted with a view like this…

Or like this…

My first skyscraper adventure took place on the 35th floor of the former Lehman Brothers offices in Canary Wharf, mere weeks before they collapsed. Later I’d visit 18th floors and 39th floors, and many more above, below and between.

The higher you go in a skyscraper, the more you look out onto the world with a bird’s-eye view. As the ground floor grows more distant, you too grow increasingly ungrounded. People on the streets below begin to look like scurrying ants. They become a distant, faceless collective.

The opposite view to the bird’s-eye is the worm’s eye. The most down to earth positions in our society are literally down in the earth. Picture miners working underground, or farm workers, far from the city, with their hands in the soil. To labourers like this, the distant towers of finance are just abstract symbols of city-based power.

Economic statisticians sometimes split the activities of people in our economy into broad ‘sectors’ - primary sector workers are involved in extracting raw materials, secondary sector workers get involved in processing those materials and manufacturing stuff, while tertiary sector workers provide services around that extraction and manufacturing base.

If you project your mind back in time to, for example, 20,000 years ago, the primary, secondary and tertiary sectors were integrated. A person might dig up clay - a primary activity - mould it into a figurine and bake it - a secondary skill - and then use it to perform religious rites for a community - a tertiary service. As our economies have scaled up, though, these once unified spheres have been stretched out, ripped apart, and delegated across time and space to separate classes of people who often no longer have any knowledge or experience of the big, integrated picture.

At a global scale, the world’s poorest countries are often those who are stuck ‘digging the clay’ in the primary sector. The Democratic Republic of Congo, for example, relies on its people extracting cobalt, which will be passed on to the mid-tier manufacturing nations - the ones who ‘bake’ it - but the high priests of capitalism who chant the rites will cluster in those big centres of finance, tech and statecraft.

This global picture, however, hides more localised pictures. Even in rich countries, you’ll find primary sector rural areas, and as you move towards the outskirts of their urban sprawls, you’ll find those secondary manufacturing zones that process stuff from the raw material peripheries. If you go on into the centre of a city, you’ll find yourself surrounded by tertiary retail store-fronts, with people trying to sell the manufactured stuff, or to cut hair with scissors forged from metals, or to mix processed flour, refined sugar and churned butter to make a croissant.

At a global scale, the tertiary sector might be seen as relatively high status, but at this local scale it’s rife with its own class dynamics. Let’s think about a baker kneading dough in a deli under a skyscraper. They’re operating somewhere between the secondary and tertiary spheres, but they do so at a small scale, at ground level, with localised impact. They wake up early, prepare the bread, sell it to people walking past, and then start the cycle again the next day. Their world is one of small-scale short cycles with immediate impact.

The opposite to that is the world of large-scale long cycles with deferred impacts. That’s the kind of thing that might happen in the skyscraper above the deli. People entering those offices with their croissants, are - nine times out of ten - going to be entering the realm of professional services, the world of overseers, managers, strategy, communications, accounting, and - eventually - finance.

Unlike the baker, who makes no assumption that his activities will have a distant impact beyond the here and now, the elites high up in offices picture their impacts stretching out into the distance, and into the future. The baker gains his sense of achievement from impacting the lives of small numbers of people directly right now, but a core characteristic of an elite mindset is that the person imagines that their single actions will affect large numbers of people indirectly and diffusely over time.

The people in skyscrapers might have close human connections with other elites, phoning them up and meeting them for lunch, but the business they discuss eventually always concerns distant people over spans of months or years. They sign documents that affect the future livelihoods of strangers they’ll never meet. They reduce countless ground level activities to numbers on spreadsheets. They write research reports that present entire countries as sets of statistics. Everything scales up and de-personalises.

So, when the elevator dings, and the doors open out into the offices of an investment banking securitization division, you’re not going to find people in there who care about getting dirty building a single house for a family. No, their role is to write and trade contracts that will indirectly induce tens of thousands of ground-level workers to build thousands of houses over the course of a decade.

Pyramidal Amplification

When an ancient pharaoh issued orders to tens of thousands of workers to build a pyramid, he was directing their energy down a particular path, but also stopping them from using their bodies and minds to do something else, like building schools for their children, for example. He later might claim to have ‘built’ the pyramid like this, but really he activated and steered others who did the actual building.

Similarly, financiers create contracts that activate particular pathways that steer human energy away from some things and towards others, and they do so from the tip of our economic pyramid. That positioning means individual people within the financial sector get to earn at vast multiples of the actual work they do.

Primary sector labourers can slog away with their bodies for an entire day and yet still struggle to survive, while a single click on the mouse by a hedge fund manager can yield tens of millions of dollars in profit. It’s not because he’s doing a lot of work, or being highly productive. No, it’s because there are billions of others below him, amplifying his returns.

This Pyramidal Amplification can be understood by thinking about a ship. A captain might exert a small amount of energy turning the steering wheel to make a 100,000 tonne ocean liner change direction, but in reality the structure only moves because hundreds of thousands of others extracted the metals for the hull, built the thing, and now staff the engine rooms. His present day actions only have impact because of millions of other actions that extend across both time and space.

The power of the captain does not reside in himself. It resides in the fact that he’s sitting on the apex of a singular productive unit, with his own labour being massively amplified by those below him.

He does, however, get to claim an outsized cut of the glory, because his positionality means his individual actions have higher consequence within the structure than the individual action of a single person stoking the engines, even though the captain’s actions would mean sweet fuck all if those engines weren’t there.

This is something I became acutely aware of in the financial sector. High finance is an apex-level industry, which means it operates at enormous scale, but the human beings within it are just normal people who find themselves in an abnormal position in the high reaches of the global economy. There’s only so many people needed to staff the top of the pyramid, but their systemic positionality means their pay is horrendously distorted. The bonus of $5 million given to a Goldman Sachs trader might seem vast from their puny human perspective, but from a corporate perspective it’s tiny.

That’s why hedge funds will pay single managers $100 million just to join their firm, and it’s the same reason why Big Tech companies will now pay AI engineers the same. It’s because their little human actions contribute to apex infrastructures that yoke in billions of others underneath them.

This positionality distorts more than just pay. It bends those people’s sense of normality. Let me illustrate this with an anecdote.

The Charity Ball

When I was working in the finance sector, a colleague of mine hosted a charity ball to raise money for a sports team. He asked some of us to help out, and I was given the job of selling raffle tickets to the assembled elite in the luxury dining hall.

After dinner, a Sotheby’s auctioneer got up to auction off various donated prizes. He started with smaller items, enabling the more junior bankers to prove their philanthropic status by bidding a few thousand pounds, but at some point he moved on to the bigger ones. One of them was a day in an exclusive private booth at a fancy horse race. The auctioneer started the bidding for that one at £16,000 ($21,000), but he’d miscalculated. He was met with awkward silence. Nobody wanted it at that price.

It’s worth mentioning here that the sports team wasn’t some underprivileged group. It was… wait for it… the British national ski team, a community of athletes drawn almost exclusively from the upper classes. The assembled fund managers and private equity bosses were weighing up whether they really wanted to hand over 16k to such a group.

The silence seemed to stretch towards eternity. The auctioneer looked around, unsure of what to do. Finally, in a corner of the room, a man reluctantly raised his hand and spent £16,000 to ease the tension.

I’d met this man earlier when I sold him a raffle ticket. He was quiet and polite, but he was also a manager at an infamous commodity hedge fund called Armajaro, one that made over £10 million in a single trade to corner the cocoa market (an exploit that earned the founder the nickname ‘Chocfinger’, after the Bond villain Goldfinger). For these guys, throwing away £16,000 was like tossing a single banknote, but what struck me was that he was going to do this because he was experiencing some ordinary emotion - that feeling of group embarrassment that leaves everyone silent - and he felt like maybe he should take the lead in breaking the awkwardness.

But, given his position in the pyramidal structure, the scale of his response was, to an ordinary person, absolutely insane. Here was our hedge fund trader, spending more than six times the average annual income of a cocoa worker in Cote d’Ivoire to buy something that he didn’t want, or need, to help an elite auctioneer save some face.

The Hierarchy vs. The Underarchy

It’s not surprising that people’s blood pressure goes up when they hear media outlets reporting on high finance with numbers that seem so deeply alien to us. Consider a phrase like ‘trillions move through the FX market daily’, or ‘high-frequency trading operates at nanosecond speed’, or ‘the value of the global derivatives market is ten times the size of world GDP’, and so on. High finance feels at once omniscient - like it permeates everything - and yet simultaneously feels abstract and meaningless.

But, as I sketch out in The Ten Layers of Finance, even the most ‘high’ of high finance is always connected back to the low earth. If I walk out of the city, lie in the grass and look down, I’ll see mites crawling through soil particles, and if I could sink deeper into that soil I’d see microbes, fungi, spores, and little drops of water falling in from the sky, pulled by gravity. This is the underarchy, the foundation which births the plants, which give life to countless creatures.

All our economies throughout history are predicated upon the simple reality that we must eat plants, or eat animals that eat plants, if we wish to survive and care for children, and it’s only upon this foundation of ecology, care and sunlight that we can be kickstarted into directing our own energy towards more abstract things.

So, people, raised by other people, raise barley from the soil, which others later input into a new production loop to raise vodka, which eventually might be inputted into the body of a stressed out derivatives broker, sitting in a rooftop bar in London, trying to raise his spirits. He’s on the high rungs of a hierarchy built upon the earthy reality of mud and human labour, but - unfortunately - people who scrape the sky like this are the most distanced from the grubby foundations of their existence.

Here, swilling my cocktail while looking out over the city, I might become confused. I might imagine that the techno-futural world could sever itself from its foundations. I might fantasise about transcending natural cycles, uploading my consciousness into the cloud and living forever.

That though, is just a grandiose delusion inhabiting a fallible human body, stuck too far up the pyramid to have any grip on reality any more.

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In today’s piece I reveal ten layers that make up the financial system. Paying subscribers get all ten. Free subscribers get the first four. Enjoy!

There’s a quick and dirty method to figure out where a layer sits in a stack of layers. You simply ask yourself what would happen to the other layers if this one were removed.

For example, let’s imagine the earth’s ecosystems as a layer. If this layer were taken away, the entire economic system would crash, and along with it the financial system. If, however, the financial system disappeared, the earth’s ecosystems would continue on as normal.

Conclusion: the financial sector is built upon ecosystems, not the other way around.

We can do this with industries too. If all farm workers stopped working for a week, every society in the world would begin to collapse. If financial traders stopped working for a week, many people wouldn’t even notice.

Conclusion: finance is built upon agriculture.

Of course it’s more complex than that nowadays, given that we live in a global economy in which the layers are inextricably entangled. Large-scale commercial agriculture, for example, is deeply entwined with financial markets, and can be heavily disrupted if the latter fail. Nevertheless, when push comes to shove, we want the farmers before we want the bankers. Farms are more foundational than hedge funds.

Finance itself, though, is not a single layer. Rather, it’s built from simpler foundations and abstracted upwards into progressively more complex forms. In this piece I’m going to show you ten layers of finance from the ground up. I’ll begin each layer with a one-line summary of how you get to it, and a description of the thing you hold once there. Let’s begin.

Layer 0: Value

Summary: you apply your body to the earth, alongside others, to produce stuff

You now hold: value

Send your mind 50,000 years into the past. There are human beings collaborating with each other to survive on the earth. This is the most primal layer of any economic system, and it always will be.

50,000 years ago nobody was talking about an abstract realm called ‘the economy’, and nobody cared about concepts like GDP, money, unemployment, inflation or free trade.

The only thing that matters to someone at that time are the people around them, and the environment they are in.

Within that environment, the only two distinctions that matter are things that require effort to get, and things that don’t.

For example, they - like us - get infinitely valuable sunlight and air without having to exert effort. It’s not something that needs to be planned for, rationed, or apportioned.

There are, however, other things like food, shelter and clothing that require them to apply their limited energy to the limited environment. They need to search for stuff, create stuff and secure stuff. There’s also a whole bunch of stuff they do for each other, like grooming, caring and cooking. To get and perform all this stuff, people use bodily energy, or labour (whether than be physical, mental or emotional), alongside other forms of energy like sunlight and fire.

Let’s just call these products of exertion value.

Once created, value needs to be apportioned, rationed, or distributed. They need to figure out who gets what and when under which conditions.

There’s no cosmic rule-book for how this should happen. An ancient hunter-gatherer band, for example, might communally distribute tasks, and communally share most products that emerge from those tasks, while having forms of subtle tit-for-tat reciprocity weaving through that over time. Maybe minor forms of explicit trade occur on the margins, but maybe not. A nomadic pastoral society, or a feudal society, or a 12th century religious commune will have different ways of arranging the same thing.

Let’s now fast-forward into the modern era. We have the same situation - a network of people drawing upon the earth - but now that network is unbelievably huge, and has been iterating upon itself for thousands of years. The products, technologies and techniques of former generations are now inputs, or foundations, to the products of current generations.

We, like hunter-gatherers, still face the same need to distribute and apportion this value, but nowadays a large chunk of that happens via market processes built upon money and finance. The earth and its people are covered by a web of tokens and contracts that distribute present and future claims upon the outcomes of production. Let’s go into it.

Layer 1: Base Money

Summary: you hand over value for a claim upon value

You now hold: a claim upon value

For the purposes of this article I’m going to ignore a bunch of complexity about the structure of money, and reduce it to the following phrase: money is a claim upon value.

Money is often metaphorically imagined like a commodity in itself - as if it were a ‘substance of value’ - but this is misleading. Functionally, at the level of our everyday lives, a unit of money is something that enables you to claim goods and services from other people (who are, either directly or indirectly, drawing upon the earth’s ecosystems).

Holding money is a bit like holding an access token to a vast warehouse of goods and services from others. In the case of goods, the stuff has already been produced. In the case of services, it has yet to be produced. Money can give access to the former and induce the latter.

Here’s a metaphor to help you understand this. Think about a simple voucher for a supermarket. The voucher enables you to access the supermarket and claim stuff. If the supermarket is destroyed, the voucher is rendered useless. If, by contrast, the voucher is destroyed, the supermarket remains, but there is one less claim upon it.

Similarly, if you burn a dollar bill, the underlying value residing within the earth and its people remains. But if the underlying people and ecosystems are destroyed, the dollar bill is rendered meaningless. A dollar bill has power to command things in our current world, but if a space adventurer crashed upon an alien planet, and found themselves stranded, a bill in their pocket would be a claim upon nothing. They’d have to ditch it, and focus upon the Layer 0 of their new environment.

So, at a very basic level, money acts as a contingent and transferable claim upon the goods and services produced by the labour power of other people in the context of our planet, and pushing it out and around can induce those people to produce things.

What I’m describing here is a kind of ‘horizontal’ view of money. It’s the view of it from a street level, where it enables you to get stuff from the random strangers who pass you by.

That said, I’m not describing the process of how such a claim is built and maintained. If you’d like to grapple with that, see my Global Money Observatory section, or my recent video on MMT, or my piece The Global Money System in 10 Images. In that latter piece, I visualise the ‘vertical’ dimension of money, the big institutional players that enable the horizontal action to occur.

The primary institutional player that issues our base money is the state, but state-issued money becomes the foundation for other forms of money, so let’s move on.

Layer 2: Bank-Money

Summary: you hand over base money for a claim upon base money

You now hold: claims upon [claims upon value]

When you hold Layer 1 base money, you’re holding a politically-backed and socially networked claim on the productive power of society within ecosystems. But, it’s not the only form of money we can hold.

In fact, most of our money nowadays takes the form of bank-money. That’s what the fintech bros call ‘cashless’. It’s the money we use when making card payments or bank transfers. It’s best thought of as bank-issued digital casino chips.

I’m not going to delve deeply into this, because I write about it in many other pieces (see The Casino Chip Society, and Paymentspotting). The basic deal though, is that banks issue a second layer of money into our society, and there are two basic situations in which they do this.

1. You go to a bank and hand over cash. You see the cash disappear and a number appears in your account. They essentially issued you a digital ‘casino chip’, which is what you now see in your account. You handed over base money to them, and got a claim upon base money in return

2. A similar thing happens when you walk up to a bank and ask for a loan. They don’t hand you base money. They issue you new chips, and extract a promise from you in return (to explore this, see Banks create money, but how do you explain this to the public?)

Regardless of the circumstances under which these digital ‘casino chips’ are issued, they are redeemable for base money (e.g. when you go to an ATM, you’re handing them back to get cash) but they’re also usable as money in themselves.

A huge amount of payments in our society take the form of people passing these chips between themselves within the bank payments system. That’s what’s happening every time someone beeps their card or Apple Pay app on a payment terminal, or makes any form of bank transfer.

Functionally then, bank-issued money ends up acting much like state-issued money - I can use it to claim stuff from the storehouse of human production - but if I’m being technically and pedantically accurate, their purchasing power is built upon that foundation of Layer 1 base money, so let’s call them claims upon [claims upon value].

Layer 3: Basic financial instruments

Summary: you hand over bank-money for claims upon future bank-money

You now hold: claims upon future (claims upon [claims upon value])

When someone starts a small business, they set up a legal entity with its own bank account, and then ‘capitalize’ it by transferring bank-money to it. The money goes from their personal account and into the account of the new legal entity.

In return, the legal entity sends them shares of ownership, which allows the holder to both control the legal entity, and to claim the profits of its future activities.

In essence, the shareholder buys the soul of the company, handing over money now in exchange for a legal instrument that gives them claims upon money emerging from the entity in future.

A share is called a share because it allows the holder to claim a share of the future profits that may, or may not, emerge from the entity. If they’re the only shareholder, they get to claim 100%. If they have partners, they may have a lower percentage.

If those profits emerge in future, they can be turned into dividends that will be returned back to the shareholder (or shareholders). That will manifest in the payments system as money being transferred back from the company’s bank account into the account of the shareholder.

Let’s look at another basic financial instrument.

Imagine a wealthy merchant giving a loan to a young associate to help them start a business. Money goes from the merchant’s bank account into the associate’s, and in return the merchant extracts a legal promise that the money will be returned with interest at some point in future.

When you study the money movements, you’ll see that they’re similar to those of a share: a person hands over money now in exchange for a legal instrument that gives them claims upon money in future. The primary difference, though, is that the amount due in future is fixed and predictable, rather than fluctuating and unpredictable.

So, a share gives a fluctuating claim upon future money emerging from an entity, while a loan, or bond, gives a fixed claim upon the same thing. You can combine these two primal forms into all manner of cocktails. In fact, you can even make one turn into the other, but we’ll have to wait for Layer 8 to see that.

Layer 4: Corporate shares and bonds

Summary: you hand over bank-money for a claim upon a federated network of basic financial instruments

You now hold: claims upon a network of {Claims upon future (claims upon [claims upon value])}

Let’s say that the two small businesses mentioned above get bought out by a bigger business. What happens is that the bigger entity transfers money to buy the shares of the smaller entities, incorporating them as kids - or subsidiaries - underneath a parent company.

A person who hands over money to get a share in such a parent company, will now be buying a stake in a three-company network, with the two smaller ones nested under the bigger one.

This is what a modern corporation is. In my Lego Model of Capitalist Central Planning, I show how a modern corporation is built from a federation of subsidiaries held under a parent company. Buying shares in the mothership gives you a claim upon its profits, but the mothership is in turn extracting profits from hundreds of subsidiaries across the world.

For the purposes of our visualisation, let’s have a corporation with five subsidiaries, but bear in mind that this could easily be fifty subsidiaries, or five hundred subsidiaries, too.

The biggest simplification I’m making here is to present the subsidiaries as being a single layer in themselves, when in reality a corporation can have subsidiaries that own other subsidiaries that own other subsidiaries. In the aforementioned piece, I visualise this process of creating chains of sub-companies, and I also show how the oil giant BP has been known to create chains twelve layers deep, with a mothership in London owning an outpost in Patagonia via a string of subsidiaries held together by financial instruments.

So, while I’m characterising corporations as a Layer 4 system, this layer could well be seen as having many layers within itself too (4.1, 4.2, 4.3 etc).

Modern corporations capitalize their subsidiaries by sending money to buy up their shares, but also by lending to them. This means they can extract money back from the subsidiaries in the form of both dividends and interest, and this can be useful when trying to run transnational systems of tax avoidance. For example, they might use their UK mothership company to capitalize a Cayman Islands one, which in turn passes the money as a loan to a Zambian one owned by their US subsidiary which in turn is owned by their UK one.

This stuff can get helluva complicated very fast, so let’s round this off by concluding that holding a share in a corporation gives you a fluctuating claim upon a tangled and federated network of subsidiaries held together by other financial instruments. If you hold a corporate bond, you’re getting a fixed claim on the same thing.

Layer 5: The Fund

Summary: you hand over bank-money for a claim upon a portfolio of corporate shares and bonds

You now hold: claims upon multiple [Claims upon a network of {Claims upon future (claims upon [claims upon value])}]

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Modern Monetary Theory - MMT - is a controversial way of describing the monetary system that gets attacked by conservatives and left-wingers alike. In this video I'll show you why it's a really good idea to learn the basic concepts of MMT, and how it has a ‘Copernican’ vibe which triggers many people.

I’ll also show you how to see through straw-man attacks on it. For example, many conservatives claim to hate MMT, yet use the very system it describes. When Trump funds ICE agents, or the border wall with Mexico, he’s ‘doing MMT’.

Conservatives despise MMT, not because it’s incorrect as a descriptive framework, but because it opens up the public imagination in ways that they feel are dangerous. They believe it to be safer to maintain inaccurate mythologies about money as a scarce commodity in order to keep the public imagination constrained.

In fact, many conservatives are joined by left-wingers in this regard, because many of the traditional battles between right and left are fights about what to do with the apparently constrained public purse. MMT is an irritant to both, because it messes with the traditional battle lines that both sides use to define themselves.

Themes covered here, include

• 1:05 The commodity theory of money vs. the state theory of money

• 2:49 MMT basics

• 3:58 The state as an oak tree

• 5:11 Tax as the foundation of money

• 6:49 Tax as a mechanism to reduce inflation

• 7:54 MMT as description vs. prescription

• 10:55 MMT and inflation

• 11:53 MMT as beyond left and right wing

• 12:33 Why all state spending is money creation

• 14:20 What does it mean to ‘do’ MMT?

• 16:52 Why do libertarians get triggered by MMT?

Enjoy, share, and please post your questions and comments below

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Paying subscribers can hear me reading the audio version here

As a child, you become aware that your parents must occasionally hand over money to the state as tax. In our young minds it seems obvious that the government wants our money to spend it. The question that then emerges is what the government gives in return. Are we ‘buying’ something? Is it simply a form of coercive tribute? Is it some act of public goodwill, signalling our desire to contribute to broader society?

I’m going to give you five conceptual models for how to think about tax. I’ll also show how they relate to our perceptions of money. You can hold more than one of these models in your head at a time, even if they contradict each other.

The first four models rely upon a view of money in which it is metaphorically, or literally, imagined as a kind of commodity. It’s imagined as a substance of value that you collect and use for exchange with other individuals. I’d estimate that 99.9% of people in our society hold some version of this commodity imagination of money. Understanding the fifth model of tax, however, will help you to join the 0.1% who can glimpse a totally different conception of money. Let’s start.

The Robber: tax as theft

In philosophies like conservative libertarianism and classical liberalism (which is a foundation of standard economics), humans are seen as solo individuals who pursue their self interest, and who naturally seek to trade with each other to better themselves. Exchange is not only imagined as naturally occuring, but also as the dominant mode of human interaction. From this starting assumption, money is imagined as a commodity that spontaneously emerges to facilitate this natural process.

Core to this position, then, is the belief that markets and money naturally exist without states, and with this vision in place, the state can be cast as an ‘unnatural’ alien invader who comes in to raid. The state steals the money commodity, in order to manipulate and exploit the natural market like a parasite, robbing people of their labour. It can also ‘debase’ the natural money, or make ‘fake’ money to replace it.

The basic gist then, is that many libertarians see tax as a form of theft, in which corrupt bureaucrats steal from hard workers and redistribute it to the lazy.

The Provider: tax as a fee for public goods

This view uses the same basic model of money as a commodity sought out by the state. The difference, though, is that it’s imagined that the state extracts money in order to pay for the infrastructure that’s required to underpin or boost the market.

At a very basic level, this includes providing security and the legal system, which in turn underpins private contracts, without which it would be hard to have any lasting form of trust between private sector players. It’s worth noting that many libertarians accept a limited version of this, seeking a ‘minarchist’ or ‘nightwatchman’ state which exists solely to protect property and contracting rights, and which is justified in taxing a small amount to achieve that.

The more expansive version of this sees the state as providing broader ‘public goods’, like roads and electricity, or education for workers, without which it would be harder for capitalists to make profit.

In this view, the money paid by the private sector as tax is a kind of ‘fee’ for useful state services which make markets bigger and more prosperous. Given that larger players use up more of the market playing field, they rely more upon this state infrastructure, and therefore can be called upon to contribute more to keep it running.

Even if those players don’t like that, they might see tax as a kind of necessary evil to overcome ‘market failures’. For example, roads are needed, but don’t get produced, because the balance of costs and benefits don’t yield enough profit for a private sector player who’d feel like a sucker for producing it (because a bunch of free-riders will then take advantage of it). Hence, the state steps in to provide the thing that everyone needs but no-one will take responsibility for.

The Redistributor: tax as justified extraction

One of the most popular views of tax is that it exists to redistribute from the powerful to the weak, or from those who have the most means to succeed to those who are under-privileged and therefore not on a level playing field in the market.

This draws on concepts of fairness - the idea of helping those on the bottom - but it also makes appeals to stability and market functionality: for a market to work well, you might need to ‘unblock’ concentrations of wealth that might otherwise lead to forms of stagnation.

There are at least three variants of this argument:

• The centrist version: tax as rich people being good citizens: many people have a certain civic pride in paying tax, believing that it demonstrates their inclusion within, and willingness to contribute to, a broader society. This carries some basic assumption that you’re held within a collective, interdependent system, and that you have basic responsibilities towards others within it. When it comes to rich people, this leads to that mantra “with great power comes great responsibility”. The person who has done well in society might feel inspired to ‘give back’. A good example of this nowadays is the Patriotic Millionaires movement, who call for higher taxes upon themselves

• The conservative version: tax as a means to prevent revolution: there’s a more conservative version of the story in which aristocrats and billionaires see tax as a safety valve to release tension caused by inequality in society. It’s a kind of sacrifice they make to the gods of stability, which - if not performed - will allow the gods of popular vengeance to rise up. It’s not that they agree with the concept of taxation, but they believe that all the jealous riff-raff will get violent if the super-rich don’t at least make some gesture of redistribution

• The Marxist version: tax as returning extracted wealth: the two versions above both believe that rich people are rich due to hard work or brilliance, and that their wealth is therefore deserved. Marxists, by contrast, believe that extreme wealth in individual people only exists through extraction. The reason why billionaires are billionaires is that they’ve capitalized on power, and slowly monopolised the toolbox that society uses to produce stuff, and - having done so - extracts rent from workers who operate those assets. In this worldview, tax ceases to be ‘rich people being nice’, but rather ‘rich people handing back their ill-gotten gains so that it can be redistributed to those who actually did the work’

The Technocrat: tax as a carrot and stick

This view sees tax as a strategic instrument used by a state to incentivise and dis-incentivise behaviours deemed desirable or undesirable. It’s a system of rewards and penalties. So, rather than a state seeking to ‘raise money’ by putting a high tax on cigarettes, the state is seeking better health outcomes by making it less likely that you will buy the cigarettes.

In this view, the achievement of the policy objective leads to the elimination of the tax: if nobody buys cigarettes anymore, the state raises no more money through cigarette duties.

Interestingly, this ambiguity is rife in the 2025 Trump tariffs, which are claimed to be a source of revenue for the government, but also an instrument of policy. When the US government imposes a tariff, they’re essentially adding on sales tax on top of private transactions between local American buyers and foreign sellers, which will in turn be paid by those buyers, but it’s ambiguous as to whether the point is to raise money - which would obviously go up with more imports - or whether it is to discourage foreign imports.

It can, of course, be imagined as both: for example, the buyers initially pay the tax, but slowly seek to pivot away from foreign sellers towards US ones to avoid the tax, thereby moving towards the policy goal. If that latter process happens, the US government ceases to raise money through tariffs.

In the case of Trump, though, he’s also using this technocratic tool of incentivisation as a political tool of punishment. For example, he slapped a 50% tariff onto Americans who buy goods from Indians, to punish the Indian prime minister Modi for buying oil from Putin.

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The Anchorman: tax as the foundation of money

In the vision of the taxman as Robber, Provider, Redistributor, and Technocrat, it’s just assumed that money is a some kind of mysterious ‘commodity-like’ thing that exists outside of the state, hence the state needing to grab it, or to pull it from some to give to others.

Since the early 1900s, however, a school of thought called Chartalism has argued that the monetary system is anchored by the tax system, and that tax is required to make money work.

The basic chartalist observation is that states spend money into existence, pushing it out in exchange for real goods and services. Crucial to understanding this, is to understand what the state wants. The state does not want people’s money, much like an oak tree doesn’t want to collect its own acorns from squirrels. Rather, what the state wants is labour, and they get it by issuing credits that they want people to take.

In order to get people to take those credits, though, the state needs to create demand for them. It does this by imposing taxation - in other words, by imposing an obligation on people to give the state those credits back at certain points.

What I’ve just said normally horrifies libertarians, because in their imagination capitalism is peaceful and markets are natural. In the chartalist worldview, and also in the worldview of many economic anthropologists, large scale markets are constructed by states and are always underpinned by violence. The tax circuit used by states to extract labour for themselves, underpins the subsequent monetary system, which in turn catalyses, kickstarts and grows markets to scales previously unimaginable, and therefore scales up private wealth accumulation too.

In this view, state violence is symbiotic with private wealth accumulation, rather than parasitic upon it, because there would be no such thing as large-scale capitalism with its large-scale billionaires if there wasn’t a large-scale monetary system anchored by state taxation. Eliminating taxation would not ‘save capitalism’ from states. It would undermine the entire structure of capitalism. The state isn’t a needy parasite extracting from a host, but rather the very thing that leads to the host growing.

That’s the basic version of the view, but the more advanced version has a technocratic side too. In the chartalist view - which nowadays finds form in the MMT movement - states do not tax to ‘raise money’ to ‘pay for’ stuff, but rather to dampen the inflation that might otherwise occur when a state spends money into existence. If a state issues too many credits it might overshoot the capacity of the system to absorb those, which in turn reduces the power of those credits, so it might first pull credits out of circulation before reissuing them, thereby not diluting their purchasing power.

That reissuance process can have a redistributional element, because money can be sucked from the rich, and then reissued to the poor, or to contractors who will build public goods, for example.

The Taxman’s inner battle

You can see why libertarians hate the views of chartalists, much like superman hates kryptonite or vampires hate crucifixes. Chartalists view tax as constitutive of capitalism, a core mechanism to give substance to the monetary system, which in turn unlocks markets and private sector wealth. For a chartalist, claiming that the state ‘steals’ private sector wealth by demanding its own money back is ridiculous.

That, however, does violence to a libertarian’s self identity as a victim of state oppression, because they want to imagine markets as natural, and money as a tool that spontaneously emerges within that, and tax as a parasitic mechanism. So, even if they reluctantly accept the chartalist reality of how the monetary system works, they don’t want it to be like that, so they must characterise that as fraudulent, coercive and unnatural, and contrast it to an ‘ideal type’ situation in which money somehow works without these characteristics. This is why gold and Bitcoin loom large in their imagination as a kind of Platonic ideal of how money should be, even if they’ve never experienced any world in which that’s an actual reality.

Regardless of this, it’s obvious that the Taxman is an ambiguous, complex and conflicted character. He roams the landscape of taxation, making intensely political decisions by pulling money from certain people and places, and pushing it somewhere else.

Our experience of this character shifts depending on where we are placed. The billionaire experiences the Taxman as robbing him, but the housing construction company experiences new money entering their accounts in payment for low-income housing. That latter action in turn might lower the number of angry and desperate young men who might be pushed into gangsterism to survive in the slums, and who might gun our billionaire down on the street to take his lambo for a joyride. It turns out that the Taxman might be our billionaire’s bodyguard.

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It builds a picture of the international monetary system, starting from simple foundations. It will help you to more intuitively visualize otherwise confusing topics like trade deficits, tariffs, stablecoins, and debates about the role of the US dollar as a reserve currency.

You can also view it on YouTube here

Enjoy!

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I’m going to show you our global monetary system in ten images, using two basic visual components: webs and see-saws.

I’ll be leaving out a lot of nuance and detail as I do this, but one of the goals of ASOMOCO is to give you simple scaffoldings that can allow you to catch glimpses of otherwise invisible systems. You can add in all the complexities, nuances and deviations later.

Image 1: Webs within webs

Any economy is always an interconnected web of people who use the planet’s ecosystems to survive, which means any economy is always limited by:

1. how many people there are

2. how many things there are for them to work with

So, imagine eight people on a small island 20,000 years ago. That economy will be very small.

Let’s zoom into that small web. Those eight people form a single system, but that system also contains sub-systems, such as a group of two people within the eight.

Image 2: A credit see-saw

Let’s focus on those two people. They can move in and out of debt to each other.

When I say ‘debt’ here, I’m not talking about a monetary debt. I’m simply talking about an imbalance in labour.

To understand this, imagine your friend doing a favour for you, like helping you move house. After they do this, you’ll feel ‘in debt’, like you have some obligation to help them at some point. Your friend, by contrast, will sense that they’ve accumulated ‘positive credit’. They’ll feel a confidence that they can call on you at some point. In fact, you might immediately offer them dinner ‘in return’, seeking to partially restore that balance.

‘Balance’ is a good concept here, and it’s why I like to use a see-saw to represent this, with the midpoint represented by a Zero.

Let’s go back to our island. If Person A contributes labour to help Person B, the weight of the labour received by Person B unbalances the relationship, pushing the latter ‘into the negative’, while the former ends up with positive ‘credits’ relative to the latter. One goes below zero, and the other above.

In this context, there’s no formal accounting or exact measurement of these ‘balances’, and being in the ‘positive’ or ‘negative’ is just a background feeling. Both parties simply have a rough intuition that there’s an imbalance, leaving Person B with a sense that they should seek to ‘balance the seesaw’ by returning labour to Person A at some point in the future.

Image 3: Trilateral see-sawing

Let’s now imagine a scenario in which Person B does something for a third Person C, gaining positive credits relative to them.

Person B ends up with both negative and positive credits, so - in the context of this three-person system - they’re in a neutral position, with the positive credits cancelling out the negative. Person A, by contrast, has only positive credits, while Person C has only negative.

Image 4: See-saws in balance

If Person C now does something for Person A, that three-person system balances out to equality again. Each person now has positive credits that offset their negative credits. In a sense, Person C has extinguished their debt with Person B, by extinguishing Person B’s debt with Person A.

Note that we end up with a bunch of stuff produced here as labour moves around, but all the credits end up converging back to zero. Credits expanded, and then contracted, while stuff produced went up.

Image 5: A web of see-saws

That three-person sub-system, though, is set within the larger 8-person system, and at this level the possible combinations get more complex. You can have individual people, but also sub-groups, moving in and out of debt to each other. Let’s imagine a web of enmeshed see-saws, a bit like this.

Those positive and negative signs represent people who are in credit or debt (in labour terms) but they always net out to zero, because the only way for an individual or sub-group to go positive is for another to go negative.

Let me introduce two important disclaimers at this point:

1. In these small-scale scenarios, having ‘positive credits’ generally reflects that you have contributed work, and that you can claim back from others in return. In much larger-scale systems, however, having large amounts of positive credits doesn’t necessarily mean you’ve done a huge amount of work: in fact, in modern systems credits often unequally accrue to those who are in positions of power, or to those who have large ownership of stuff, rather than to those who do lots of work (I’ll expand upon this in later pieces)

2. Most small-scale communities - whether a family, a group of friends, or an ancient hunter-gatherer band - keep these webs of credit informal. They don’t write down who has done what to keep an exact ‘score’, and seldom expect exact returns. They just keep a rough sense of the ‘balances’ in communal memory, and a rough expectation that reciprocity will play out over time. Much larger-scale systems, by contrast, will begin to formalise the webs of credit

Image 6: A web of see-saws, on a see-saw

Imagine now that our web of eight people has some kind of unbalanced relationship with some external power. Perhaps they are menaced by a warlord and his militia from a neighbouring island.

This warlord demands stuff from them as tribute, threatening violence. Rather than simply sacking the island, though, and thereby destroying the source of the tribute, the warlord uses a more sophisticated method. He issues literal credits - in token form - in recognition of the labour and stuff he obtains from the island.

These credits represent a kind of ‘debt’ that the king owes the people, but he doesn’t intend to ‘repay’ it by transferring labour or stuff back in the future. Rather, he simply demands the credits back at periodic intervals, telling the people that they have to use those credits to neutralise a different type of debt they owe him, which he calls tax.

This is a very crude story that I just gave - and the issuance of tokens by sovereigns in actual human history is far more complex than this - but the basic deal is that people give stuff to the king in exchange for credits that he issues, and then later hand credits back to ‘pay their taxes’, thereby returning them (and moving the see-saw back).

The king is in a position to ‘go negative’, precisely because he has the power of violence to periodically eliminate the positive credit accumulated by the people (aka. “I am more powerful than you, and if you do not hand those credits back to me in tax my militias will hurt you”) but the use of tokens to extract goods and services from the island has some very powerful side-effects, as follows:

• The people in our 8-person system continue to have relationships with each other, but as a system they are all in positive credit relative to this external power

• Crucially, those positive credits issued by the external power might become the basis for that small network to begin measuring the relationships between themselves. This is the primal vibe of a monetary system

We saw in Image 5 that the balances in the network of eight people net out to zero. What happens, though, when those eight people become one half of a larger see-saw, with a sovereign issuing credits on one side, and the people using those credits between themselves on the other?

Well, their own zero line gets moved upwards. The zero between them gets renamed as a positive number.

Let’s arbitrarily choose some numbers to illustrate this. Let’s say the King is -10, representing the credits issued out to obtain stuff from the network. That means the network on the other side, as a whole, is +10. Now everything nets out to 10 rather than 0 within the 8-person network, because somewhere else in the system, on the issuance side, there’s a -10.

In our everyday experience of our monetary system, we’re like that network of people on the left hand side of the see-saw - we see money credits as ‘positive numbers’ - but all positive units of money actually have a negative counterpart somewhere else in the system. That minus number section on the right hand side is called the liability side of money, and in our modern system it exists in the state, the central bank and in the banking sector.

So, let’s take the image above and modernise each component.

Image 7: Scaling it up

Unlike an island with eight people using informal webs of credit, a modern national economy is a vast web of millions of people. Let’s represent that web like this.

Those lines between the people are intended to generically represent the enmeshed webs of interdependence between people (or the ‘see-saws’ in our earlier 8-person image).

Let’s now represent our ‘king’ in a new form - as a conglomeration of monetary institutions, with commercial banks clustering around a central bank backed by state power.

I’m well aware that I’m glossing over an enormous amount of detail here, but as mentioned, I’m aiming to give you a conceptual model that you can then go fill out.

I’m going to represent society on the positive end of a see-saw, with the banking sector and state on the negative side, but I’m going to do it in a slightly counter-intuitive way, as follows…

Now, in your mind’s eye, rotate this image around 90 degrees, so it ends up like this, with the see-saw on a vertical axis rather than a horizontal one.

Image 8: Splitting the meta-see-saw

Now, imagine that big see-saw as being constituted by various sub-see-saws controlled by different banks connected into the central bank, but collectively spreading out positive credits like a web across the population…

Ok, so we now have a very rough - but workable - image of our monetary system, with a vertical and horizontal dimension.

On the horizontal dimension at ground level, we have a huge network of people with ties of horizontal interdependence between them. As mentioned earlier, that interdependence nets out to zero, but we’re using positive-number credits between ourselves that come from big institutions. Those positive units of money only exist because there’s a giant hidden negative number that sits in that vertical dimension in the banking sector and state, both of which push those credits out, and pull them back in (to explore the bank element of this, see my recent piece Banks create money, but how do you explain this to the public?).

So, our monetary system is a multilayered hierarchical system administered by commercial banks, central banks, and state treasuries, but it ends up functioning like a giant accounting system that keeps track of the different ‘scores’ people have on that horizontal plane.

Now, in a future episode, I’ll problematize this particular image. Specifically, I’ll start to add in hierarchies of ownership and power, with corporations, billionaires and so on, and I’ll show why their extremely high ‘scores’ do not equate to work done. For now, though, that topic will have to wait.

Image 9: The international system

Having created that national image, it’s now crucial to point out that each national economy with its national currency is but one sub-system within a much larger global economy. To view the international system, we have to start thinking about it as a giant credit network of credit networks.

Let’s imagine our eight person island, but now each ‘person’ is an entire country.

The image below shows a whole series of countries with a mesh of see-saws between themselves. They can go positive and negative relative to each other. This is what economists will talk about as ‘trade surpluses’ - when a country is ‘positive’ - or ‘trade deficits’ - when they’re in the negative.

This image will also help you imagine international payments and foreign trade. Choose one random person in one of the countries, and then trace a path through their banking sector to another person in another country. When you pay for goods internationally - for example, when you click ‘buy’ on a website offering goods from abroad - a bunch of banks have to do business with each other to ‘settle’ things on behalf of citizens or local companies.

Image 10: The US dollar reserve system

Having said that, it’s worth noting that a huge amount of international trade between countries actually relies upon them using a single currency between themselves, and that currency is the US dollar. This is what we call the US dollar reserve system.

To visualize it, imagine that network of countries having an unbalanced relationship with the US, and using its credits to mediate trade between themselves.

Let’s now do the same little trick we did in Image 7, and shift the orientation slightly…

And then swing the see-saw 90 degrees to a vertical axis…

And finally, let’s pull those two sides in, to create an image of the US dollar as a kind of ruling monarch of the international system.

This position gives the US certain powers. In fact, it gives it an ‘exorbitant privilege’, an ability to go way more ‘into the negative’ than the average country, as well as a bunch of other special powers, like lower borrowing costs due to high and consistent demand for US dollars.

This image might be helpful if you’re trying to understand a bunch of current geopolitics. For example, for the rest of the world to use the US dollar as a reserve currency, they - theoretically at least - must run a ‘trade surplus’ with the US (i.e. be getting positive US dollar credits by giving the US stuff, and not handing those credits back to the US in exchange for stuff).

This - theoretically - leads to what is sometimes called the ‘Triffin Dilemma’ - the US can choose to maintain its position as the world’s reserve currency and get a bunch of power and stuff from that, but this means it must remain ‘in the negative’, which is something that Trump and his economic adviser Stephen Miran whinge about.

I say ‘theoretically’, because the real world is more complex than this model, and there are other ways for countries to get US dollars beyond running trade surpluses (if you want to get into the technical weeds of that, check out this piece).

Another hot topic right now is the fact that the US - hovering above the rest of the world - is now trying to get private sector players to push out US dollar stablecoins (digital vouchers for US dollars) in an effort to directly undermine the national sub-networks beneath it, and to make the world’s population dependent on the US dollar for even everyday transactions between local people in their own countries. A bunch of politically naive tech and crypto enthusiasts think that’s wonderful for the world’s population, but it’s also an imperialistic play.

Of course, I’m leaving out a shit-tonne of stuff here, like the entire financial system and bond markets and so on. Hopefully, though, this gives you an initial understanding for how that sense of small-scale debt you feel when a friend helps you move house, has vast-scale counterparts in the international system.

Be careful though to add in differences in power when the scale changes, because power alters the nature of debt. Remember that sovereigns and other powerful players often like to be in debt, because it’s part of the structure of what makes subordinates dependent on them. You will help me move house, and you will be grateful for that, for I shall bestow upon you my precious tokens, and you will become dependent on them to survive.

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I was recently watching a great video from the iconoclastic ‘heterodox’ economist Steve Keen, in which he attacks some mainstream views on banking. Steve, like myself, is deeply frustrated by the way that orthodox economists - such as Ben Bernanke - continue to use the completely bogus idea that banks lend out the funds given to them by savers.

This ‘loanable funds’ model is both very old-school and very common, and it remains the mainstream view. It’s used on the popular finance education site Investopedia, and in a bunch of orthodox economics textbooks I have on my shelf. It’s totally wrong, but it nevertheless has reached the status of being ‘common sense’ to most people.

In this model, the true lenders in society are ordinary savers, people in the public who ‘fill up’ the banking sector with their money, and who then leave the banks to re-lend that out. Here’s how it would look in visual form, with money going from savers to borrowers via the banking sector.

Through this lens, there’s only one form of money in society - state-issued money - and the banking sector simply moves it around. Banks are not seen as changing the money supply, because they’re simply taking purchasing power from one part of society (savers) and giving it to another (borrowers). Banking is seen as a ‘neutral’ system of intermediation, creating a little boost to economic activity by transferring money from parties who don’t want to spend it to those who do.

For many years, critical thinkers on banking and money have tried to dislodge this model. Unfortunately, much like the Barter Myth, it’s one of those foundational ideas in modern economics that’s very hard to kill because it’s part of a paradigm, a network of ideas that require and respawn each other (so even when one of the ideas gets overturned it soon gets revived like a zombie by the others). If you’d like to explore some components of that paradigm, see this footnote1.

Because the mainstream model is ‘common sense’ to most people, and because words like ‘money’, ‘credit’, and ‘banking’ are loaded with preconceptions, it’s actually very hard to describe to a non-expert why the model is bullshit. I’m going to start by showing how I do it, and then conclude by comparing that to some approaches used by Steve, the Bank of England and Ray Dalio, the billionaire hedge fund manager.

Dismantling the intermediation myth in 6 steps

When I’m facing someone who believes that banks lend out money given to them by savers, I’m not only facing someone who is using a flawed model, but also someone who may very well have a flawed understanding of common terms like ‘money’. What’s more, they also might have their own critiques of this system, but built upon an incorrect understanding of it.

For example, there are many people who attack the banking sector for doing ‘fractional reserve banking’, but when describing this they use the mainstream economics model of the thing they’re attacking, which actually means they’re quixotically attacking a false image (for the record, it’s worth being critical about ‘fractional reserve banking’, but you need to actually understand the thing you’re critiquing).

So, to avoid triggering landmines in people’s minds, I have to carefully pick a path when laying out the alternative way of seeing things. Here are the six basic steps I use.

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I’ve been on the road for the last week. Specifically, desert roads in Oman, in 41°C heat, in a small Toyota Corolla with a broken air-con. Soon after taking the photo above I got lost in a landscape that looked like it came out of Dune, with children in remote villages laughing at me as I tried to manoeuvre the rental car through sand drifts.

As an English-speaker, I often find myself publishing my work into the bubble of US-European thought, but it’s always a blessing to escape that comfort zone and to be confronted with something wildly different, and the Sultanate of Oman is certainly that.

I have written about how the world economy is interconnected, like a superorganism tied together by the global monetary system, but that doesn’t mean the interconnected parts don’t have their own logics. At a global scale, Oman is part of the energy complex we all rely upon - it sells oil to accumulate dollars - but at a local scale it’s a parallel world, tinted by parallel cultural filters and a parallel media landscape. While every Western news station rolls out its lopsided coverage of the tragic calamity unfolding in the region, every Arabic TV channel I saw while there was rolling out a parallel commentary, one in which Arabic people take centre stage, and are normal, rather than being strange others far away.

Just north of Oman, across the gulf, is Iran, while Yemen is on its southern border. Right now the Sultanate is an oasis of comparative calm amidst the conflict, but the region as a whole - and its oil - is of acute interest to every major power in the world, and has been for a long time. Oman was in fact a regional imperial power in the 17th and 18th centuries, with a great seafaring trade empire. I stayed for a couple nights in Sur, which was a launching point for Omani dhows to head down to Zanzibar, from where they were major players in the East African slave trade.

In the 19th century Oman fell into infighting, and British colonialists took the opportunity to extend their influence, signing treaties with local elites, granting them protection in exchange for securing their own imperial ambitions. Fast forward to 1970, and Sultan Qaboos took over as a modernizer, finally banning slavery and using the country’s growing oil revenues to undertake massive infrastructure projects.

The sultan also used some of that money to hire some of my dad’s friends from Zimbabwe to train and serve in his elite armed forces. My dad is a former special forces soldier, and, yes, many of his friends are former mercenaries. In my childhood I’d hear stories about the Sultanate when they arrived back after lucrative soldier-of-fortune gigs. Oman certainly has a brutal past, and it most definitely is an authoritarian country, but nowadays it’s also very rich, which means it has that well-functioning autocracy vibe, like Singapore. In fact, some people call it the ‘Switzerland of the Middle East’, because the country tries to stay out of regional conflicts and hedge its geopolitical bets, but the historic violence of imperial trading life still turns up in symbolic form in the ceremonial Khanjar dagger that Omani businessmen wear as part of their formal attire.

As business attire goes, I must admit that the Omani style is way more bad-ass than dull European suits (side note: I wonder what ceremonial weapons an English banker might wear in a parallel reality?), but for a couple days in Oman I was surrounded by different forms of formal attire because I started my trip at the Global Currency Forum, a get-together for central bankers and currency industry folks, set within the tinkling piano music of a five-star hotel resort on the coast below the capital city Muscat.

Because I’m a defender of physical cash, I sometimes get invited to these shindigs and get to meet a fair number of central bankers. The great thing about hosting these forums in tourist complexes is that, eventually, the central bankers get drunk, shed the suits and start wearing tiki shirts, and that’s when you can start to tap into what they really think about things (Oman is Islamic, but they do allow alcohol to flow within the hotels that Western investors and dealmakers inhabit, knowing how it loosens things up).

My primary mission while there was to do pro-cash work among central bankers, and to suss out the vibe in the global monetary system from the executives present, but I’m also an anthropologist, and I couldn’t help but notice that the majority of people doing the non-elite menial work - serving, cleaning, construction etc - were from India, Bangladesh and Pakistan. This sent me on a side-quest, in which I discovered that about 30% of Oman’s population is made up of these migrant workers (in the nearby UAE, the percentage is much higher, at 85%). After chatting to some Indian hotel workers, I discovered it’s seen as a good temporary place to build up some savings before returning home, because wages are good while the oil revenues roll in.

Still, like all Middle Eastern oil states, Oman is very aware of how precarious it is to rely on a single commodities like this - half their GDP is accounted for by oil and gas - so they take their oil money and funnel it through their sovereign wealth fund to buy up non-oil assets - like shares in US tech companies - to diversify.

That takes us back to that strange meeting between the local culture - formed in the scorching desert winds - and the global system, with its interconnected stockmarkets and interconnected currency ecosystems. So, what did I learn about the latter at the Global Currency Forum 2024? Below you’ll find an audio and text briefing of 10 big themes, in particular in relation to the battle between digital payments and good old hard cash in an age of AI.

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Imagine having your smartphone removed from you for a week. You’d initially experience withdrawal symptoms, but your brain would quickly begin to recalibrate. You’d start to notice things in your environment you’d forgotten, like your ability to navigate through space by reading physical features, rather than relying on Maps. You might even find yourself feeling a little liberated, like a creature released from a zoo, relearning what it means to be a wild animal.

Now imagine you had all ability to pay for things removed for a week. This is a lot more serious than having your phone removed. Having your incoming or outgoing payments stopped in a market economy is economic suffocation. You’d be forced into dependence on friends and family, and if they’re not around you’d have to ask strangers for help. By the end of the week you might have become like an urban fox, scavenging through bins. Foxes do have a kind of freedom living in the shadows of our economy, but it’s not the kind of liberation that most people are looking for.

There are many established ways to censor the actions and thoughts of people, from media censorship through to intimidation. In a world where we’re dependent on money, however, the deliberate blocking or limiting of payments by authorities is a particularly devastating method. Physical cash historically provided a partial buffer against this, but as our dependence on digital finance gets entrenched, fear of payments censorship is rising. I’d like to dive into this as a case study, but to understand the politics we need to start with a more primal form of censorship found within our social structures.

Insiderness, outsiderness and censorship

No person survives alone. Rather, we survive in interdependent social clusters. Those operate with shared cultural rules and expectations that govern what is considered normal. People who fail to follow these conventions are often ostracised, blocked, or shunned. This version of censorship needs no police, and no surveillance equipment. It’s done by ordinary people, all the time. Kids learn early on that if they don’t want to be called a weirdo, they’d better conform.

I’m sure many readers have experienced forms of social ostracisation. Perhaps you didn’t abide by a gender stereotype, or show the correct set of interests. Perhaps you had some physical feature, like bigger-than-average ears, that marked you out as different. Maybe you failed to show enough enthusiasm towards the intended path for one born into your position.

I’ve certainly experienced this. The 1980s South Africa I was born into was violent and authoritarian. The white minority that I’m part of imagined itself as an embattled tribe under siege, and used this to justify a police state that suppressed the black population, banned books, controlled the media and limited movement. As a child in this repressive atmosphere, I sensed I was not fully welcome to express who I was, so I detached and built imaginary worlds. I wanted to draw pictures rather than kill rabbits with rifles. I failed to learn the names of the men on the national rugby team. I struggled to understand things that seemed obvious to my peers. I refused to follow music, clothing and technology trends, and began to take contrarian stands in the face of humiliation, but I could literally feel the surrounding social atmosphere trying to push the mute button on my voice.

This is the outsider experience. The outsider struggles with trust, struggles to feel included, struggles to adopt the conventions that hold the normal group together, and feels precarious. Outsiders have an intuitive feeling for censorship - the blocking of voice and action - because we often get ignored, spoken over, mocked, and pushed to the sidelines. We have to deal with bullies who derive their identities by putting us down, and the subtler cruelty of those who simply turn their backs.

This sense of separateness and alone-ness is painful, but we also have the ability to turn that into a source of strength. An outsider can take their feelings of rejection and reflect it back at groups by rejecting the path of insiders. This creates a lone wolf persona with certain gifts: a heightened ability to walk alone, to see through group narratives, and to not feel chained by convention. We often end up self-taught (see, for example, Outsider Art), which sometimes helps us to see the world differently.

A lone wolf persona can emerge to protect that part of yourself that feels excluded, but it also doubles as a protective impulse towards all other underdogs. In any social situation, they stand out to me as if under a spotlight. That’s because, through outsider eyes, insiders often blend into a single mass. You can see them bound together by the euphoria of feeling included. You can see them partaking in the policing of the boundaries.

Outsiders might not require acceptance to operate, but that doesn’t mean we don’t still desire it. In fact, what often happens is that we use the gifts of our outsiderness to try gain some inclusion. For example, we might try to impress with our self-taught art-forms - like Kurt Cobain did - and, given that we may end up on a margins between groups, we have certain skills in building bridges (for example, by explaining the inside stories of each group to members of the other). We’re also quite adept at busting through the more smarmy forms of self-reinforcing insiderness that hold many groups together. This is how I came to be providing critiques of the progress narratives pumped out by digital corporate oligopolies.

Digital outsiderness

Over the last decade the fintech industry has risen to power. They cast physical cash as an unwanted outsider, and force-feed the world an inauthentic story about shiny digital convenience, innovation and win-win consumer benefit for all. They’re part of that class of paternalistic digital crack-dealers, talking about how the kids are so empowered by Instagram, Venmo and ApplePay as we all sink deeper into addiction.

I have an almost allergic reaction to their self-serving narrative, and I started deconstructing the standard stories around ‘cashlessness’ in 2015. My critique is multi-pronged (see 10 Reasons to Fight Cashless Contagion), but one strand of the critique focuses on the use of digital payments for surveillance and control. Unlike cash, digital payments can have conditions and restrictions placed on them, largely because they go through intermediaries - the card companies, banking sector and (fin)tech firms - who have the ability to monitor them, limit them or block them (or receive orders from a government to do that).

Over the years, I’ve been contacted by many people from all over the political spectrum who picture themselves as being the potential subjects of deliberate payments exclusion. Cutting off money, blocking transactions, and seizing wealth to prevent action is a pretty ancient phenomenon, but the most prominent modern form is economic sanctions. This is a mode of coercion sometimes used indiscriminately against entire movements or nations, regardless of whether their individual members are even involved in a conflict. If you’re a repressive political leader who wants to stamp out any nascent insurgency, it’s crucial to get opposition groups classified as terrorists so they get put on international sanctions lists. This ripples through into the transnational banking sector, who sometimes stop providing cross-border payments to entire sectors and population groups through a process euphemistically referred to as ‘de-risking’ (more accurately, financial strangulation).

At a more granular level, we know about the freezing of individual bank accounts of rich fraudsters, or political dictators, but this also happens to individual advocacy groups. For example, after it published Chelsea Manning’s leaks in 2010, the whistleblower site Wikileaks was subject to a blockade by VISA, MasterCard, PayPal, Bank of America and Western Union. Greenpeace had its Indian bank accounts frozen in 2015, on dodgy charges designed to stop them ‘stalling crucial development projects’ and ‘hurting the economy’. It was 2020, however, when the concern around payments censorship escalated to never-before-seen levels.

2020 was a year when our digital environment thickened and suddenly felt all-encompassing. This coincided with stronger-than-usual state directives, with stark restrictions on action. The fintech sector and retail chains used this opportunity to launch a massive campaign of totally bogus scaremongering about cash, claiming - or not-so-subtly implying - that it carried COVID. People were caught between the fear of the physical, and a suspicion of the digital, but in the confusion felt pushed into the arms of Big Fintech.

The concern escalated due to an obscure technical problem that accompanied this. The ‘cashless’ units in your account are like digital casino chips issued out by banks, and like all chips they derive much of their power from their redeemability back into cash (i.e. when you go to the ATM, you’re ‘cashing your digital chips’). Put differently, cashless systems are psychologically and legally anchored by the cash system, so the fact that the cash infrastructure was being undermined made central bankers fret. They began pondering about potential digital replacements for cash, which led to a spike in interest about ‘CBDC’ - central bank digital currency (see Zen and the Art of CBDC Analysis).

Most people aren’t trained in the underlying plumbing of the monetary system, so it was easy for them to get confused by this. Unsurprisingly then, I saw a big public up-tick in interest about my work on cash and digital payments. Many people were also concerned about whether restrictions could be placed on what they pay for, where, when and with whom? Their concern was legitimate, but I started to notice a distinct cultural skew in their language. A significant number of my new post-pandemic followers were beginning to reference common phrases and names, like ‘The Great Reset’, ‘plandemic’, Klaus Schwab, the WEF, and Augustin Carstens. I also noticed that conservative columnists like James Delingpole, and UKIP campaigner Douglas Carswell were retweeting my work. I had a right-wing Dutch politician enthusiastically promoting me. Then my mother alerted me to the fact that a clip of me was being used without permission in a viral video about how Bill Gates was orchestrating COVID to push a cashless society, so that he - and others - could control your spending and movement via digital payments.

By the time I saw that video it had over a million views. I was spliced in alongside a weird cast of rebels, including an apocalyptic preacher prophesying the coming anti-Christ in the form of microchipped cashless payments that represented the mark of the beast.

That guy was an extreme, but it’s definitely true that many people showing interest in my work were also getting drawn into conspiratorial vibes. Rather than analysing the cold impersonal forces of global capitalism, they imagined individual personalities like Bill Gates pulling the strings behind the scenes. Some commentators were referring to this growing cultural constellation as ‘conspiracy theorists’ and the ‘populist right’, but those labels weren’t accepted internally, and it was apparent that there were many disparate strands of people coming together to weave a unique identity. In fact, many believed their growing ranks transcended the traditional boundaries of Left and Right, and that they were a rebellious force representing The People versus The Elite. In due course I found a term for them that fit: ‘diagonalists': those who imagine themselves to be cutting through the staged battle between the centre left and centre right.

Core to the diagonalist self-image was a mainstream-busting aesthetic. They used all the words of heroic lone-wolf struggle against victimhood. They rejected suppression. They stood for freedom, free-thinking, the path less travelled, making up your own mind, ignoring experts, being contrarian, learning for yourself, breaking the rules, tearing down the establishment. They had various charismatic leaders rising to the fore, like Russell Brand, formerly an avowed socialist who was repositioning himself as a voice standing up against elite power more generally. He was joined by others from the right wing, and together they formed a growing class of opportunistic pundits who specialized in raising the alarm about looming digital totalitarianism. Within central banking circles, the debates around CBDC are dull and slow, but in the hands of people like Brand, it became a dystopian story about an imminent takeover of the digital money system by repressive state actors and oligarchs.

While I was supportive of the general uptick in pro-cash sentiment that these commentators were stoking, something was very wrong in their analysis. For a start, it’s the commercial banking sector that’s been undermining the cash system, and they’ve been doing payments surveillance and blocking for decades. Most banking CEOs don’t announce this fact. The various technocrats from central banking circles, by contrast, were blissfully ignorant about how their plumbing operations were being spun in the popular realm, and made the ill-advised decision to speculate about the ‘programmability’ of CBDC.

Programmability is just a buzzword for automated conditionality. Any digital system - regardless of whether it’s controlled by a state, a corporation or a community - can have conditions placed on its operations. There are many private-sector fintech firms that specialise in creating systems that can only be used by authorised people for specific things, with automatic triggers and blocks (for example, think about those apps that allow parents to control the digital spending of their kids). In the pandemic moment, however, amidst the fears stoked up by the punditry, I noticed that a large number of people were beginning to imagine that programmability was a unique property of state-run digital systems, rather than a general feature of almost every corporate platform that their lives currently depend on.

My outsider eyes were also picking up other glitches in the narrative. For example, I noticed that some people in this constellation had a habit of placing certain historically-marginalized groups within the scope of ‘The Elite’. Also, despite their references to breaking down mind-viruses and group-think, they showed many classic signs of group-think within their own ranks. Not only were they beginning to use the same language, but they were using the same examples to illustrate their talking points. For me, one stood out above all. The Canadian Truckers.

The selective curation of universal principles

The story of the Canadian Truckers is quite well-known now. In 2022, some people who worked in the Canadian trucking industry crowdfunded the Freedom Convoy, a protest initially against cross-border vaccine mandates. They blocked off down-town Ottawa with their trucks, and after two weeks the Ontario government declared that it was no longer a protest but an ‘illegal occupation’. This eventually led to their GoFundMe page being terminated, and the bank accounts of the organizers being frozen as part of an effort to stop them.

It’s obvious that there was a clash of world-views at play when Justin Trudeau decided to take action against the protest, and the growing diagonalist intelligentsia - which was now starting to include everyone from Jordan Peterson to Tucker Carlson, Naomi Wolf, Joe Rogan, Elon Musk and Bret Weinstein - all took up the Freedom Convoy cause. Russell Brand dedicated over ten videos to it on his channel, but I was also being asked to commentate on it. I received a spate of invitations to appear on ‘anti-mainstream’ news outlets who claimed to be broadcasting the truth that authorities and legacy media ‘don’t want you to know’. To some presenters, the Truckers seemed to represent a new and ominous portent about a totalitarian future that was coming to get us (or at least them).

There’s no doubt that the Freedom Convoy was subject to financial suppression via a digital payments infrastructure. It’s worth noting, however, that this is almost identical to the aforementioned actions taken against Wikileaks and Greenpeace. In all cases a protest group finds themselves shut down by authorities who say what they’re doing is illegal. These groups, plus many others across the world who’ve been labelled as terrorists, see themselves as victims of politically-motivated suppression. This is not new to me. In my own home country, opposition groups who asked for the most basic human rights - like the right to vote - had their assets frozen and were imprisoned as terrorists from the 1960s to the early nineties.

Many of the diagonalists, however, seemed to view the Truckers as an unprecedented one-of-a-kind instance, a wake-up call. To some extent this makes sense. After all, the Wikileaks case concerns a secretive global group with no obvious geographic location, while the Greenpeace case happened in faraway India, a country of relatively little interest to Western media. As for groups like the PKK in Turkey, Erdoğan gives his word that they’re baddies who use bombs (something the Turkish government would never dream of doing), so they just get written off.

All these cases happen somewhere distant to a person in the US or Canada, so could it be that the Truckers struck a nerve because this was the first time that citizens of a democratic Western nation were subject to payments oppression? The answer is no. Cashless payments censorship has a long and established tradition in Western countries. It’s just that it’s not recognized because it’s been focussed on marginalized groups such as welfare recipients. The scholar Nathalie Maréchal, for example, has investigated how financial control of the poor has often been normalized on paternalistic grounds.

There are many reasons why a person might rely on welfare, from war disabilities through to single parenthood, sickness, depression and addiction. These situations are also often associated with people who’ve been structurally marginalized in their societies. In other words, they disproportionately affect groups on the outside edges of society, but the welfare system often ends up controlled from the inside by people who’ve seldom faced systemic outsiderness. Insiders like this are far more likely to casually believe the conservative memes about the poor being poor because they’re lazy, or because they lack initiative, impulse control and motivation. It might appear reasonable to them that welfare recipients should be monitored like little kids.

The earliest forms of payments ‘programmability’, then, have been welfare systems like the US food stamp programme. These operate via coupons that contain inbuilt conditions that limit their redeemability to certain things in certain places (while often having an explicit prohibition on the receiving of change in cash).

Sometimes this appears relatively benign. For example, in the early days of the pandemic, the small town of Tenino in Washington handed out ‘wooden dollars’ - dollar-denominated vouchers printed on wood - to people who were entitled to support grants. These vouchers were only redeemable in small local businesses, rather than in distant corporate behemoths like Amazon.com or Walmart. By limiting the redeemability of the vouchers like this, welfare recipients were corralled into spending locally, which could help create a local ‘multiplier effect’ that might boost local employment too, thereby killing two birds with one stone.

Much more controversial though, was the Australian Cashless Welfare Card, a VISA card scheme set in motion by members of the conservative government of Tony Abbot. It was explicitly designed to limit the spending choices of the poor - which disproportionately includes indigenous Aboriginal Australians - by blocking them from buying things like alcohol and cigarettes. This practice, and other restrictions, came disguised with paternalistic names like Enhanced Income Management, but community activists had a simpler name for the scheme: the ‘Class Warfare Card’.

The Cashless Welfare Card system worked primarily by blocking entire shops, but experiments with product-level blocking within approved shops have gone on too. Not only does this have the psychological effect of making adults feel like children, but it treats addiction problems as if they were bad choices made by deficient people, rather than emotional responses to having been made an outcast on your own territory. This same technology is now being applied to outcasts outside their own territory, such as refugees in Germany.

In 2022, the Cashless Welfare Card scheme was ended by the new Labour government in Australia, causing backlash from conservatives. Since then, the conservative newspaper The Australian has run no fewer than seven stories talking about the ‘chaos’ that has ensued since the paternalistic scheme has been ended, while Spectator Australia slammed the decision as based on ‘ideology, not reality’. Their message can easily be read as ‘We want payments control over indigenous Australians to be reinstated’.

When an Aboriginal person reads the newspaper called The Australian, do they feel like Australians at all? That publication also ran sympathetic stories about the Canadian truckers, but it’s worth asking how many members of the Freedom Convoy have ever spoken out on a couple centuries of financial and political silencing of indigenous Canadians. To some people, the image of The Trucker might be the image of a hard-working family man, but when an Anishinaabe women sees the protesters rolling past her reservation, is she filled with a sense of proud patriotism and inclusion, or is the feeling more complex? Indigenous Canadian researcher Krista Stelkia argues that the Freedom Convoy would have been shut down much quicker, and more violently, if they’d been a convoy of indigenous drivers.

Detachment styles

The Australian is torn on the issue of another Australian. Julian Assange. In 2010 his Wikileaks published the Collateral Murder video, in which a US helicopter crew guns down Arabic people while laughing as if it were a video game. Assange has become an ambiguous figure because he has markers of another outsider archetype: the mercenary.

Social outsiders certainly have the capacity to buy into causes, and to experience forms of inclusion, but they’re also relatively more able to detach from the insider dynamics of these groups. This may double as a less judgemental view on any apparent enemy of the group, which can give outsider-types a slightly mercenary edge (the wandering lone ranger resigned to a life of mercenary outsiderness is a popular film archetype, especially because they can be saved through love or inclusion).

Unlike a true zealot, the mercenary archetype doesn’t really hate the people they fight against. They might actually give you fairer treatment if you’re on trial in a domain controlled by a group you don’t belong to, but they can also pose a threat. Like Assange, they might reveal things a person likes - such as Hilary Clinton’s emails - but also things they don’t like, such as the war logs of an ally.

This is sometimes how I feel when I appear on the 'anti-mainstream' 'free thought' media outlets. They want to hear about the financial censorship of the Freedom Convoy, but they don’t want to hear about restrictions on Aboriginal payments. This hints to a skew in their freedom of thought, and it’s certainly not open-minded. When they approach me, they’re trying to recruit that mercenary side of me who is nominally prepared to defend their narrow free thinking, but this poses an ethical dilemma, because their selective curation of what examples of payments censorship they’re prepared to ask about or listen to amounts to a silent form of censorship in itself. Selectively hearing, and amplifying, one set of injured voices - the Truckers - can be very similar to blocking another set out.

But this is core to the diagonalist strategy. Their spiritual leaders, from Steve Bannon to Brand, first appeal to big universal concepts like The People, Justice, and Freedom, which supposedly have a pure meaning inscribed in the cosmic order. They then superimpose those over particular parochial concerns. So, Freedom is a universal principle written in the sky, but - more specifically - it’s The Canadian Truckers. By extension, Trudeau’s payments censorship is Repression, but Tony Abbot’s attack on Aboriginal payment freedom is mere Prudence. After all, what universal principles and archetypes do the aboriginals represent to those who will not listen to them? Addiction. Laziness. Entitlement. Losers. Outsiders. Weirdos.

All movements will spin universal principles like this into their narrow political programmes, but the diagonalists have done it in a particularly sneaky way. They’ve stocked their growing network of promoters with people who can credibly claim to represent both sides of the old political spectrum, like Russell Brand, and Naomi Wolf, who hate the idea that they might be right-wingers. Nevertheless, it’s obvious through their curation of examples that they’re veering rightwards. Brand is supposedly a working-class boy with a feel for the people, yet he isn’t talking about the Class Warfare Card, or the new requirements pushed out in the UK to monitor the bank accounts of welfare recipients.

Rather, he’s ranting about a hypothetical future state digital money system, which might hypothetically be used by Greta Thunberg to force you to buy low-carbon products. Brand himself might not make the latter claim directly, but it’s done by association through the diagonalist influencer universe, which operates like a social network of strange bedfellows. Many of them have made cynical political pivots to ride the diagonalist popularity train. For example, Richard Werner used to be an insightful critical voice on debunking mainstream economics. Now he’s selling cheap scare stories about micro-chip CBDC implants to his new audience, selectively noting how they could be used to force you into 15 minute cities, or police your carbon budget, while ignoring the stories of actually-existing payments censorship of groups his audience doesn’t resonate with.

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When outsiders cosplay insiderness for insiders cosplaying outsiderness

The sad thing about people like Brand is that he probably indeed is an outsider. He probably does experience an internal crying out for acceptance. So, he trades his principles off to be the centre of attention for a new group built around his wounded ego, one that turns him into a guru touched by some magical outsider light. A guru like this isn’t so much an insider as an enclosed outsider, captured by those who reflect his image back at him, comforting him.

But this position isn’t secure. There’s no shortage of new rising stars in the diagonalist attention economy, and Brand must feed his followers to keep their eyes on him. He must replicate his story, day-in-day-out, to keep his guru status. If he doesn’t, he might find himself dropped. Silenced.

Being thrown back into obscurity would probably liberate him from his followers, but right now he’s yoked into curating examples that make them feel like outsiders, because feeling like an outsider is a core part of their new identity. Let’s face it, one major reason the diagonalist movement has gained traction is because its gurus specialise in applying the language of outsiderness like a balm to those who wish to restore a sense of lost insiderness. At core, it’s a rebellion of the disenchanted white middle class, a group particularly prone to believing in all the old stories about being a self-made person in the free market. Many sense their position in the world is in a state of relative decline, and are drawn towards a kind of victim complex in which they imagine themselves as suppressed minorities. In fact, some literally start to believe they are like African slaves, persecuted Jews, or ostracised weirdos, as if the guy running the libertarian YouTube channel is like a Spinoza fearing for his life in the 17th century, or Nelson Mandela having his 1978 book banned in my home country.

This is what Naomi Klein calls doppelganger politics, a kind of mirroring, cosplaying, appropriation and mimicry of victimhood. The complexity, however, is that insiderness-outsiderness is a fluctuating spectrum, even within a person. On average, the diagonalists represent a radicalized middle of society that’s now cloaking itself in the image of those historically excluded, but averages hide many nuances. For example, a Welsh working class man might feel relatively marginalised within the UK, but at a global scale he’s actually part of middle class, given that he’s a citizen of a country with a lot more geopolitical and economic power than, say, my home country (where it’s not uncommon for the working class to live in hand-built tin shacks). This is one way in which diagonalism starts to capture a motley cross-ideological crew of people with different degrees of inclusion, but sharing a common sense of losing relative position. There are many old British left-wingers who care about fighting austerity programs and protecting welfare systems, but who’ve found themselves drawn into a cranky diagonalist rhetoric of rebellion that structurally skews to white social conservativism. This is how their eyes have fixed onto the censorship of the Canadian truckers, and why they’re clicking the like button on Russell Brand’s videos.

I started life as a shy voiceless one, but nowadays I try to hear and amplify silenced voices, but this still involves making judgements on who is truly silenced. This is what confronts me when I get approached by those seeking common cause with me on payments censorship. What do I say to someone who has come to believe that they have enemies suffering from a woke mind virus, and that these enemies will use CBDCs to police their carbon footprint, to prevent them buying meat, and to extend cancel culture into the realm of free transactions?

I’ll tell them five things. Firstly, yes, it’s very important to fight the general principle of payments censorship (and, by extension, to protect the cash system that provides a buffer agai nst it). Secondly, I must inform them that the actual chances of payments censorship being used against them is smaller than the chances of it being used against refugees, migrants, the homeless, or sex workers, who face recent real-world cases of financial censorship.

Thirdly, while I really do respect their concerns about hypothetical cases of their future victimhood, I must also reflect back to them the actual cases of present victimhood.

Fourthly, I must share that if woke is a mind virus, then so too is anti-woke. The imagined freeing of thought and action represented by the latter is really just the reassertion of one particular style of thought and action that was previously hegemonic. That takes us back to the social dynamics we began with, and to my fifth point: Hegemonic thought silences people, and makes them censor themselves , without any authority needing to resort to overt technologies of control. Actual free thinkers can see that quite easily.

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Imagine the fiery origins of the earth, with asteroids crashing and depositing debris all over the planet, and volcanos depositing lava. Nowadays this leads us to discover cobalt deposits, gold deposits and iron ore deposits in the earth’s crust.

Now picture the Amazon river raging in flood, and bursting out into the Atlantic ocean where it deposits a payload of sand. We might say there’s now a sand deposit that’s been deposited into the ocean.

I can list countless more examples of' ‘depositing’. For example, picture me pouring beer from a jug into a cup. I'm depositing beer to create a 'beer deposit' in the cup.

The basic rule in the English language is that the verb ‘deposit’ creates a noun of the same name: the volcano 'deposits granite deposits', and the river 'deposits sand deposits', and so on. Following this linguistic convention then, surely we’d be correct in thinking that we 'deposit a bank deposit'? Surely, much like the beer I’ve poured into a glass, the bank deposit is money I’ve poured into the bank.

It certainly seems that way, and reputable sources like the Oxford Dictionary of Finance and Banking confirm this when they tell us that a deposit is “A sum of money left with a bank, for safekeeping or to earn interest”. The Merriam-Webster Dictionary corroborates this, stating that the noun version of deposit is 'money deposited in a bank'.

Unfortunately, they’re all totally wrong, and this error wreaks havoc on our undestanding of Big Finance.

Unhitch the linguistic glitch

To understand the problem, let’s go through a thought experiment. Imagine you go to a casino on a cold night, wearing a big coat. Before entering the main area, you stop by the cloakroom and deposit your coat there. In return, the clerk issues you with a little numbered slip, which enables you to claim the coat back.

There’s a nuance to be aware of here. The casino cloakroom has just become a custodian of your coat, but they do not own your coat. You retain ownership, and the slip is your proof of ownership. If you lose the slip during the night, you still own your coat, but will have to find some new method to prove that (perhaps you’ll have to describe its features, or tell the clerk what’s inside its pocket, to prove ownership). For now, though, you stuff the slip into your wallet.

Having done this, you go through to the cashier area, and hand over $250 in cash to get $250 in chips. In a sense, you’ve just ‘deposited’ cash to get the chips.

This situation is similar to the cloakroom - you deposit one thing and get another - but it’s also slightly different because in this case you no longer own that cash. Let’s look at this through an ‘asset vs. liability’ lens. Assets are things owned. Liabilities are things owed. For the casino, the cash you hand over becomes an asset to them, which means you’ve lost that asset, but they simultaneously have to issue chips out to you, which becomes your new asset. You replaced one asset with another.

To the casino, however, those chips are liabilities, because they give you, the bearer, the right to demand cash back from the casino at the end of the night. This is confirmed in the highlighted section below from the UNLV Gaming Law Journal (Volume 5, Issue 1, 2014).

A chip isn’t a proof of ownership of some specific thing, like your cloakroom slip is, but is rather an ‘IOU’ issued out by the casino that gives you a claim over them. When presented back, it will force the casino to hand over some of its assets to you.

So, hypothetically, if you were to get totally drunk during the evening, and accidentally drop some chips into the toilet and then unknowingly flush them down, the liabilities of the casino will decrease while their assets stay the same. If you stumble up to the counter, having lost these chips, and try to ‘prove’ that you actually own cash behind the counter and want it back, they’ll reject you. The only way you’re getting cash is to present the chips to them.

Where does the noun reside?

In both cases above, you ‘deposited’ (verb), so where do the subsequent noun-versions of ‘deposit’ reside? Well, there’s a bunch of coats being held in trust in the cloakroom, so that’s a ‘coat deposit’, and there’s a cash pile behind the cashier’s desk, so I guess we could call that a ‘cash deposit’. As you walk around the casino, however, you’re not holding those nouns. You’re holding the things issued out - a slip and chips.

Let’s create an odd scenario. Imagine if you started calling the slip a ‘coat deposit’, saying ‘I have a coat deposit in my wallet’. It sort of sounds like you’ve stuffed a big coat into your wallet, but if someone heard you say this, they’d guess the context and say ‘oh, you have a coat deposit receipt in your wallet’.

Now, imagine you start calling the chips ‘cash deposits’. You turn up at a poker table and say ‘how many cash deposits to buy in?’ The dealer is going to look at you strangely, and say ‘you mean how many chips to buy in?’ At best you’d be thought of as a little eccentric for using this language, and at worst they’d think you’re an idiot. You’re holding chips, not cash deposits.

This, though, is exactly what I think about when I hear economists talking about ‘bank deposits’. Economists, like our confused punter above, use the term ‘deposits’ to refer to the chips issued out by banks, but in doing so erroneously give off the impression that they’re talking about ‘cash behind the counter’. They use a term that denotes ‘thing put in’ to refer to something that’s actualy issued out, and this seriously compromises our understanding. So, when thinking about 'bank deposits' you need to unhitch your mind from the traditional verb-noun pairing.

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Why the word ‘bank deposits’ is a liability to society

The best way to understand banks is to compare them to our casinos, because so-called ‘bank deposits’ are closely related to casino chips. When you deposit (verb) cash into a bank, it goes into their assets. Think of it as entering the ‘treasure chest’ of things they own. Like our casino, they simultaneously issue us IOUs, or ‘digital casino chips’. That’s what you see rendered on the screen of your phone or computer when you’re looking at your bank account. In other words, your bank account is not a place where the bank is ‘storing’ money you ‘put in’. It’s the place where a bank records how many chips it has handed out to you.

Bizarrely, however, these chips get called ‘deposits’. You can see this if you look at a bank balance sheet. Their treasure chest is described on the asset side, while claims against that are described on the liability side. Here’s the balance sheet of Barclays Bank, for example. Notice that ‘deposits’ is on the liability side, because they are issued out, not put in.

If deposits were truly ‘in’ the bank, they would be in the assets section on top. So, while it’s true that we can ‘deposit’ money into Barclays, the money we deposit there ends up getting called ‘cash and balances at the central bank’, while the thing they call ‘deposits’ refers to something emanating out of the bank. This is definitely a poor choice in terms, but I’m going to assume that a senior banker at Barclays basically understands that a ‘bank deposit is not deposited’. When it comes to economists, however, I’m not so confident. In their case, they often authentically seem to think that the deposit refers to a ‘thing put into bank’.

For example, when economists are describing what they call ‘fractional reserve banking’, they’ll say something like this: ‘people deposit money into banks, but banks then lend that out to borrowers while telling their depositors that it’s still there’. Here for example, is the major finance site Investopedia saying this exact thing:

When you consider the Barclays balance sheet, and the fact that ‘deposits’ turns up on the liability side, you’ll start to see how idiotic this description is. How does Barclays ‘loan out’ something that’s a liability to them? That’s like saying ‘I loaned my friend my outstanding tax bill’.

Let me explain the mistake they’re making. They’re starting from the erroneous assumption - derived from that verb-noun convention - that a deposit is a ‘thing inside the bank’, rather than a ‘thing issued out by the bank’. They then imagine the bank taking that and handing it out to people, but by doing this they’re falling into the classic OTOMI problem - the One Type of Money Illusion that I describe in my piece The Casino-Chip Society. They’re failing to realise that the term ‘money’ refers to more than one thing, and comes in different forms with different issuers.

In particular, the term ‘money’ simultaneously refers to state-issued cash and bank-issued digital casino chips. So, take that phrase ‘banks lend us money when we ask for loans’, and replace ‘lend’ with ‘issue’, and ‘money’ with ‘digital casino chips’. Here’s what it looks like: banks issue us new digital casino chips when we ask for loans.

This is a much more accurate description of bank operations. If you look at the balance sheet above, you’ll notice that the digital casino chips (‘deposits’) on the liabilities side far exceed the 'cash and balances at central bank' category in the assets section. It’s not that Barclays is sneaking cash out of its ‘treasure chest’ and trying to hand it out to borrowers. It’s that Barclays is simply issuing new digital casino chips at will, against the backdrop of its treasure chest, to people who ask for loans. Banks aren’t limited1 in the amount of chips they can issue out (albeit it puts them at risk to issue too many, which is something that regulators try to limit through the various requirements of the Basel III accords), and given that these chips get called ‘deposits’, it follows that they can expand their deposits even if nothing was deposited.

This is the actual operation of modern ‘fractional reserve banking’, or - more accurately - credit creation of money. The key thing is that banks issue new digital chips in order the harvest loan assets, which is what you see filling up the other sections of the asset side of their balance sheet. If you want to delve deeper into that, see my Emotional Guide to ‘Fractional Reserve’ Banking.

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Update the dictionary

I wish we could just stop using the noun ‘bank deposit’, but unfortunately it’s encoded into our language, textbooks and politics like a dinosaur etched into the fossil record. If only there was a global ‘update the dictionary’ council that I could appeal to, but in the absence of that I’d at least like to have a chance to show you how I’d rewrite the Merriam-Webster definition. This is how I’d do it.

The verb-noun glitch creates all manner of weird anomalies when you start to play with it. For example, if I do indeed insist on depositing a bank deposit it will in fact destroy it, because - using our updated definition - that would actually mean 'handing chips back to the bank that issued them'. Incidentally, this is actually what happens when you repay a loan. You’re literally retiring bank chips from circulation.

If you have any further suggestions for how to dislodge this term, or what terms you’d use in it’s place, I’d love to know.

Leave a comment

Part 1 can be found here. Paying subscribers can find the audio version here.

Every group has its trends and cultural expectations that spread mimetically and get enforced socially. If I put on country music rather than techno at a Berlin hipster party, I’ll be shunned. If I defend physical cash at a tech conference, wear a Karl Marx shirt at a Bitcoin meetup, or hand out Google swag at a socialist convention, everyone will avoid me like a plague.

When it comes to mainstream innovation scenes, however, there’s an added element. Not only do these scenes have trends and cultural expectations that you’re expected to follow, but those trends are pushed by systemic forces that nobody’s truly in control of. Capitalism is a headless beast that blindly crawls towards the next new thing, and much of the so-called ‘innovation’ within it is just inertia, the process by which we just drift in a particular direction unless stopped. Furthermore, much of that innovation inertia is just automation, which is the most unimaginative form of innovation, and also the most popular with corporations, because it helps them to accelerate everything, fire their employees and pursue their never-ending quest to turn the entire planet into a giant robotic mall.

It really isn’t particularly innovative to go along with this inertia, but we have a whole class of innovation pundits and futurists who specialise in dancing around it like bards, claiming that this drift represents the will of the human spirit and our bountiful creativity. There’s something almost ritualistic about the ‘hype cycles’ that accompany this. People - feeling powerless to control the drift - choose to imagine that every new technology is some kind of revolutionary uprising that will ‘change everything’. In reality, most of our technologies do the same thing they always do - speed up our lives to make us produce and consume more (see Tech doesn’t make our lives easier. It makes them faster).

In my jaded moments, I call this phenomenon Idiotic Innovation Inertia. It’s ‘idiotic’, in the first instance, because so much of the hype gets directed towards stuff that’s incredibly predictable. Being excited about automation under capitalism is like being excited that a stone gets pulled down under gravity: fine, if you glue yourself to the ceiling, you can choose to believe that the stone is launching upwards into the unknown, but in reality most automation is just pulled into being by the gravitational force of our economic vortex. Right now, there are countless startup teams around the globe contributing into that: they’ve noticed that some aspect of life isn’t yet automated, so will secure venture capital funding to change that, and at some point they’ll get on stage at one of those tech conferences to tell a heart-warming story about how they ‘solved’ some problem through automation that the vast of people didn’t realise was a problem until now.

Sometimes, though, our system also generates random 'idiotic’ perturbations - let’s call them side currents - that briefly ripple into a wave of hype before predictably dying out. NFTs, for example, propagated mimetically through the human population, before the current died off and everyone returned back to the main automation trend. Now everyone who hyped NFTs is hyping that darling of automation - AI. In fact, every blockchain conference in the world right now has pivoted to ‘blockchain meets AI’ to appear relevant.

I’m noting all of this, because anyone who finds themselves in any kind of elite tech or innovation scene is expected to parrot the current suite of generic talking points about the current suite of buzzwords, and this applies to politicians too. One of those buzzwords right now is CBDC - central bank digital currency - which entered the hype cycle in the last couple years. It’s impossible to truly understand the debates around it unless we recognise the huge amount of Idiotic Innovation Inertia that conditions them.

Tunnelling through the CBDC hype cycle

The hype cycle is a methodology from Gartner, which tracks the stages of excitement around a technology. Its peak looks like the top of a hill, but to think clearly you need to tunnel directly through it.

In Part 1 of Zen and the Art of CBDC Analysis, I offered five meditations to help prepare us for that. Firstly, to calm our ideological horses, I explored the difference between libertarian, socialist, anarchist, and centrist takes on CBDC, mapping out how each group is likely to think about it. Secondly, I noted that CBDC already exists under a different name - central bank reserves - and pointed out that the debate is really about whether or not the public should be given access to that existing form of digital money, which has been available to the banking sector for decades. Thirdly, I noted that early proponents of this were actually monetary reformers who wanted to challenge the power of the banking sector: they believed that giving the public access to digital reserves would provide us with an alternative to the existing system of bank-controlled ‘digital casino chips’ that we currently use as digital money. Fourthly, I noted that central banks are not radical monetary reformers, and have no intention of disrupting the banks. Furthermore - contrary to some accounts - they are not considering CBDC out of a concern for being ‘outcompeted’ by the private sector payments players that they underpin and regulate.

So what’s the CBDC debate all about then? Well, I concluded Part 1 by noting that the CBDC discussion in on the table primarily because of the pressure on the physical cash system. Cash is a massive un-automated part of the monetary system, and it’s currently standing in the way of systemic acceleration and automation. As I noted in my recent Aeon essay, ‘it operates at human scale and speed within a system that increasingly demands inhuman scale and speed’. This means there’s a systemic drive to get rid of it, but doing so creates a shed-tonne of systemic instability, because all those ‘cashless’ digital casino chips are in fact psychologically and legally tethered to cash. This causes a classic ‘contradiction of capitalism’: our system wants to get rid of something that underpins it, like trying to shoot of its foot to run faster.

This means central bankers are sensing a systemic pressure, and the emergent contradiction is causing their brains to fret. The predictable thought that forms in their minds is to calm this issue by releasing some kind of ‘digital cash’ that jells with transnational automation while still offering an ‘anchoring’ form of state money. In reality, however, this just means allowing the public access to the pre-existing digital central bank money that banks use between themselves. This in turn predictably leads to resistance from the banking sector, because giving the public access to state ‘digital cash’ threatens the sector’s stranglehold over retail digital payments. This then predictably leads the central banks towards watering down their CBDC proposals to protect the banking sector.

So, the reality is this: current debates about CBDC are on your radar because of the unstable storms caused by the gods of capital, but we’re not supposed to talk about that, so all the innovation bards dance around the topic, reverse-engineering a back-story about what ‘problem’ this is supposedly solving. So, in the spirit of bypassing these people and the hype cycle they serve, I’d like to offer five reflections.

Reflection 1) Idiotic Innovation Inertia creates the ‘official’ justifications for CBDC

Since publishing Part 1 of this piece earlier this year, I’ve been pulled into many discussions with politicians, technologists, and central bankers about the topic of CBDC. What’s striking is just how few of them actually seem to understand why the discussion is happening. It’s like they all turned up at some proverbial grand forum, having been told to be there, but nobody can recall who called the meeting or why they’ve gathered.

The vacuum in understanding emerges from the fact that it’s taboo in mainstream circles to think or talk about the contradictions of capitalism. This means you cannot acknowledge that the CBDC discussion emerges from problems created by digital acceleration and the ‘war on cash’ that it inspires. This also means that people in the mainstream need to invent a bunch of after-the-fact explanations for why they’re at the discussion. Here’s the official list of options they can trot out:

• We’re discussing CBDC because it’s important for financial inclusion: people like Queen Máxima of the Netherlands are convinced that it’s a giant travesty that 20% of the world’s population is ‘unbanked’ and thereby not cuddled tightly enough by the embrace of corporate capitalism. Prior to the CBDC discussion she believed that public sector bodies should assist private sector players like Mastercard to infiltrate into the lives of ‘the unbanked’, so that they too could tap their ApplePay watch at a patisserie in Amsterdam. Now, she and others have become convinced that public sector CBDC could fast-track this absorption (which she would call inclusion), leading people into the arms of corporate capitalism without depending upon fickle private sector payments players (who frankly are not always fussed about absorbing unprofitable poorer people into their systems)

• We’re discussing CBDC because it solves problems in cross-border payments: national currencies are ecosystems made up of many different players, but at an international level these composite systems become even more complex, because they have to be tacked together via a mishmash of transnational bridges (like SWIFT, SEPA etc). Under conditions of systemic acceleration and expansion in the global economy, there’s a constant perceived need to find newer ‘frictionless’ forms of global payment, and - in the current moment - some have decided to shoe-horn CBDC into that mission. Perhaps all the fragmented private digital systems could all be glued together better if this new public option was available. Some are now framing this as a mission to create a ‘unified ledger’, a transnational system for streamlining the fragmented conglomeration of national ledgers currently used

• We’re discussing CBDC because it’s the Spirit of the Times: Sometimes central bankers will weakly acknowledge the systemic automation drive under capitalism, but will do so by imagining it to be like a popular upwelling driven by the individual choices made by the person in the street. The thought-structure goes like this: X seems to be happening in our society, therefore this must mean that everyone desires X, so we should push X as well. They say generic stuff like “our lives are becoming ever more digital”, which then supposedly lends credence to the idea that the central bank is but a passive player that must ‘keep up’ with this inexorable stream, and do its part to reinforce the very same trend through digital innovations like CBDC

Against this backdrop, we find a whole range of academic pundits who pile-on more exotic suggestions for what the true purpose of CBDC is. This includes:

• Technocratic macroeconomists like Willem Buiter, who wishes to accelerate his war on the ELB - the ‘effective lower bound’. This is a piece of economist jargon that refers to the fact that physical cash cannot be subject to negative interest rates (aka. somebody cannot push a button to make a £5 bill disintegrate into a £4.50 bill in your hand). You can, however, do that with digital money, so Buiter now believes that abolishing cash and replacing it with CBDC will give people like him a delicious new macroeconomic tool to push people to spend more (incidentally, this property is not unique to CBDC - you can also do it with money in conventional bank accounts)

• Others, like Andy Haldane, push a more ‘populist’ technocratic line. He thinks it’s an outrage that the public does not get paid interest on cash, and uses various mental gymnastics to argue that this represents a regressive shadow ‘tax’ which could be reversed if the public was allowed to hold interest-bearing CBDC. You might notice that this is actually the opposite to Buiter, who would create a CBDC that not only doesn’t pay interest, but actively extracts it from people (aka. cash’s ‘lower bound’ protects you from Buiter while thwarting Haldane)

• Those careless officials who don’t have their finger on the pulse of public opinion sometimes express excitement about the potential for ‘programmability’ in CBDC, the ability to place limits and conditions on who can use it, for what, and with whom. Historically this kind of conditionality has been used on welfare recipients, but libertarians are causing a lot of stink about it as a tool for a global elite to control your lives (see my essay in Aeon Magazine on how to analyse right-wing theories around CBDC). The posterchild for this is the Mexican economist Augustin Carstens of the Bank for International Settlements (BIS), who likes to talk positively about programmability (albeit he’s equally enthusiastic by the possibility of private sector players using it)

Carstens seem blissfully unaware that not everyone in the world trusts technocracy, but it’s not like there aren’t nascent concerns in mainstream circles about CBDC inertia. It’s a standard business meme to contrast opportunities with risks, and in the official discourse the current list of the latter includes:

• ‘Disintermediation’: this is by far the biggest official concern. It’s the aforementioned fact that the banking sector doesn’t want the state competing with them by providing an alternative to commercial bank accounts. The term is somewhat dubious, because banks are not ‘intermediaries’ in any true sense of the word - they are active creators of money in our system - but basically they’re telling the central bank, ‘back off from our territory’, or ‘if you come onto our territory, you do so on our terms’

• Privacy: all mainstream players pay lip-service to privacy concerns, but they will always set it up as something that needs to weighed against the need for transparency. This issue also cannot be separated from the disintermediation point above: the banking sector already runs a giant ‘cashless’ payments surveillance system, so will perceive it as unfair competition if the state offers a privacy-preserving version of the same thing

• Digital exclusion and literacy: it’s standard practice in mainstream circles to forcefully push digital systems while expressing concern for the fact that not everyone can use or understand them properly. This normally creates demand for a class of inclusion professionals whose job it is to rectify that

• Resilience: there’s increasing concern that digital systems in general are subject to hacking, resource constraints, geopolitical cyber-attacks and power outages. God forbid that global automation-acceleration-expansion be hampered by actual limits. This has led to an acute interest with how to create ‘offline’ CBDC that can still operate when the systems crash

• Paternalism and authoritarianism: this critique is only nascent within the mainstream, and it really depends on ‘programmability’ actually becoming a thing. That said, there’s definitely some effort being made by the leaders of some CBDC projects to distance themselves from accusations that CBDC would be tool to micro-manage people’s spending

Reflection 2) Four intersecting dualisms to map CBDC

In my piece Paymentspotting, I represent the monetary system visually by showing the central bank hovering over society at the apex, with commercial banks plugged into it below, and then people and companies plugged into the commercial banks via accounts, but also having access to cash. If we had to take a helicopter and fly above this structure to look down on it, it might look like this:

The CBDC debate can be illuminated via four intersecting dualisms that can be mapped onto this picture:

1. Layer 1 money vs. Layer 2 money

2. Public money vs. private money

3. Physical money vs. Digital money

4. Passive agency vs. Active agency

The first two dualisms concern the structure of the monetary system, which is constructed in layers. The first layer of money in our society is issued by the state via the central bank, while the second layer is issued by private commercial banks (there are other layers, but let’s leave those aside). So, the primary option most people face is whether to use Layer 1 public money or Layer 2 private money. The latter can be though of, metaphorically at least, as bank-issued ‘casino chips’, but those derive their power from their tethering to Layer 1 state money, which acts as an anchor.

Dualism 3 concerns the form in which the money tokens in these different layers take. The Layer 2 money issued out by commercial banks is digital, whereas the Layer 1 money issued by states has both a digital and a physical form. As mentioned earlier, the banking sector has access to the digital form - central bank reserves - whereas we in the public only have access to the physical form - cash.

Prior to CBDC discussions, the original ‘cashless society’ debate was always about whether individuals and firms would be pushed into complete dependence on Layer 2 private digital money, while the Layer 1 public physical money faded away. There are (at least) two meta-processes going on there. In the first instance, that’s a privatisation process. In the second, it’s an automation process, because digitization is a core component of modern automation.

But what about Dualism 4? What is ‘passive agency’ versus ‘active agency’? I use those terms to refer to the account given for why big players do the things they do. Big commercial banks, for example, always pretend to be passive: they claim that the public actively ‘demands’ cashless society, and that they, the banks, merely passively follow the trend like faithful servants. The reality, however, is the opposite. The public wants choice, but the digital payments industry has aggressively and actively pushed to shut that choice down for a long time, running propaganda campaigns against cash, lobbying against cash protection legislation, and undermining the cash infrastructure by shutting down branches and ATMs. They’ve been joined in this by Big Retail, the airline industry and many other institutions that have decided to actively shut down the option to use cash. This whole drive gets a lot of ideological support from Big Tech too.

Central banks, by contrast, have been passive when it comes to protecting the cash system: they stand there and let the banking, payments and corporate sector beat cash up, claiming they have to be ‘neutral’. The original push for cashless society then, is one in which the commercial sector actively undermines cash, while central banks passively look away. This has led to our aforementioned contradiction, in which the Layer 2 system is shooting itself in the foot by attacking its own Layer 1 foundation.

So, how do these dualisms add up to CBDC?

Global capitalism has always been a public-private hybrid, but while the balance of power between public and private sector fluctuates within it, it always wants more automation. Put differently, the structural forces in capitalism push far more against physicality in the monetary system, than than they do on public sector involvement in that system.

This is partially why central banks find it less outrageous to promote a CBDC than to actively promote the cash system. Promoting a CBDC might threaten certain elements of the banking sector, but it doesn’t threaten corporate capitalism more generally. Amazon execs don’t care about whether their customers pay in the form of CBDC or Bank of America digital casino chips. They just don’t want cash, because they can’t automate it.

CBDC jells with the transnational automation drive, and if central banks do push one out, we’ll still have Layer 1 public vs. Layer 2 private money, but the former will now be available to all people and firms in a digital form. Central banks claim that this isn’t intended to replace cash, but in reality - given the non-negotiable automation fetish under capitalism - CBDC would de facto play into the existing war on cash. It would give nation states a plausible excuse to start shutting down cash infrastructure that they might have otherwise attempted to protect.

What we’ll probably end up with then is a new battle: public physical money versus public and private digital money, with the latter both being seen as keeping in sync with the ‘digital transition’ required for capitalist expansion and acceleration. The tension between public and private remains, but the digital forms will all gang up on physical, which will be presented as some kind of ‘horse cart of payments’ that only needs to be maintained while those who ‘still’ use it are slowly weaned off.

This leads us then to the most vanilla mainstream accounts of CBDC (which are often the most ideologically centrist too): we’re firstly told that cashless society is an organic bottom-up move driven by you and me, and that the banking sector has been passively ‘following’ this. Secondly, we’re told that central banks are now ‘behind’ the curve of this inevitable transition, so they too must now passively follow to keep up with the spirit of the times.

The key to disrupting this view is to politicise it, and to do this you have to assert that Big Finance-Tech has actively pushed for the domination of their Layer 2 digital systems. This allows us to spice up the dualisms by demanding, for example, an active push for Layer 1 state physical money: this is the Pro-Cash Movement, which seeks to counter not only the privatization of money, but also the far more powerful automation fetish. Cash is the ‘public bicycle of payments’ fighting to keep a balance of power against the (private and public) ‘uberisation’ of payments.

Alternatively, if you want to maintain the automation line while pushing against privatization, you can promote a more radical version of state digital money. Rather than slouching towards a half-assed watered-down CBDC, a government could actively push for a privacy-preserving form of ‘e-cash’ that’s designed to provide an authentic alternative to the banks without compromising public privacy. This is what the ACLU (USA), the ECASH Act, and Positive Money (UK) are suggesting.

There’s also a geopolitical version of this latter position. Countries in the Global South often have their own monetary systems subordinated to digital (US dollar) systems pushed by private sector players. If you’re a central bank in such a country, you’ll watch as your commercial banks partner up with players like Visa and Mastercard, which will extend the reach of the US state into your economy. In this context, providing an alternative, non-US form of payment becomes politically interesting. This is one of the reasons why CBDC pilot projects are of such interest to central banks in countries lower down on the global pecking order. Let’s turn to that now.

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Reflection 3) Stranger Kings and the Global South

Having noted that the CBDC debate has been dragged into life by the systemic inertia in our interconnected global system, it’s important to acknowledge that our system remains - in many ways - fragmented. There might be systemic trends that apply the world over, but that doesn’t mean there aren’t sub-systems with their own political currents that might bend those trends towards more local objectives.

Many people suspect that CBDC is a ‘solution in search of a problem’, but the imagined problem varies depending on where in the world you are. In the case of technocratic folks like Augustin Carstens, who sit in the centre of global power, the imagined problem is that the global financial architecture is too fragmented, and is thereby constraining potential growth. In his mind, this calls for rebuilding it in a unified form that will unleash the latent potential, and he imagines that wholesale CBDCs could form an upgraded base layer for all of this. For people on the peripheries of power, by contrast, the problem may be that the global economy is not equal. It’s dominated by imperialistic players that preside over whatever ‘shared’ infrastructure there might be, so what may be required is ‘digital sovereignty’ for smaller players. Some are now imagining that CBDC could play a role in that.

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The global monetary system - in stylized terms - looks like a pyramid of pyramids. Each national system has a central bank at its apex, with commercial banks plugged into it, but weaker national systems will often plug into more powerful ones, like the US dollar system, which is used to make transnational hops between countries. This requires countries to hold US dollar foreign reserves, and to have emergency credit lines with the US. Woven into this are all the private payment infrastructures, like the US-dominated SWIFT network, used by banks to coordinate international payments, and the US card giants Visa and Mastercard. Those companies hover around the global ‘financial inclusion’ scene, trying to make inroads into countries where citizens use cash instead of relying on digital bank transactions. As local commercial banks enter into deals with the card companies to extend their own power, the card companies project the US state into countries where people have no political rights in the US.

During the 1980s, the meme of the ‘state versus the market’ was popularized, but this dichotomy contains two dubious assumptions. The first is the assumption that markets are not built on top of states. The second is the assumption that states-in-general can be separated from markets-in-general, and that geopolitics can be separated from geo-economics. Those binaries are false. The reality is that the US state backs the US market, and American corporations have far more power than many smaller governments do. In its push for global expansion, the US market acts to undermine the sovereignty of many countries in the Global South, and extends the influence of the US state in the process. Geopolitics and geo-economics are a continuum, and many geopolitical battles - say, between China and the US - involve strategic promotion of their own corporations. US officials want Visa to penetrate into foreign regions, and to project US power as a by-product of its search for profit. This is why, for example, the US development agency USAID actively collaborates with Visa.

This means, if you do find yourself as a politician in a small country, you’ll find that US agencies are already encouraging you to do ‘financial inclusion’ projects in collaboration with Visa, and you’ll probably also notice that your local banking sector sees an advantage in collaborating with those firms. As this happens, sovereignty is undermined, because your citizens become dependent on foreign firms.

In some countries, these firms might appear like the ‘Stranger King’. This is a term from the anthropologist Marshall Sahlins, and it refers to the situation in which a foreign force is perceived to offer citizens more protection than their own local political elites do. Those who believe in local democracy, however, see such Stranger Kings as a trap. This is a common theme in the African context, where local intellectuals will often speculate about whether there are ways to break away from the US-dominated international system, either unilaterally, or in multilateral arrangements with other African countries, or by playing the great powers off against other each. Inviting a Chinese payments network like UnionPay into your local markets is a subversive act in US eyes.

CBDC is now playing into this. One of the very first CBDC-style experiments was run in Ecuador between 2014 and 2018, when the government piloted a state-run mobile payments system, along with an open API that would allow an ecosystem of private players to build services on top of it. It was shut down due to lobbying and opposition by the Ecuadorian banking sector.

The former Ecuadorian central banker Andrés Arauz was one of the people behind the experiment. He sees CBDC as an opportunity to build a stronger national system in conjunction with community credit unions, forming an alliance that could compete against international payments firms that are collaborating the local commercial banks. It’s similar to the left wing vision of CBDC promoted by UK groups like Positive Money (see Zen and the Art of CBDC Analysis Part 1), but with an added geopolitical element: in providing an alternative to the banks, the state indirectly battles foreign domination.

It’s certainly notable that many CBDC pilots have begun in Global South countries, but in these countries we observe a contradictory combination of factors. On the one hand, officials in such countries are low down on the global geopolitical order, and often display ‘more Catholic than the pope’ behaviour in an attempt to suck up to the global powers. In this sense, the desire to run CBDC pilots could look like an aspirational attempt to appear modern and on board with the vision pushed out by the likes of the BIS. On the other hand, many of these same officials have rebellious thoughts behind closed doors. They are well aware of just how little power they have globally, and having less seats at the table can also mean they have less to lose by trying to create an alternative vision. It doesn’t take much for Swaziland to announce that it’s experimenting with a national CBDC. It’s not like it has any power in the international banking scene, so it has more freedom to be experimental.

(As a side note, this is also partly why El Salvador was happy to take the gamble on making Bitcoin ‘legal tender’. Very few people in El Salvador use Bitcoin like that, but the Salvadorian president Bukele intended it as a geopolitical play to get favour from US libertarians, who might inject capital into the country. He had little to lose in that situation. In fact, it’s the Bitcoin community that has more to lose by being associated with an autocrat.)

Being able to recognise these dynamics is a question of position: a fintech analyst in London might assume that Visa and Mastercard are ‘good’ players that are geopolitically aligned with the UK. If you’re sitting in Ecuador, however, that assumption may not be shared.

Reflection 4) ‘Exnomination’ puts both crypto and CBDC into the spotlight, and the banking sector into the shadows

My favourite term from the French semiotician Roland Barthes is ‘exnomination’, or ‘outside of naming’. It refers to the process by which a power elite becomes virtually invisible by never referring to itself. True power ‘goes without saying’, and fades into the background as a kind of unquestioned default, and only deviations from that get noticed or mentioned.

I believe that a version of this plays out in the monetary system: the entire digital payments system is run by the banking sector, and in places like the UK their ‘digital casino chips’ make up over 90% of the money supply. Despite this, there’s no word to refer to that money, other than ‘deposits’, which makes it sound like its government cash that’s been stuffed into the bank. The fact that the banking sector is a gigantic money issuer that hides itself in plain sight leads to some serious issues in public understanding of money, and by extension, the CBDC debate.

For example, I recently spoke at the launch of Big Brother Watch’s new report on CBDC at the UK Houses of Parliament (see image above). The room was a mix of MPs, industry representatives and members of the public. During the Q&A, a man got up and insisted that CBDC was being pushed so that the government could spy on our payments to monitor for tax evasion. Implicit in his comment was the idea that the government couldn’t already do this by spying on our commercial bank accounts, but this is false. For example, the 2017 UK Taylor Review suggested pushing small businesses towards ‘cashless’ bank transactions so that the state could do tax monitoring.

There was something else implicit in the man’s comment. He seemed to think that any future CBDC would be the only digital pound available. He was either unaware that the banking sector already issues digital pounds, or he thought that the state would outlaw those and only allow us to use CBDC, thereby turning it into a giant state surveillance system. Capitalist nation states, though, have no intention of destroying their own banking sector by outlawing bank accounts. The UK government is constantly trying to promote its financial sector to the world, and any politician that tried to go against that would be seen as totally unhinged, and would almost certainly face massive backlash.

What’s extraordinary about all this though, is just how invisible the banking sector is in people’s minds. Even the official names used for CBDC projects, like ‘The Digital Euro’, imply that there’s not already some digital Euro that exists. This is absurd, because the majority of the Euro system already takes the form of bank-issued digital euros.

CBDC is highly visible - and causes much consternation - because it’s a deviation from the unnamed - or ‘exnominated’ - default, and is seen to be a ‘new’ digital currency. It’s also often erroneously seen as the ‘first’ fiat digital currency, as if central banks were following suit from the crypto world by releasing a new centralised ‘coin’. This is reflected in much public discourse: Big Brother Watch, for example, uses the term ‘spycoin’ to refer to the UK CBDC proposals, while others have called it ‘govcoin’, or ‘Britcoin’.

The belief that the real battle is actually between CBDC and Bitcoin, rather than between the dualisms described in Reflection 2, is actually very common. Almost every article written about CBDC in 2019 or 2020 had to make some obligatory reference to Bitcoin, which was going through its own hype cycle at the time. Not only was it assumed that Bitcoin was connected to CBDC in some way, but journalists would often lump in the other shiny new thing - stablecoins. They’d say stuff like ‘with the rise of new digital currencies like Bitcoin and stablecoins, central banks are trying to keep up with CBDCs’.

In essence, they simply took everything that wasn’t exnominated, and placed them in an arena together. They’d present a ‘new world of digital currencies’ battling each other for dominance while cash faded away in the background. This January 2023 BBC article, for example, weaves together the UK government’s plan to become a ‘crypto hub’ with government proposals for a CBDC ‘digital pound’, stablecoin regulation, and the ‘crypto winter’ that affected Bitcoin prices. The implication is that they are somehow all related.

In keeping with the exnomination theme, one of the issues here is linguistic. The vast majority of our digital money takes the form of digital casino chips issued out by the banking sector, but people have learned to associate the term ‘digital currency’ with crypto-tokens. This means that when people hear the term ‘central bank digital currency’ they associate it with Bitcoin.

In reality, however, Bitcoin barely qualifies for mention in this debate. Bitcoin is a system of limited edition digital collectibles with monetary branding, but they totally depend upon being priced as assets in the actual monetary system. This is what furnishes them with a property called ‘countertradability’ (see Designing the Moneyverse), which in turn gives them certain ‘moneylike’ properties, but they don’t pose any structural threat to the central banking system.

Insofar as central banks pay attention to Bitcoin, it’s either to castigate it for being a new mechanism for money laundering, or it’s to warn about the consumer protection risks that come with the massive speculative market that surrounds it. Structurally, though, there’s no visible dent in the global banking system as a result of Bitcoin. If anything, it’s led to an increase in bank payments, as people make bank transfers in and out of their crypto trading wallets.

Perhaps even more un-enlightening than the ‘CBDC vs. Bitcoin’ binary is the ‘Bitcoin vs. Stablecoin’ one. As I noted in How to Build an Origami Stablecoin:

(the term) ‘Stablecoin’ was chosen because it was… supposed to mean ‘like Bitcoin but stable’, but a better taxonomical strategy would be to say ‘like Paypal but in decentralized digital bearer-instrument form’.

The real battle is not CBDC vs. Bitcoin, or Bitcoin vs. Stablecoins. In most cases, it’s also not CBDC vs. Stablecoins. It’s CBDC versus ‘bank-coins’, the digital casino chips or ‘deposits’ pushed out by the likes of Barclays and Bank of America. In keeping with the observations in Reflection 3, however, it is worth noting that a ‘decentralised PayPal’ pushing out Layer 3 US dollars is going to be seen as a threat to any country with a weaker currency in the global system. It authentically is a problem for a South African central banker if my family starts using US dollar stablecoins instead of the South African rand. In this geopolitical context, there is a chance that stablecoins have some bearing on the decision to implement a CBDC, but this is not a battle between ‘crypto and the state’. It’s a battle between the US dollar in crypto form, and weaker states.

Reflection 5) Beware the Public-Private Dualism

In November 2022 Edward Snowden put out a tweet saying ‘it begins’. He was referring to a ‘digital dollar’ pilot being run by the New York Federal Reserve and a range of banks. The tweet got over 18 thousand retweets, but what was ‘beginning’ according to Snowden? His statement was designed to play into popular concerns around a possible new state CBDC. He was implying that some previously unprecedented attack on freedom was about to take place.

In reality, nothing ‘new’ was really happening. The project he linked to wasn’t instigated by the US government. It was instigated by the commercial banking partners, the ones who already dominate the digital payments space. The project they are working on is the Regulated Liability Network. It’s jam-packed with commercial players, and it’s just the latest in a decades-long process to streamline the public-private nature of the monetary system.

I’ll reiterate something I’ve already noted. When someone like Augustin Carstens puts out a vision of a ‘unified ledger’ underpinned by wholesale CBDC, he’s just advocating for a more accelerated version of our existing system. We already have ‘wholesale CBDC’, and it’s the system that banks use to settle transactions between themselves. Augustin and his crew are mostly just interested in a kind of IT upgrade or streamlining process where they make the interlocking public-private parts of our system more ‘frictionless’, so that everything can speed up a gear. The project linked to by Snowden is the same. It’s designed to promote the commercial bank money payments infrastructure, by streamlining settlements between banks with an upgraded version of central bank money.

The key mistake made by many people - including Snowden - is in assuming that the automation drive we see under capitalism is guided by political leaders’ desire for domination, but in reality it’s guided by the corporate profit-motive, and for many politicians success rides on supporting that. Political domination can emerge as a by-product of the infrastructure pioneered by those seeking profit, and co-evolve with it, but it’s not necessarily the driving force.

I spend a fair amount of time in mainstream circles, and I’ve almost never encountered a central banker who is gung-ho enthusiastic about CBDC. Rather, they feel a slow-motion gravitational slide towards it, which is a result of the much larger global automation vortex, but what they primarily care about is keeping their jobs, and that depends on them keeping the monetary system stable and friendly to the private sector. Central banks are like private clubs that manage the relationship between the state and the commercial banks, acting partly for both, and this is a constant balancing act. Every mainstream CBDC proposal right now is purpose-built to walk that fine line. This is why those proposals most likely will:

• Include measures to limit the power of CBDC: for example, by placing limits on how much the public can hold

• Include measures to bring the private sector in: for example, by allowing the banks to insert themselves between any future CBDC and the public

• Focus on ‘wholesale’ CBDC that doesn’t interface with the public, and that’s actually designed to boost the background efficiency of private systems

So, if you ever find yourself in the room at these CBDC discussions, you’ll realise that the vibe is one of sluggish inertia criss-crossed with confusion about how it does or doesn’t relate to crypto-tokens. My contribution to these discussions is often to remind people of the actual structure of the monetary system, and to forcefully promote a balance of power within it, not only between public and private, but between physical and digital.

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IOU is short for ‘I Owe You’. We write this on the paper because a basic stablecoin is a voucher or promissory note (in common language, a promise).

Who is the I though, and who is the U? In my case the I is me, Brett Scott. I’m the one issuing the promise. The U is going to be left open-ended. It will be whoever ends up holding the stablecoin, so let’s just call them ‘the Bearer’. Flip the paper around as shown and write these as follows.

Leaving the bearer unnamed is important, because it makes this a bearer instrument. Whoever holds it is the owner. Some vouchers are bearer instruments (I Owe Whoever Holds This X), and others are not (I Owe Specific Person X).

But what do I owe? The promise inscribed on a voucher could be for specific real goods and services (for example, I owe you three freshly baked muffins), but it could also be a voucher for money (which, in very broad terms, is something that’s come to operate as a claim on good and services in general). The units you see in your bank account are like this: they are Layer 2 vouchers for Layer 1 government money, and a basic stablecoin - similarly - is a Layer 3 voucher for those Layer 2 vouchers.

Let’s ignore the nuances of all that for now, and just write out how much money is being promised. I’m going to promise $100, but with an origami stablecoin it’s a two-part process to write this out. Start with the currency symbol and final zero (see frame 1 below) and then flip it over from right to left and write the rest of the amount backwards, as shown in frame 2.

We now have all the components of the IOU contract laid out, but to bring it all together we need to make the folds displayed below. You start by folding the paper top to bottom in half (1), and then fold it from the top again half way down until you reveal the IOU (2). You then flip it over onto its other side and fold the top half of the triangle upwards to reveal the amount (3). You then fold it in half left to right (4), and make a wing by folding it part of the way back right to left (5). Do the same on the other side to complete a second wing (6).

The final step is to flip it over, make an indentation into the head, and fold the head inwards as follows. Fantastic. This is an origami stablecoin.

Well… not yet actually. Like any promise, it doesn’t really exist until it’s issued.

It’s worth doing a quick aside on this point, because it’s a general feature of all promises, vouchers or IOUs. A promise waiting on the tip of my tongue is just a hypothetical potential promise. It’s only when I speak it out (or write it out and hand it to someone) that it becomes real. Similarly, muffin vouchers waiting behind the counter at a bakery only become real when they are handed out. Before then they are just manufactured pieces of card with a hypothetical promise etched onto them. It’s the social act of handing them out (under a particular legal regime) that activates them. This is also a key feature of the physical cash system: central banks might get third-party manufacturers to produce banknotes, but those only become money once they are issued out by the central bank (for some visualizations of this check out Part 5 of Paymentspotting). Until then, they’re just potential money, waiting to be activated through issuance.

With this in mind, we can see that the origami pigeon constructed in the steps above is just a potential stablecoin, waiting to be activated into a real stablecoin through the act of issuance.

Ok, but in what circumstances am I going to activate it by issuing it out? Bear in mind that if I hand this out I’ll owe whoever bears it $100, so if I hand it out ‘for free’ it means I’m giving without getting anything in return, which is probably unsustainable. So, what should I ask for in return for issuing these out?

It may help to look at some examples of what other money issuers ask for in return. Governments, for example, issue out Layer 1 credits in exchange for stuff like labour for military service, road building, hospitals and so on. Commercial banks, by contrast, issue out Layer 2 units in order to harvest long-term loan contracts from people. The typical ‘Layer 3’ money issuer is a bit more modest in their aims: they only issue out moneyvouchers when someone passes the aforementioned Layer 2 bank-issued money to them (in common language we call this a ‘bank transfer’).

Stablecoins operate in that Layer 3 space, so ask a friend or loved one to take part in your origami craft project by making a bank transfer to your bank account. In my case, I’m going to ask Julio to transfer $100 into my account (for a visual guide of what’s going on in that process, check out my last piece Paymentspotting).

When I see the payment confirmation I will hurl the origami stablecoin at him, thereby issuing my moneyvoucher.

The stablecoin is now in circulation. Because it’s a bearer instrument that only addresses ‘The Bearer’ rather than a particular person, Julio is free to hand it on to others (perhaps in exchange for stuff that he needs), and any of those people can come back to me at any time to demand the redemption of the promise. If they do, I’ll have to reverse the issuance process, transferring bank-money to them and withdrawing my stablecoin from circulation.

I may wish to reissue it at some point, so I could choose to store my origami pigeon somewhere, but if I’m feeling theatrical I could mark its removal from circulation with a ritual burning (alternatively, I could invest in a G+D banknote shredding system, which is what central banks use to upcycle their retired physical credits into colourful briquettes).

Beyond origami

Issuing origami stablecoins is a great craft project for the whole family, but most ‘serious’ stablecoin issuers - like Tether, Paxos and Circle Internet Financial - frown upon this practice as silly. They don’t use origami as the basis for their stablecoin moneyvouchers, and they also have a very different motivation for issuing them. Rather than hurling a paper pigeon at someone who hands them Layer 2 bank-money, they will issue digital moneyvouchers to that person on a decentralised crypto network. The person will see these Layer 3 chips pop up in their crypto wallet, after which they can transfer them to someone else’s crypto wallet. Here’s a (kinda crude) visual representation of that, using some older drawings I did a couple years ago, based on my Hovering Banks series.

The orange circle represents the stablecoin issuer’s bank, and the orange line represents the stablecoin issuer’s connection to that bank via an account. The network on the bottom right is the crypto network that they’re issuing their stablecoins into. The drawing is a bit rough, and probably needs more unpacking to make proper sense to a beginner, but the basic point is to convey the connection between the banking system and the crypto network where the stablecoins will circulate.

Like a lot of Layer 3 money issuers, stablecoin issuers want to harvest your Layer 2 bank-money by issuing you their Layer 3 money instead. Once they’ve harvested it they can claim the interest that you might have otherwise earned on that. This isn’t that far off from the business model of players like PayPal, who also get you to hand over your bank-dollars in exchange for their third-layer chips, after which they can claim the interest, and also scrape fees from you.

The main difference between a PayPal unit and a stablecoin like Tether USDT is the means via which the third-layer voucher is recorded and tracked. The former uses a centralized database controlled by one party, while the latter uses a (theoretically) decentralized database distributed between a number of parties. The former also requires you to have an account with your real name, while the latter allows you to pass around a ‘digital bearer instrument’ simply by having a pseudonymous crypto address.

One of the dubious legacies of crypto-token culture has been to pump out slightly meaningless terms that we’re now stuck with for the rest of time (unless we can convey a global meeting to get everyone to change words). ‘Stablecoin’ was chosen because it was sort of supposed to mean ‘like Bitcoin but stable’, but a better taxonomical strategy would be to say ‘like Paypal but in decentralized digital bearer-instrument form’. A stablecoin is far closer to a PayPal unit than to a bitcoin in nature.

Now onto the most controversial question: should an origami voucher for money truly count as a stablecoin? Well, why not? The whole point of crypto culture is to try create bearer instruments in the digital realm, but a bearer instrument in the physical realm is naturally decentralized in the sense that it passes from hand to hand in a peer-to-peer fashion, and a distant authority cannot send out an order to have it blocked or reversed or whatever. There’s a reason why crypto culture appropriated the word ‘coin’ in the first place, and that’s because the original bearer instrument is cash. My origami voucher is a cash-like instrument (albeit operating in the third layer of the money system rather than the first), so I’m going to appropriate the term stablecoin to refer to it, because language is malleable and I’m allowed to.

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IOU carrier pigeons vs. algorithmic carrier pigeons

Imagine my physical origami stablecoin as being like a carrier pigeon that transports an IOU to someone. Using this as an analogy, we might think of PayPal as being like a central air traffic control for a flock of digital carrier pigeons. A typical crypto stablecoin system, by contrast, is like a distributed ground network of folks with backyard radio receivers trying to do the same thing. Well, that’s the folk imagination of crypto. In reality the big stablecoin companies are like corporations now, funded by mainstream venture capitalists and cooperating with regulators.

The biggest stablecoin issuers plug into banks, and this puts them in the same league as many fintech platforms, which also plug into the banking sector in the background. That said, the fact that something like Tether USDT or Circle USDC can get passed around on crypto networks like Ethereum means they have a natural synergy with crypto ‘DeFi’ (decentralized finance) platforms. DeFi innovators are attempting to build out the crypto equivalent of mainstream fintech (aka. financial automation), and often use stablecoins as the basis for their automated loans and financial products.

From the perspective of a crypto die-hard, however, the major weakness of any voucher system (regardless of whether it’s implemented on a crypto platform or not) is the I part of the IOU. An IOU only has power insofar as the issuer actually is prepared to uphold their side of the bargain, but that means having to trust them, and that also creates a central point of failure. Stablecoins like Tether USDT were originally like digital black-market promises for US bank-dollars, but they rely on the Tether company to redeem them if you want to cash in the unit for the bank-dollars it promises. That means if the authorities seize the assets of the Tether company or freeze its bank accounts (which hold the bank-dollars that back the units), the entire ecosystem is at risk. For crypto hardliners, who yearn for an algorithmic world controlled by unbreakable protocols running on distributed hardware (rather than their human brethren), this is unsatisfactory.

This is why the holy grail among purists is to create a unit that looks like a digital IOU carrier pigeon, but which actually isn’t. They want to create a DeFi ecosystem that behaves as if it were backed by the power of the US state and its financial giants, but without actually being backed by them. This is why there’s been many attempts over the last few years to build so-called ‘algorithmic stablecoins’. I used to work in financial derivatives, and one of the standard ambitions of derivatives structuring is to artificially synthesise the effect of holding a particular financial instrument, or of being in a particular situation, without actually holding that instrument or being in that situation. Algorithmic stablecoins, similarly, want to synthesise the effect of holding a digital US dollar without you ever having to hold it. In practice this normally means holding some Frankenstein-like unit constructed from a bunch of digital parts, which has its price regulated via a very-hard-to-understand automated trading mechanism that very well might fail.

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The politics of Layer 3 money

I can carry my origami moneyvoucher in my hand luggage when I go visit my South African family, and hand it to my brother, allowing him to hold a US dollar voucher without having a US dollar bank account. My brother might even be able to pay one of his employees with my stablecoin, allowing him to bypass a typical cash or bank transfer.

You might think that’s useful, but one reason why stablecoins are politically controversial is that they allow powerful - and, one might say, imperialistic - currencies like the US dollar to make incursions into the lives of people far away. In doing so, they can increase dependence on foreign currency, and that’s political because the people of South Africa have exactly zero political say in the management of the US dollar system. From a superficial perspective, the fact that US dollar stablecoins are issued on decentralized crypto systems might make them look subversive and challenging to the US state and its banking sector. In reality, however, they can operate to extend US hegemony. The same goes for stablecoins issued for any other powerful currency.

It’s also worth noting that a standard stablecoin is a voucher for a voucher for money (which in turn can operate as money), but there are many other things that are like this too. In fact, there’s a giant universe of ‘Layer 3’ units that go under all sorts of names. For example, if you ever hear the term ‘electronic money institution’, it’s often referring to a Layer 3 player. Similarly, the somewhat arbitary term ‘virtual currencies’ is often used to speak about Layer 3 units: my origami stablecoin is a virtual currency, but so is stuff like company-issued coupons, in-game currencies, Amazon Coins, Facebook credits, and even air miles (given that they’re really a kind of voucher for monetary discounts off future flights and services from the airline). The digital money units you might see in your account on a share-trading platform are third-layer moneyvouchers, and so are those on an online poker site.

There might be a difference between physical and digital implementations of these different units, but at a structural level they all circulate in third layer orbit around the centre of the monetary system. One of the key skills to learn is to be able to separate out the body of these tokens from the promises they may carry. I could etch a voucher for $100 on a piece of metal, or I could write it down on an Excel spreadsheet, or I could record it on a vast distributed database that’s held in play by 10,000 strangers across the world and rename it as Brettcoin. In the end, on one dimension at least, it’s the same thing: a voucher for $100. The form of the body, and the affordances it offers, can certainly make a difference to how the voucher might be used or abused. That said, being able to see through the body, and into the social and political web within which the promises it conveys get activated, is a sure-fire way to level-up your monetary understanding.

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Those who follow my work will know that I get deeply frustrated by the OTOMI - the One Type Of Money Illusion. People who suffer from the OTOMI speak of money as a singular blob, making no deep distinctions between its different issuers, layers and forms. We often hear about ‘the dollar’ or ‘the pound’, but in reality the dollar is an ecosystem created by multiple issuers issuing money in multiple layers in multiple forms. Pointing this out isn’t mere pedantry. It really makes a big political difference who these players are, what technologies they’re using, and what the balance of power between them is. The OTOMI prevents the public from understanding what’s at stake.

I laid out a method for breaking free from the OTOMI in my piece The Casino-Chip Society, where I used the metaphor of casino chips to help highlight the different layers of money that we use. Much like a casino privately issues chips to us when we hand them cash, banks privately issue ‘digital casino chips’ to us when we deposit cash (or when we ask for loans). Those privately-issued chips are what you see in your bank account, and what you then use for ‘cashless’ payments. Players like PayPal, in turn, will issue another layer of chips on top of that if we transfer our bank chips to them. We end up with at least three chained layers of publicly and privately-issued money, and once you get to that third layer there are literally tens of thousands of issuers of ‘dollars’ or ‘euros’ or ‘rupees’.

But, while this casino chip metaphor is useful, it has limitations. It’s good for revealing obvious relationships between money forms (like ‘I deposit Layer 1 cash at the bank and they issue me Layer 2 chips in return’), but not as good for revealing more subtle and complex background interactions between money types. In this piece I’ll lay out some further building blocks that will help us expand beyond the casino metaphor, but to do that we must first meet another illusion: the OTOPI.

The OTOMI’s shadow: The One Type of Payment Illusion

One of the classic signs that someone is suffering from the OTOMI is that they also suffer from the OTOPI - the One Type of Payment Illusion. They’ll make a distinction between the things they are paying for (groceries, train ticket, tax, interest, subscription to Spotify etc), and the form factor of the payment (was it physical or digital), but the act of payment itself is seen to be essentially uniform: it’s always just generic money moving from Party A to Party B, both of whom are assumed to be users of money.

The reality is that there are many payments in which Party B is not a user of money, but rather an issuer of money. Once you can understand this distinction, acts of money transfer become a lot more variegated, their character shifting depending on whether the interaction is happening between two or more issuers, an issuer and a user, or between users. I’m going to break the OTOPI by showing you that the apparently singular act of passing money can actually be split into at least nine different categories operating in different dimensions of our monetary system. Some of these payments create money, while others merely transfer it, and others destroy it. Some create and destroy it simultaneously.

Like a lot of my work, this account is going to be stylised, in the sense that it’s not intended to be a pedantically accurate technical account for total geeks, but is simplified in order to be useful for non-specialists. I’m going to lay out each type of payment, along with scenarios in which they occur, but before we can do that let’s sketch out three conceptual dimensions that will intersect with each other in the process.

Dimension 1: Layers of Money

My Casino-Chip Society essay broke money down into three layers, but for simplicity I’m only going to use the first two:

1. Layer 1 state-issued money

2. Layer 2 bank-issued money (‘digital casino chips’)

Dimension 2: Vertical and Horizontal Planes

To delve deeper into money requires seeing things in 3D, and that requires vertical and horizontal planes. We’re going to split monetary payments into those that are:

1. Vertical: a payment between a money issuer and a money user

2. Horizontal: a payment between two money users

I use this spacial metaphor because it helps to convey power relations: the most important issuers of money loom ‘above’ us in society, issuing money ‘down’ to us and pulling it back up again. Ordinary folk doing commerce on the streets, by contrast, are passing money ‘horizontally’ between themselves. Check out the basic sketch above to get the vibe.

Dimension 3: Money Supply Consequences

We’re used to thinking that an act of payment transfers money, but some acts of payment create money, while others destroy it. This means payments have two sets of consequences: firstly, they act to get something for the payer, but secondly, they also have a positive, neutral or negative effect on the money supply. Here are the categories, and you’ll see that some are mirror-images of each other:

1. Creative issuance: new money is created through the act of issuing

2. Neutral issuance: new money is created, but only by rendering other money inactive

3. Neutral transfer: no new money is created

4. Complex neutral transfer: balancing sets of money are destroyed and created, leading to no new money being created on net

5. Neutral redemption: money is destroyed, but only by reactivating other money

6. Destructive redemption: money is destroyed by being redeemed

The Nine Payments

There are nine different types of payment that I’m going to showcase, each of which emerges at a different intersection of the dimensions above. Understanding each of these is technically demanding for a beginner, so I’ve illustrated them below with some lively characters and storylines that will make the learning journey slightly more fun (make sure you’re enabled images so you can see the sketches). If you’re struggling with one section, just move onto the next - it’s better to get a rough sense for all the types than to get stuck on one of them. Finally, my list is not exhaustive, and the ordering I’ve chosen is partially arbitrary. You could start from a different point to me and see where it takes you, but I’m going to start us with an act of money creation.

Payment Type 1: Government Money Creation

Scenarios

• 1.1: A military contractor called Maimstream Offence Inc. gets paid by the US government for delivering assassination drones to the Pentagon. The payment appears in their account at Megadebt Banking Inc.

• 1.2: Sobia Varnhshut is a single mum who gets a child support payment via a government welfare department. It appears in her account at Fairyvale Cooperative Bank

• 1.3: Blaze Framboise is a spy who has embedded themselves as a civil servant in a government department, and who receives their salary at an account at Whalefish Bank

Category

All of these are examples of Layer 1 Vertical Creative Issuance, via Layer 2 Vertical Neutral Issuance.

Description

In the scenarios above companies or people are receiving payments from the government, which turn up in their bank accounts. This is what we call ‘government spending’, and every act of government spending is an act of money creation (in countries that control their own currency at least).

To grasp this you first need to have some familiarity with how credit money works, and the quickest way to understand credit money is to grapple with the concept of ‘paying by promise’. Picture yourself getting something by issuing a promise (e.g. ‘If you help me paint my room I’ll make you dinner'). You’re getting an immediate service (painting) by issuing a promise for something in future, so - in a sense - you’re ‘paying’ for that service by issuing that promise. That promise is a liability to you because it puts you on the hook (‘I owe them a dinner later’), but an asset to the person who holds it (‘yum, I’m owed a dinner later’).

Governments do a related thing, albeit in a far more complex, obscure and large-scale form. They get immediate things (like missiles, or road building services, or healthcare for citizens), by issuing credits that we call money, which are experienced as a liability to the government but as an asset to whoever holds them.

I realise this is a pretty complex way to start, and I know for a fact that some readers will initially struggle to conceptualise what is being ‘promised’ in the case of government money issuance. That’s a specialist topic for another time, but all I’ll say for now is that it’s initially useful to see government-issued money as a credit promising you temporary freedom from your existential bondage to the state, via it’s ability to extinguish your tax debt (yeah, I know I’m glossing stuff over here, but I’m doing stylisation).

For our purposes right now, it’s more important to note that governments almost never directly issue these credits to the recipients. Rather, they issue them indirectly by paying the banking sector. To pay Maimstream, Sobia and Blaze, the government issues new Layer 1 credits into the reserve accounts of their banks (Megadebt, Fairyvale and Whalefish) at the central bank, leaving those banks to in turn credit the recipients’ accounts with newly issued Layer 2 ‘digital casino chips’ (check out the image above for a visual sense of this). In essence, the government’s Layer 1 liability ‘ripples’ like a domino through the bank into the recipient’s world as a Layer 2 asset, as follows:

1. Government issues new Layer 1 credits, which it experiences as a liability

2. Recipient’s bank receives those, experiencing them as an asset, but simultaneously must issue out Layer 2 chips to recipients, which it experiences as a liability. This means, on net, the bank’s new asset is counterbalanced by their new liability

3. In the recipient’s world though, they end up with new Layer 2 bank chips, which they experience as an asset

Payment Type 2: The Intra-Bank Transfer

Scenarios

• 2.1: Maimfactory initiates a bank transfer into the account of their CEO - Willard Grover Dickkopf III - as a bonus for securing a smart-grenade deal with the Saudi government. Willard also banks with Megadebt Bank

• 2.2: Sobia pays rent to her landlord, a frustrated wannabe MMA fighter called Johannes Landraub, who also happens to bank at her bank

• 2.3: Blaze is on a Tinder date, and makes a contactless payment at a bougie cocktail bar, whose owner - Margaret Mohair-White - also banks with Whalefish

Category

These are all examples of Layer 2 Horizontal Neutral Transfer.

Description

In the scenarios above, payers are initiating a transfer of Layer 2 ‘digital casino chips’ to a recipient that happens to bank at their bank. This means that previously issued Layer 2 money is just getting reshuffled between people. This is pretty straightforward for the bank, because the payment is a simple internal accounting operation for them. They simply take Layer 2 chips from one account holder and give them to another (in a digital system this is a simple act of editing, like switching numbers between two adjacent cells on an Excel spreadsheet). The asset and liability breakdown is pretty straightforward:

• One account holder has their chips go down, while another has their chips go up. On net, there’s no change in the overall level of chips outstanding

• The bank is indifferent to whoever holds their Layer 2 chips, much like a casino doesn’t care when one punter loses chips to another, and there’s no change to the bank’s overall liability

Payment Type 3: ‘Getting a Loan’

Scenarios

• 3.1: Willard and his chief finance officer successfully secure a new 10-year loan for Maimstream Offence from Megadebt Bank. Maimstream’s account at Megadebt is credited with $50 million

• 3.2: Johannes Landraub gets a new mortgage to expand his rental property empire. He signs a loan agreement and the bank credits his account with one million dollars

• 3.3: Margaret Mohair-White has been spending beyond her means on vintage absinthes, but she’s got a big overdraft with her bank that automatically loans her money when she dips below zero

Category

These are examples of Layer 2 Vertical Creative Issuance.

Description

In the scenarios above, the recipients are obtaining bank loans, but when a bank is ‘loaning money’ it is simply issuing new Layer 2 digital chips into the recipient’s account. This is called ‘credit creation of money’. To delve deeper into this, see my Emotional Guide to ‘Fractional Reserve Banking’, but for now let’s look at the liability and asset side of this:

• The bank issues out new liabilities in the form of Layer 2 digital casino chips

• The recipient experiences those as new assets in their account

• The bank isn’t a charity though: in exchange for issuing those new chips, they’ve extracted back from the recipient a legal promise to hand back a greater quantity of Layer 1 money over time (well… there’s nuances to this, but we’ll discover those later). The bank experiences this loan contract as an asset, and one that’s worth more than the new liabilities they’ve issued (albeit this asset carries risks). The bank is essentially issuing Layer 2 money to harvest or ‘buy’ loan contracts that will attract Layer 1 money to them over time

• The recipient, on the other hand, experiences that loan contract as a liability that will gradually extract more back from them in the long term - via interest payments - than what they’re getting in the short-term

It’s very important to note that no government-issued money is being used in this process. In old-school texts about banking they always say stuff like ‘the bank takes money that was deposited into it and lends it out’, but this is very wrong: the act of ‘lending’ is simply the act of a bank privately issuing out new ‘digital casino chips’. Bear in mind, however, that once a recipient has those chips, they can demand to redeem or transfer them, and the bank has to be able to manage those demands.

Payment Type 4: The Inter-Bank Transfer

Scenarios

• 4.1: Maimstream Offence, under the instruction of Willard Grover Dickkopf III, makes a transfer to a tech company called MinRep, apparently to fund a research project on military facial recognition tech for drones, but the company is actually a front for Willard’s playboy son, Jackfrucht Dickkopf, who banks with a digital-only neo-bank called Bright Pink

• 4.2: Johannes Landraub might have been issued 1 million dollars in digital casino chips by his bank, but those won’t stay in his account for long, because they were granted for the purposes of buying a house from a retired sculptor called Melinda Oldonox, who banks with Whalefish. A transfer takes place and her account gets credited as Johannes takes title of her old house

• 4.3: Margaret Mohair-White is getting vexed by the fact that homeless people are sleeping in the doorway of her cocktail bar. She makes a bank transfer to a craftsman called Emmanuel Zinglo, after he designs and installs anti-homeless spikes for her (albeit tastefully crafted in the form of art nouveau hedgehogs to fit in with the bar’s aesthetics). He doesn’t feel good about it, but he’s low on work, so accepts the payment into his account at Fairyvale

Category

These are examples of Layer 2 Horizontal Complex Neutral Transfer.

Description

In all the scenarios above, someone is trying to use their bank-issued Layer 2 digital casino chips to pay someone else who banks with another bank. At face value, that’s a bit like trying to use the chips of Caeser’s Palace Casino in Nero’s Palace Casino. Look at the image above: how do you get Megadebt-issued chips to ‘jump’ from Maimstream’s account at Megadebt Bank to Jackfrucht’s account at Bright Pink Bank? How do ‘inter-bank’ transfers actually happen?

The most important thing to note is that they don’t ‘jump across’ at all. What actually happens is that the first bank retracts Layer 2 chips from the payer, passes Layer 1 reserves to the other bank, and gets that other bank to issue new Layer 2 chips to the recipient. Unlike Payment Type 1 above, which involved a vertical ‘ripple’, this one involves a horizontal ripple. Let’s illustrate it with the case of Margaret and Emmanuel (see if you can follow the path in the image above):

• Whalefish Bank retracts Layer 2 chips from Margaret Mohair-White, so her assets go down

• Given that Whalefish has taken their chips back, their liabilities go down, but the bank’s assets also go down, because it must pass Layer 1 reserves to Fairyvale Bank

• Fairyvale will see its Layer 1 reserves go up, so their assets go up, but they have to issue out new Layer 2 chips to Emmanuel, so their liabilities also go up

• Emmanuel receives these new Layer 2 chips, so his assets go up

In any single inter-bank transfer, the two banks end up with the changes in their assets being offset by an equal change to their liabilities, while the two end users of their chips end up with offsetting increases and decreases of assets. The individual situations of each player might have changed, but at a systemic level nothing has changed in the money supply: when viewed as a unit, the two banks have the same amount of chip liabilities outstanding, and the two recipients collectively have the same amount of chip assets, even if there has been a relative reshuffling of these between the players via the horizontal ripples.

The final thing to note is that banks very seldom process these inter-bank interactions individually. Normally what they do is collect them all up into bundles and settle with each later via big ‘multilateral netting’ systems: Notice in the image above that when Johannes pays Melinda reserves must move from Fairyvale to Whalefish, but when Margaret pays Emmanuel they must move in the opposite direction from Whalefish to Fairyvale. In a netting system, those movements would be offset against each other. In fact, with this type of netting in place, large amounts of Layer 2 chips can be reshuffled around the payments system while much smaller amounts of Layer 1 reserves move between banks.

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Payment Type 5: The ATM Withdrawal

Scenarios

• 5.1: Jackfrucht Dickkopf withdraws $5000 in cash. He wants to visit a sex worker who he’s fallen in love with, and who he doesn’t want his wife to know about it

• 5.2: Melinda Oldonox withdraws $1000 to give as a short-term loan to her friend Margaret Mohair-White, who is struggling after maxing out her overdraft to pay for art nouveau hedgehogs

• 5.3: Emmanuel Zinglo withdraws cash for his church tithe collection. He wants to expunge his feeling of guilt for building anti-homeless spikes for Margaret

Category

All of these are examples of Neutral Redemption, but it happens via Layer 2 Vertical Redemption and Layer 1 Vertical Transfer.

Description

We don’t normally think of an ATM withdrawal as being a ‘payment’, but it’s a type of payment in the sense that Layer 2 chips moves from you back to the bank that issued them, while Layer 1 money moves from the bank to you (note: for the purposes of this section, I’m going to assume you’re visiting your own bank’s ATM - it gets more complex if you visit an ATM controlled by another bank).

The act of going to an ATM is basically like turning up at a casino counter and demanding to cash your chips. As mentioned, however, my casino chip metaphor has limitations, and you might have already started to notice some of them. For example, in Payment 1 we saw that the actual act of government money creation started with the state issuing digital credits to the banking sector, and then getting the banking sector to issue chips to us (rather than the state issuing out cash to us and then us depositing that cash into banks to get chips, which would be the more ‘casino-like’ scenario).

To get the full picture of what’s going on, you need a basic grasp of the two different forms of Layer 1 money: when a government issues out credits in digital form to the banking sector it gets called ‘reserves’, but when it does it in physical form it gets called cash. They are both Layer 1 money, but we in the public don’t have access to reserves. So, if the state is issuing Layer 1 money primarily by issuing reserves to banks, how do we end up with cash in our hands?

Well, at a systemic level, cash is ‘released’ when people and companies asks their banks to ask the central bank to swap digital reserves into cash, which then gets pushed out into the world via ATMs and branches (a process that also leads to the banking sector collectively having to pull chips out of society, which is also a process in which they lose power). My piece What Tron teaches us about Cashless Society provides a different metaphor set to help you understand this, but let’s look at the asset-liability chain to help clarify (and check out the image above for a visual representation of this):

• Firstly, a bank must prepare for the possibility that someone will demand cash by stocking up their ATMs and branches. They do this by asking the central bank to switch out some of their Layer 1 digital reserves for Layer 1 physical cash instead. The bank’s Layer 1 assets end up the same, but the form factor has changed (e.g. imagine Fairyvale has $10 billion in digital reserves, and $0 in cash, and then gets the central bank to rearrange that to $9 billion in digital reserves and $1 billion in cash)

• When Emmanuel turns up at the ATM and requests cash, the bank retracts Layer 2 chips from him - which means the bank’s liabilities go down - but then has to hand over Layer 1 cash to him, which means the bank’s assets go down too

• Emmanuel loses Layer 2 chips but gains Layer 1 cash, which means his assets stay at the same overall level

Notice that the bank reduces assets and liabilities simultaneously, so the act of us swapping chips for cash is theoretically ‘neutral’ to them, but in reality what we’ve done is swap allegiance from one money issuer to another. We have ‘activated’ the Layer 1 cash by deactivating - well actually destroying - the Layer 2 bank chips, and that represents a shift in power between two money issuers. Our situation largely remains the same, but the bank is now losing the data and fees it would have previously been getting had you simply stuck with using their chips.

As we saw in Payment 1, the banks are - in one sense - agents of the state, allowing its Layer 1 promises to ripple through them to us via their Layer 2 chips, but those chips in turn become a form of money that competes with any form of state money that we can directly hold, like cash. One of the often-missed points in debates about cashless society is that the banking sector does not issue cash, but is a gatekeeper to it. This means they are in a position to slowly nudge people away from it by doing stuff like closing down branches and ATMs, a process that slowly locks people into dependence upon their digital casino chips.

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Payment Type 6: The Cash Payment

Scenarios

• 6.1: Jackfrucht Dickkopf pays his sex worker lover Jamae Jackson $5000 in cash to spend the weekend with him, pretending to be on a work trip so that he can hide from his wife and authoritarian father. Jamae later passes half the cash to his half-sister and best friend Sobia, who needs support covering her rent

• 6.2: Melinda Oldonox slides an envelope with $1000 in cash to Margaret as they sip absinthe martinis

• 6.3: Emmanuel Zinglo stuffs $200 into the collection pot of his church, Blessed Lamb Ministry, whispering ‘forgive me father. Please use this to feed the homeless’

Category

All of these are examples of Layer 1 Horizontal Neutral Transfer.

Description

While its tricky to understand what goes on behind the scenes with an ATM withdrawal, it’s super easy to understand what happens once you get the cash out. In the scenarios above one person is handing government-issued credits in physical form to another. No banks are involved. End of story. (PS. if you want to see why cash payments like this must be defended, check out my Luddite’s Guide to Defending Cash).

Payment Type 7: Depositing Cash

Scenarios

• 7.1: Sobia Varnhshut needs to prepare for her next rent payment, so deposits the cash into her bank

• 7.2: Margaret has debts to pay, so she deposits the cash into Whalefish

• 7.3: The church wants to convert its cash into digital chips that can be used to buy shares in the stockmarket (via an index fund that happens to invest in Maimstream Offence), so they deposit the cash into their account at Bright Pink

Category

These are all examples of Neutral Issuance, but it happens via Layer 2 Vertical Issuance and Layer 1 Vertical Transfer.

Description

In all the scenarios above people are handing over Layer 1 physical money to their banks, and getting Layer 2 digital chips in return. This is actually the payment type where my casino metaphor works best, because it pretty much replicates that old-school casino situation where you turn up at the counter, hand over cash and get chips in return.

The issuing out of digital chips by banks is an act of Layer 2 money creation, but in this case it’s done by surrendering Layer 1 money to them (contrast this to Payment 3, where banks issue out new Layer 2 money without any movement of Layer 1 money). This process is also the direct mirror image of Payment 5, so to complete the picture I have drawn the banks handing over their newly obtained cash to the central bank to exchange for digital reserves instead (a process that takes cash out of circulation).

The banks like this situation, because you’ve essentially surrendered a competing form of money to their control, and resume your dependence upon their digital chips. In their ideal world, the banks vacuum all cash out of society and have everyone totally structurally and mentally captured by their systems, with all shops refusing cash and everyone forgetting that it once was normal. To build this level of cultural hegemony, however, takes time, and their progress on it is patchy (although in places like London, for example, they have made huge gains by almost totally capturing the middle classes).

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Fast-forward

I’m going to finish with two last forms of payment, but before we do that let’s push fast-forward on our mini-economy and assume that our cast of characters make and receive a whole series of payments. In particular, let’s assume that Maimstream, Johannes and Margaret receive a bunch of Type 4 payments. This, as we saw above, will lead to their banks getting new Layer 1 reserves while issuing out new Layer 2 chips to them.

Payment Type 8: Repaying a Loan

Scenarios

• 8.1: Maimstream owes interest on its 10-year loan from Megadebt, so makes a payment

• 8.2: Johannes makes a mortgage payment to Fairyvale

• 8.3: Margaret pays off her Whalefish overdraft

Category

These are all examples of Layer 2 Vertical Destructive Redemption

Description

All the examples above are mirror images of the situation described in Payment 3, where new Layer 2 chips were handed out by banks to people who asked for loans. In Payment 8 people are handing those back in order to ‘repay’ their loans, or interest on their loans. This seemingly simple payment is one of the most fascinating things to explore in banking, and we can only scratch the surface here, but to understand what’s happening you have to pay attention how all the other forms of payment affect a bank’s balance sheet. I’ve summed it up with this table:

You’ll note that only two of these - Payment 3 and 8 - are unsymmetrical. Credit creation of money (Payment 3) occurs when banks expand their Layer 2 chips without expanding their reserves, but credit destruction of money (Payment 8) is the opposite: it occurs when banks destroy Layer 2 chips without reducing their reserves. The crucial question for any bank is whether they can destroy more Layer 2 chips in the latter process than they created in the former, because - if so - it actually means they gain Layer 1 reserves.

To make this slightly less abstract, consider the case of Johannes. When Fairyvale bank granted him $1 million in chips (Payment 3), their chip liabilities went up without their reserves going up, but in Payment 4 their chip liabilities and reserve assets went down simultaneously as Johannes initiated a transfer to Melinda. Johannes, however, is a landlord getting rent transfers back from people - including people who may bank at different banks - so this will manifest in Fairyvale’s world as a simultaneous increase in their reserve assets and chip liabilities. Given that there’s interest attached to the loan, Johannes must accumulate more Layer 2 chips (via, for example, Payment types 2 or 4) than the bank originally granted him, in order to pay back over time. This means that over time (and assuming that Johannes doesn’t go bankrupt) the bank will accumulate more Layer 1 reserves via those transfers than it originally lost when he paid for the house, after which they’ll cancel out Johannes’ claim upon those reserves by getting him to hand back a greater number of Layer 2 chips than he was first granted (aka ‘interest’).

This is a highly simplified description, but it’s a useful start to understand what ‘repaying’ a loan actually means. In a bank balance sheet, it will manifest as an increase in their equity: their reserve assets stay the same while their liabilities - external claims against the assets - decrease, leaving them with the surplus. One of the dark arts of banking is to issue out Layer 2 money to harvest interest-bearing loan contracts that will create a monetary pressure gradient that slowly pulls Layer 1 money to the bank. Whew, now onto our last payment type.

Payment Type 9: Paying the Government

Scenarios

• 9.1: Melinda pays capital gains tax on the house she sold to Johannes

• 9.2: It’s discovered that Blaze is a spy. He flees the country in a hovercraft, but not before the authorities seize his bank account and claw back all his salary

• 9.3: Johannes takes part in a privatisation programme where old government-owned social housing is sold to private landlords

• 9.4: Maimfactory manages their finances by buying short-term government bonds

• 9.5: Willard and Jackfrucht are fined by the government for a fraudulent transaction in which Willard siphoned off Maimstream funds to his son for non-existent work

Category

These are examples of Layer 1 Vertical Destructive Redemption, via Layer 2 Vertical Neutral Redemption.

Description

In all these cases, the protagonist is paying the government (or being forced to pay), but doing so via the banking sector. At first glance, this looks like they’re using bank-issued chips to pay the state, but in reality they’re not. Rather, they’re handing back bank-issued chips to the banking sector in order to get the banking sector to pay the government using Layer 1 digital reserves, which is a mirror image of what we saw in Payment 1. In the bank’s world, their liabilities go down as they retract digital chips, but their reserve assets go down as they hand reserves to the government’s account at the central bank, a process that actually leads to the destruction of Layer 1 money. Here’s our full set of payments from a bank’s perspective:

People who are well-versed in MMT (Modern Monetary Theory), are used to this idea that taxation, fines and fees paid to the government, and even government ‘borrowing’ (in which people pay the government for financial instruments) result in the destruction of Layer 1 money. Remember folks, if somebody hands me back a promise I’ve issued, the promise no longer exists. Similarly, when someone hands back a credit, IOU or other promissory instrument to its issuer, it gets destroyed.

I’ve taken you through the whole cycle in 9 steps, but of course there are many nuances I’ve missed out, and other categories too. For example, there’s a lot of talk right now about a hypothetical new form of Layer 1 digital horizontal neutral transfer, and to learn about it see my Zen and the Art of CBDC Analysis. I’ve also totally glossed over international payments, which involve interactions between banks that are part of different currency ecosystems under different central banks. As mentioned, I’ve also left out all Layer 3 forms of money, and the entire shadowbanking sector (which you might think of as a kind of Layer 4 realm). There’s also a whole range of innovative forms of issuance on the horizontal plane when you get into the realm of alternative currencies (for more on that see Zero is the Future of Money). These are all exciting topics that can be explored in future.

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Physical Flynn being reconstituted as digital Flynn provides a useful pop culture metaphor to illustrate some key elements of modern monetary politics. I’m going to use Flynn as a metaphor for state-issued money, and map out eight different scenarios he might find himself in.

Scene 1: Physical Flynn hanging out in the world with you

In our metaphor, physical Flynn is cash, the physical version of state-issued money. Cash is issued by central banks (and national treasuries), but roams the world among us like a gregarious everyman. Flynn is happy to hang out with your elderly grandparents, your anarchist mates, your pretentious coke-snorting fashionista friend, beggars, buskers and oligarchs. If you find cash in your wallet, you own it, because it’s a ‘bearer instrument’: Flynn pledges allegiance to whoever he hangs out with.

Scene 2: Physical Flynn captured by a bank

When you hand over cash to a bank, however, it’s like imprisoning Flynn. The bank is not looking after him for you. They take ownership of him, and put an end to his free-wheeling travels. Here’s an image of him captured by the UK bank Barclays.

Banks have various options for what to do with the physical cash they end up taking control of: they can lock it up at a branch, or stock it in ATMs, or return it to the central bank (we’ll get to that in the next section). These cash holdings end up on the asset side of their balance sheets. Here’s the 2022 balance sheet of the Barclays to demonstrate.

Notice though, that it’s recorded under a line item called ‘cash and balances at central banks’. To understand this, you must split that in two: There is [cash] and [balances at central bank], and the latter often get called ‘reserves’. But what are these reserve ‘balances at the central bank’? We’ll see in the next section.

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Scene 3: Flynn transferred into digital captivity

Now that Flynn is their captive, the bank is at leisure to decide what form to keep him in. They can either keep him in physical form, or ‘dematerialize’ him into a digital form.

Here’s a quick thought-experiment to help you understand this transformation process: Imagine issuing a promise to someone by writing it down on a piece of paper (I owe you a massage). Now imagine that person asking you to just write the promise down on a computer instead, under their name. So, you tear up the paper promise and rewrite it on a spreadsheet that you control. It’s the same promise, just recorded in a new format.

This is basically what’s happening when physical cash is transformed into digital ‘reserves’. Barclays takes cash to the central bank, which withdraws it from circulation (‘tears it up’) and rewrites it in digital form as a balance in Barclays account at the central bank. This is how Flynn is ‘vaporized’ and reconstituted as a computer character that’s held captive, along with millions of others of his kind, in digital form.

So, cash is the physical version of state money, while reserves are the digital version recorded at the central bank, and this explains that line item on Barclay’s balance sheet that says ‘cash and balances at central bank’.

Cash and reserves may have a different form, but are interchangeable. Barclays can choose to transform cash into reserves, and vice versa, but each time this transformation is happening one form is getting destroyed and replaced by the other.

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Scene 4: The bank issues digital ‘Get Flynn out of jail free’ promises

Cast your mind back to Scene 2: many people think that when they deposit cash into a bank, the bank ‘stores’ it for them. They also often come to believe that the units that they see in their online bank account are like ‘Digital Flynns’. Both of these beliefs are wrong.

Commercial banks like Barclays do not ‘store’ anything for you, and you have no access to digital Flynn. He’s imprisoned at the central bank in a cell controlled by Barclays (or whatever other bank you use).

So what are you seeing in your account then? The digital units in your bank account are bank-issued ‘Get Flynn out of jail’ cards (I’m guessing most people know this cultural reference, but I’m basing this on the old Monopoly board game with its ‘Get out of jail free’ cards).

Let’s call these ‘Get Flynn out of jail’ cards by the acronym GFOOJC. They are bank-issued digital promises for state money, recorded into your bank account.

We have an immensely confusing vocabulary for talking about these units: they often get called ‘deposits’, which sounds like the thing you put in to a bank, but in reality deposits are the thing issued out to you by the bank. This is why ‘deposits’ appear on the liability side of a bank balance sheet: they’re not things that the bank owns. They are promises that the bank has issued to people (and institutions) in the outside world:

Those of you who are observant might notice that the combined ‘cash and balances at the central bank’ recorded on the asset side of this balance sheet are smaller than the ‘deposits’ issued out by the bank on the liability side. This is due to so-called ‘fractional reserve banking’ (it’s an archaic phrase), or credit creation of money, in which commercial banks issue out far more GFOOJC than there actually are Flynns in (physical or digital) jail. If you’d like a deep dive into that, see my Emotional Guide to ‘Fractional Reserve Banking’.

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Scene 5: Digital GFOOJC transferred around

If all those units in our bank accounts are GFOOJC, it also means that the entire ‘cashless’ (or ‘Flynnless’) digital payment system is constructed out of them. Every time you tap your contactless card, or pay using Apple-Pay, you’re transferring around these bank-issued digital-promises-for-state-money. As we pay for things using GFOOJC, Flynn himself lingers in his cell in captivity, while guarantees of his release are transferred between people in the outside world.

Scene 6: Banks trade digital Flynns in the background

There is, however, some nuances to this. Barclays isn’t the only bank to control a cell at the central bank. All the banks have accounts at the central bank, and these banks pay each other by moving their digital reserves around. This is the interbank clearing and settlements system: as we make payments using GFOOJC across different banks, the banks have to sometimes arrange for Flynn to be moved from one bank’s digital cell to another bank’s digital cell.

I’m at risk of pushing the Tron metaphor too far, but you might even imagine the banks having a private arena where they trade their digitally imprisoned Flynn’s, or make them race against each other.

Scene 7: Flynn returned to physical imprisonment

Banks have one major irritation though. Many of us have a pesky habit of demanding the release of Flynn. After all, the GFOOJC in our bank accounts can be used to free him. That’s what happens when you go to an ATM: you’ll see your bank balance go down - the GFOOJC being destroyed - and the cash in your hand go up: Flynn is released.

Before this can happen though, the banks must transform digital Flynn into physical Flynn, and they must do this before you actually demand Flynn’s release. If you ever hang around central banking and cash nerds, this is part of what’s called the ‘cash cycle’: banks like Barclays must predict people’s demand for cash, and stock up their ATMs and branches in anticipation. This means they might have do the reverse of what we saw in Scene 3: they can get the central bank to eliminate digital reserves from their account, and ‘materialize’ it by rewriting it as physical cash that the bank can then take ownership of. Flynn will literally leave the central bank in an armoured vehicle, to be transported back to one of the many physical cells controlled by Barclays. Let’s say in this case it’s an ATM.

Scene 8: Physical Flynn released from ATM captivity

This may be the point where you arrive at the ATM, slide in your debit card, type in your PIN, and demand the release of physical Flynn. In the process you’ll destroy GFOOJC that was previously in your account, but you’ll see Flynn’s smiling face come sliding out of the ATM slot. Freedom at last!

We’re now back to where we started. Physical Flynn hopping around the country from person to person, charming shopkeepers, bartenders, kids getting pocket money, street dealers, church leaders asking for tithes, and thousands of others. His world is one of countless micro-adventures in both the formal and informal economy, among rich and poor alike.

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A world of imprisoned Flynns: Cashless society

Not everyone likes free Flynn, and there’s been a distinct rise in bigotry towards his more casual and genial physical life. Since the rise of Silicon Valley and smartphones, many people have been slowly incalculated into the values of extreme automation and digital corporate expansion, letting it sink into their consciousness and bodies under the innocuous guise of ‘convenience’. The capitalist system wants to expand and accelerate, and actually the physical version of Flynn irritates the hell out of many corporate executives. You think Jeff Bezos likes cash? Of course not: how will his ‘Go Cashierless’ automated stores deal with physical units of money? Corporate elites don’t like things that cannot be easily automated, because anything that cannot be easily automated preserves all manner of non-commercial values (often castigated as ‘friction’). Human beings in general quite like non-commercial values, but for inhuman scale corporations, those simply stand in the way of the profit-motive.

This is why corporate capitalism in general would far rather have Flynn permanently imprisoned in digital form under the control of banks, and have us all use GFOOJC, a form of money that’s much easier to jell with automated systems. This is what’s referred to as ‘cashless society’: a world in which all the free roaming Flynn’s have been hunted down and incarcerated as digital reserves in the central bank, out of our reach, and where we’re basically forced to use bank-issued digital money instead. In places like the UK, the banking sector is deeply complicit in this, and is in the process of shutting down all the ATMs and branch infrastructure, in essence setting up for a situation in which Flynn will become ‘unrelease-able’. For those who are interested, I published a whole book on this.

So, Flynn is experiencing increased bigotry on the streets, with ‘cashless’ shops refusing to let him enter, but this cultural shift is not organic: it’s been in the works for a long time, with many top-down players collaborating with (or exploiting) compliant parts of the bottom-up public to slowly nudge all of us in that direction. Incidentally, if you want a guide on how to resist this, see my Luddite’s Guide to Defending Cash.

Democratizing access to Digital Flynn? CBDC

In the ‘cashless society’ scenario, all physical Flynns are imprisoned as digital Flynns that we have no access to, while we all use bank-issued GFOOJC. This scenario has some pretty bad implications for surveillance, censorship, exclusion and corporate centralisation of power, but also for the resilience of the monetary system and financial stability. After all, what is a ‘Get Flynn out of jail card’ supposed to mean if Flynn is de facto unreleasable?

Central bankers know this. They’ve allowed big finance, big tech and big retail players to push the ‘cashless’ wave, but in the process they’ve created a problem for future monetary stability (this is what Marxists would call a ‘contradiction of capitalism’: private sector players have collectively shot themselves in the foot whilst persuing their individual private interests).

This is one reason why we’ve seen a sudden rocketing interest in the concept of ‘CBDC’: central bank digital currency. What is CBDC? It’s Digital Flynn. The current CBDC debate isn’t about a ‘new’ form of money. It’s about whether us ordinary people should also be allowed to access and control digital reserves at the central bank. Put differently, should all of us have the right to control a cell at the central bank?

From one angle this could be seen as a democratisation of access to digital Flynn. From another angle it would involve us having to contact the central bank to ask to transfer him around, a process that would involve us having to identify ourselves. This is why libertarians imagine this scenario as leading to a giant state-controlled digital money system that will enslave us.

If you’re more nuanced about it you’ll see that the banking sector - which currently controls digital Flynn - isn’t happy about the scenario in which that control gets passed to ordinary people. If you’ve been following CBDC news, you’ll know that the central banks are trying to placate the banking sector by telling them that they’ll have a key role in running any future CBDC infrastructure: put simply, they want to keep the banks as gatekeepers to digital Flynn. If you want an introduction to the politics of CBDC, check out my Zen and Art of CBDC Analysis.

Harmonizing Metaphors: Flynn & the Casino Chip Society

If you’ve been following my earlier pieces, you’ll know that I get very frustrated by the OTOMI - the one-type-of-money illusion - in which people fail to understand that the money system is made up of multiple different issuers issuing money in multiple layers in multiple forms. People suffering from the OTOMI often imagine that bank-issued digital money is just some kind of ‘upgrade’ to state-issued physical money, and one of the key metaphors that I use to combat this belief is to talk about bank-issued money as being digital casino chips. This metaphor set was originally laid out in my piece the Casino Chip Society, and it’s the dominant metaphor set that I use for this issue, because it’s easy to understand while being pretty accurate and versatile.

That said, I’m always fascinated by developing new metaphors that offer new angles on the issue. Any metaphor set has strengths and weakenesses, and I’ve enjoyed playing with this Tron metaphor. It’s a bit more clunky that my casino-chip set, but it’s also more fun and has can be used to humanise monetary politics to some extent. I would never use these two sets of metaphors directly with each other, but I’d love to hear your opinion on which works for you. Please do leave comments and suggestions!

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In November 2022 I released The Casino Chip Society. My aim was to popularise a simple metaphor that could help us defeat the OTOMI - the One Type of Money Illusion. Too many people go through life believing that what they call ‘bank deposits’ are basically just repositories of government money that they’ve stashed in a bank. Part of the reason for this is a linguistic convention in the English language, in which the verb ‘deposit’ typically creates a noun ‘deposit’ (such as when we say “the flood deposited silt into the river, and now there’s a silt deposit in the river”). We often believe that because we deposit (verb) money into a bank, the subsequent ‘deposit’ (noun) must be the thing we put into the bank, but this is very wrong.

In reality, the thing we deposit into a bank is taken away from us, and we are given something entirely different in return, which is why I use casino chips as a metaphor. The thing I deposit into a casino is cash, but the thing I get given in return is chips. The casino owns the cash. I own the chips. Now for the linguistic glitch: imagine the casino started calling the chip a ‘deposit’. This is exactly what happens in the banking sector. All those units in our bank accounts are bank-issued digital chips, but we have to contend with this god-awful terminology in which they’re referred to as ‘bank deposits’. In reality, bank deposits are not the thing we ‘put in’ to a bank. They’re the thing issued out by banks. This is why I believe it’s much more useful, and less confusing, to just talk about Layer 1 government-issued money and Layer 2 bank-issued chips.

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So what does this have to do with Silicon Valley Bank? Silicon Valley Bank was very skillful at marketing itself to tech startups, and many of them began depositing (verb) money into the bank over the last several years, which means Silicon Valley Bank’s Layer 1 reserves were going up while they issued out a whole lot of Layer 2 digital chips, or ‘deposits’ (noun) to those startups. For a beginner’s guide to some of the dynamics of how banks build up their balance sheets, check out the new version of my Emotional Guide to ‘Fractional Reserve Banking’, but the very crude version of the SVB story is that the bank was accumulating Layer 1 reserves as assets, but those aren’t very profitable to hold, so they were using those to obtain various long-term bonds as assets instead.

The twist is that recent interest rate rises pushed down the value of older bonds that they were holding, because those were issued in a lower-interest rate environment (this is a technical topic that we need not get into here). This means jitters began to spread about the asset side of SVB’s balance sheet, and this means the people and companies holding SVB-issued digital casino chips began to edge towards the door.

Silicon Valley isn’t just an economic powerhouse. It’s a relatively close-knit cultural community with people who spend a lot of time networking to make professional connections and to build reputation. This is an economy of agglomeration, where industry blooms precisely because everyone is in close proximity to each other. This means a dense network of people all start receiving the same WhatsApp, Telegram and Discord notifications when some news is hitting the ground, such as concerns about a specialist bank that many of them had accounts with.

This is especially the case when a bunch of those people are part of startups that are funded by the same ecosystem of venture capital firms. In my last piece Zen and the Art of CBDC Analysis I talked about the contradictions of capitalism, a Marxist term for an economic fallacy of composition in which capitalists assume that what makes sense at an individual level must make sense at a collective level too (or, more realistically, they don’t even think about the collective level). Here we have a beautiful example: venture capitalists told their startups to pull their money from SVB in order to protect their short-term interests, seemingly unaware that in doing so they’d trigger a chain reaction that would undermine the collective interests of all the startups in whole ecosystem.

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This means that all the people with accounts at SVB started stampeding for the exits, like a bunch of gamblers holding chips in a casino that they start to have doubts about. And that’s when the crisis hit and the the government stepped in.

But this takes us to one of the most controversial topics in the whole saga: bank deposit insurance. As mentioned, ‘bank deposit’ is an attrocious term, so we really should refer to this as ‘bank-issued digital chip insurance’. Digital chip insurance is run by the FDIC (the Federal Deposit Insurance Company), a US government agency that’s supposed to dampen the chance of bank runs by providing assurance to all digital chip holders that even if the bank goes bust, its chips can be redeemed at par for government money again. Historically there was a limit to this of $250,000, but the problem for tech startups is that they tend to raise tens of millions at a time from venture capitalists (to do stuff like building platforms for AI-generated cat pictures and so on), and because they’re not very focused on financial risk management, they just might keep $10,000,000 worth of Layer 2 digital casino chips in their account, rather than diversifying.

So when Silicon Valley Bank goes bankrupt, all those Layer 2 chips are called into question, and given that those firms use those chips to pay their developers, all that progress on building AI-generated cat picture platforms, or killer drone technology, or mind-control devices, or surveillance tech is called into question too. It turns out that the US government sees the startup ecosystem as being collectively Too Big To Fail (TBTF), so is swooping in to bail them out by overriding the traditional limit on digital chip insurance.

This raises a question I briefly touched upon in my Casino Chip Society piece. In that piece I made a clear distinction between Layer 1 state-issued money and Layer 2 bank-issued money, but if Layer 2 money is implicitly guaranteed to be redeemable into Layer 1 money, is it in fact Layer 2, or is it really a variant of state money that’s had its issuance delegated to the banking sector?

I suspect that’s a question that will be discussed in the coming months, but I’d like to reiterate that in most countries Layer 2 bank-issued digital chips are in fact not legal tender, even if they are widely used for so-called ‘cashless’ payments, and that’s a meaningful legal difference. If you want to delve deeper into the technical weeds of this, I’d recommend checking out this interesting piece from my friend Nathan Tankus, who makes a suggestion that concessions could be extracted from the banking sector by giving all Layer 2 chips insurance in future. I’d also encourage you to listen to this Odd Lots podcast episode for some solid analysis of the realpolitik of bank bailouts from Dan Davies.

Let me conclude with one final point that few commentators will pick up on. The FDIC insures bank deposits, but we know that these are actually bank-issued digital chips, and these Layer 2 chips are the core component of what’s referred to as the ‘cashless society’. This means the FDIC is also acting as a Federal Cashless Society Insurance Corporation, providing an implict government backstop to Layer 2 bank domination of the US monetary system. This feeds into the parallel debate about CBDCs: as mentioned in Part 1 of my Zen and the Art of CBDC Analysis, many libertarians are convinced that the state wishes to take over the digital money system via CBDC, and yet it’s pretty obvious that the state spends a helluva lot of its time trying to protect confidence in the privately-run bank digital payments system. I’ll try get into that in Part 2 of that piece, but until then I encourage you to stop using the term ‘deposits’, and to call them for what they are.

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Dear Readers, Part 2 of this piece can now be found here.

Our economies are held together by three layers of money, with the government issuing the first layer, the banking sector issuing a second layer of ‘digital casino chips’, and players like PayPal issuing a third layer of chips built upon the bank chips (learn more in The Casino Chip Society). The end result is that you and I have a choice between Layer 1 state-issued physical cash, Layer 2 bank-issued digital chips, and Layer 3 corporate-issued digital chips.

The so-called ‘cashless society’ refers to the situation in which the first option is removed, leaving us captured by the other two, but this has now been complicated by the arrival of a hypothetical new player called CBDC - central bank digital currency. If this were introduced, it would be a form of Layer 1 state-issued digital money, to supposedly co-exist alongside cash. It would be a bit like having an online account at your country’s central bank, which is something you can’t have right now.

I’ve been involved in CBDC discussions since 2015, but it’s only in the last year that I’ve seen it catching on as a hot topic in public. Google Trends data confirms this, showing that interest in it started to spike in 2022.

This interest is partly due to the fact that a variety of central banks have launched research initiatives and pilot projects to experiment with CBDC (see the CBDC tracker to explore these). This is leading to a cottage industry of social media pundits that are flooding the world with CBDC hot takes. I could give you my own hot take, but we don’t need more of those. What we need is a cool-headed way to approach the debate, so I’d like to offer 5 meditations that may help you in your quest.

Meditation 1: Acknowledge your background Imaginary

The first step in analysing CBDCs is to not think about CBDCs. Instead, we should acknowledge that all of us are bound to leap to certain conclusions about the topic, because all of us are haunted by background imaginaries that shape how we interpret things. ‘Imaginaries’ is a bit of a wanky academic term, but think of an ‘imaginary’ as being like a subconscious mental game-board upon which you play out scenarios in your head. It’s a game-board that has certain pre-set biases that will exert a pull on your thoughts, warping them in particular directions. You can have more than one imaginary competing to warp your thoughts, but here’s a selection, along with descriptions of what they are likely to make you think about CBDC.

CBDC in the libertarian imagination

If you’re a person who refers to yourself as a libertarian, your background imaginary will likely be set up as a battleground between good and evil. On the good side is a heroic, innovative and productive entrepreneur class defending against a bad, stagnant and parasitic government that tries to rob things. In this game-board, regulations are just an oppressive shackle suffocating innovation, and state enterprises are inefficient and corrupt drains upon society. Actually, you might not even believe in ‘society’ (echoing Margaret Thatcher’s belief that ‘there’s no such thing’ as society), and prefer to see the economy as but a collection of sovereign individuals without obligations to each other, who only interact to mutually pursue their self-interest. From this perspective, welfare systems are just one group of people using the state to leech off the hard work of others.

So how might a libertarian imaginary affect your perception of CBDCs? Well, it’ll probably bend your mind towards viewing CBDC as a new attack launched by the evil side of the battle. The state will use its control over this new digital money to watch you, censor you, and discipline you. In the socially conservative version of libertarianism, CBDCs loom as the monetary wing of a terrible new system of woke environmentalist authoritarian control. It’ll be enlisted to force you to buy green vegan products and to demote you if you fail to declare your pronouns. CBDCs may appear as just one more means to unnaturally distort the natural hierarchy of God and male patriarchs, who would otherwise by striving to preserve themselves and their family by competing hard in the market (which is imagined to produce spontaneous natural order when left to run without interference).

Conservative libertarianism is also very heavily invested in the Tarzan Suite, a mode of thinking about economies in which the individual is primary, and which tends to lead - through a number of twists and turns - to you imagining that money should be akin to a natural commodity. This may push you towards believing that Bitcoin is the great dollar-killer, which in turn may push you towards believing that CBDC is a desperate attempt by a frantic state to fight against the crypto revolution.

CBDC in the socialist imagination

If you call yourself a socialist, you may reject the idea that the individual is primary in the economy, because we’re all entangled together in a huge interdependent mass. Furthermore, you’ll probably believe that the most vulnerable people in society are not at liberty to just choose whatever path they want within this mesh. As Isaiah Berlin put it:

People are largely interdependent, and no person's activity is so completely private as never to obstruct the lives of others in any way. 'Freedom for the pike is death for the minnows'; the liberty of some must depend on the restraint of others.

On this game-board, poorer people often only have a choice between starving and selling their labour to rich people who have far greater power. So, within the socialist imaginary the state is seen as something to be harnessed to protect people against a parasitic capitalist class (which gets enormously wealthy by extracting surplus value from peoples’ labour). The state can act as a shield to protect the minnows from the pikes (and in this frame, deregulation efforts are a ‘licence to exploit’). In the far misty reaches of the imaginary there may be a dream of a future workers’ state where everyone collectively owns everything and exploitation is ended forever (this also exists in the libertarian vision, but as a dark nightmare of totalitarian communitarianism).

So how might this affect someone’s perception of CBDC? This is a tricky one, because people on the traditional political Left tend to have an aversion towards thinking about finance and money, seeing it as a profane realm of capitalists. But those who are savvy may see CBDCs as a Layer 1 opportunity to break the power of the Layer 2 private banking sector (which, alongside Big Tech, is in the midst of privatising the entire monetary system via its attacks on physical cash). They may see CBDC as initiating a new era of public digital money for the good all those crucial workers who lack status in capitalist markets, like nurses, teachers, and exploited minorities. Rather than CBDC being something to take over people’s lives, it’s something to be used in the fight against a banking sector that seeks to take over people’s lives.

Of course, ‘socialist’, like ‘conservative’, is a broad concept, and it’s an ecosystem of beliefs rather than a single species. While many left-leaning groups tend to see society as being like a large family that should be working together, only some believe there should be a paternalistic daddy figure on top directing the action. China stands out as having more of this ‘daddy-on-top’ vibe, and in the Western world there’s a small but vocal sub-section of the Left, pejoratively called ‘tankies’, who claim that critique of China is just a cloaked form of US imperialism. For this sub-set, and for anyone else who has bought into the daddy vision, privacy may appear as a kind of luxury sought after by bourgeois capitalists (who wish to stall the progress of the overall family). Digital surveillance may seem like a common sense element of a good society, to make sure everyone pays their taxes and contributes to the public good, but this obsequious attitude is rejected by left-wing anarchists, who are next on our list.

CBDC in the anarchist imagination

If you are someone - like me - who sits more on the left-anarchist (or libertarian socialist) spectrum, you’re probably not going to make a clear distinction between states and (large-scale) markets. The left anarchist game-board has the state acting in concert with large private sector players to form a kind of ruling coalition (even if the coalition members might make a big performance of sabre-rattling at each other). This means people with an anarchist impulse will tend to express cynicism towards both state and market. Nevertheless, they may see value in trying to engage with both in order to minimise the destructive tendencies of the ruling coalition by creating balances of power between the members (almost like trying to curb the expansion of a malignant dual cancer by getting one part to attack the other). Against this backdrop there’s a vague utopian dream of federated anarchy, a future in which small self-governed collectives flourish by setting up interconnected networks-of-networks (this vision has found new expression in the more progressive parts of the crypto world - for example, it sometimes pops up in the Ethereum and Cosmos ecosystems).

So how does this imaginary interact with CBDC? Hrm. Well, it probably leaves you with less nightmarish vision of CBDC than libertarianism, but a less romantic vision of it than the socialist imaginary might give. Given that state and market are just enmeshed elements of each other, you’re more likely to recognise the torturous angst that government officials will go through as they think about CBDC. State officials will be reluctant to launch one, because it risks disrupting the private banking corporations that form a core part of the ruling coalition. Insofar as a CBDC gets launched, it will have its fangs removed in order to maintain a strong role for the banking sector to continue to dominate the digital money system. In fact, CBDC may end up just being a ruse to improve the efficiency of the private interbank payments architecture, with the goal of accelerating and extending the reach of corporate capitalism into the furtherest reaches of your soul (more on this in Part 2).

Anarchisty people will already be concerned by the surveillance in the existing private sector digital payments system, but will now also have to be concerned about the potential for payments surveillance via CBDC. If you’re sitting somewhere between this imaginary and the previous one, you may be tantalised by the potential to mess with the big banks via state-issued digital money, but you’ll advocate for a privacy-centric implementation of it (perhaps along the lines of the E-Cash proposal by Rohan Grey and others).

CBDC in the centrist imagination

Technically speaking centrism is a middle position that rejects the extremes of the traditional Left and Right, but as a social imaginary it’s a pastel-coloured landscape stripped of fiery politics. This is a crude caricature, and centrism can seep into the liberal Left and neoliberal Right, but it’s kinda the comfort zone of the apolitical middle blob. It’s a game-board that assumes the world muddles on in the right direction, provided we all keep civil, and it also carves out much space for technocratic governance by experts (rather than by political ideologues). The world is a steady march towards economic efficiency, social good and progress, and if things exist it must be a sign that they serve a purpose for us all, not because they are there to extract power for one or other group.

Silicon Valley trades quite heavily on this imaginary: new technology emerges because ‘we’ have desire for it (indeed, its existence is seen as evidence of our desire), and all that remains is to have a managed process of transition to make sure nobody gets ‘left behind’ as everyone gets upgraded. Your individual identity can blossom in this consumerist landscape, as long as you don’t call for an ethno-nationalist police state, or for a true socialist revolution against the capitalists (albeit, you are allowed to call for fake revolutions on Instagram, and to wear left-wing aesthetics like a brand of clothes). As for states, they must be background plumbing to help business leaders meet the needs of consumers.

In the centrist imagination, CBDC has its political content watered down, and this is the standard mode by which it’s being presented in most official discussions. The underpaid public sector officials who are tasked with investigating it seem to be saying: ‘we are not authoritarian dictators or capitalist illuminati. We’re just hard-working policy experts working alongside private sector partners and civil society to serve society in its forward march into ever greater productivity and automation’. CBDC, in this frame, is just another step in our broader move towards ‘digital transformation’, which is seen to be inevitable because it’s part of our unstoppable, never-ending, and ever-so-exciting enlightenment journey towards ever more efficiency, convenience, interconnected complexity and SCALE.

CBDC in your imaginary

This isn’t an exhaustive list, and you may disagree with my (somewhat tongue-in-cheek) categorisation. The point, however, is to highlight that we may be less in control of our perspectives on CBDC than we may think, because the topic is often being routed through a series of pre-installed shortcuts in our minds. There’s no escape from this, but I’d recommend coming to terms with why you’ve ended up with the imaginary you have (for example, I grew up in Apartheid South Africa, where a fascist police state used law to forcibly extract labour from workers to enrich capitalists, and the existential pain of that expresses itself in me as an anarchist intuition, duh!) Now onto Meditation 2.

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Meditation 2: Accept that CBDC already exists under a different name

Meditation 1 addresses fantasies, but this one addresses realities. I noted that we have access to three layers of money in our society – Layer 1 state cash, Layer 2 bank-issued digital chips, and Layer 3 corporate-issued digital chips. Cash, however, isn’t the only form of Layer 1 money. There’s another, but we can’t access it. Only banks can.

The term given to this money is ‘Reserves’, and it’s the digital central bank money that commercial banks use between themselves. It certainly is ‘central bank digital currency’, and has existed for a long time, but because we can’t access it we’re often unaware of its existence.

If I’m a British citizen, I don’t have the ability to open an account at the UK central bank (The Bank of England), but commercial banks do have this ability. In fact, to be a bank they must open an account at the central bank. Think of the central bank as being like an exclusive private club where the state and the banking sector do their own banking (and which also serves as a regulator and place for them to meet). Members of the club get access to a premium digital version of Layer 1 central-bank-issued money, while we in the public use cash and Layer 2 commercial-bank-issued digital money (check out my book Cloudmoney for a deep dive into the interaction between these).

If you have a Barclays account in the UK, you’ll have an app that allows you to message the bank to ask for your Layer 2 chips to be moved from your account to another, but in the background Barclays and the other banks have access to a system where they can message the central bank to ask for their Layer 1 digital units to be moved between their respective accounts (albeit, I doubt the Bank of England gives them an app for this).

So, if central-bank-issued digital currency has been used extensively by the banking sector for many decades, why is it only becoming a hot topic now? Well, in new popular discourse, the term ‘CBDC’ is reserved for the hypothetical scenario in which ordinary citizens get given direct access to central bank reserves to make payments. That would be akin to allowing you and me to open an account at the central bank, thereby giving ordinary plebs like us access to the formerly exclusive private club.

When Citibank and Chase Bank message the US Federal Reserve, they may ask it to move tens of millions of digital reserves between their accounts, but imagine if you too could stand alongside them and ask the Fed to move a mere $10 of central bank money to a small-town theatre for a movie ticket. How do you think that makes the original members of the club feel? Meditate upon that question.

Meditation 3: Realise that early CBDC proposals were attacks on banking sector power

Meditation 3 takes us into some of the hidden political history of (one version of) the CBDC idea. For a long time it was not a mainstream idea, but was advocated by quite radical groups who were critical of the mainstream central banking and commercial banking establishment. Let me explain.

Big players like Citibank and Chase traditionally dominate the digital money system, because they issue the Layer 2 digital ‘casino chips’ that we see in our bank accounts. They create a significant proportion of those chips through a process called Credit Creation of Money (summary: they issue new chips in exchange for loan agreements from people, a process that is sometimes called ‘fractional reserve banking’. See The Casino Chip Society for more detail). Credit Creation of Money gives banks a lot of power to direct the economy, because they get to decide which sectors to activate or deactivate by issuing or retracting credit). This is why there’s a tradition of monetary reform campaigns that call for the state to remove this power from the banking sector (see, for example, the American Monetary Institute in the US).

Such monetary reformers face an uphill battle, because in capitalist countries the state often acts to protect the banking sector (and officials may see the sector as foundational part of the Good Society, helping us achieve our life goals). So, in a country like the UK where the banking sector has huge political power, it’s politically impossible to call for legislation to prevent banks creating money (in fact, it’s far more likely that the state will work with the banks to promote ‘financial inclusion’, a euphemistic phrase referring to efforts to onboard people into the commercial banking sector, and to make them dependent on bank credit). Put simply, the idea that the state will work against the banking sector is out of sync with political reality.

So what is a monetary reform campaigner to do? Well… one possibility is to use a more oblique strategy. Rather than calling for legislation to remove money-creation power from the banks, just give the public a new option. Advocate for us to be given access to the traditionally limited-access central bank reserves that the banks have exclusive use of. This is turn will make us less dependent upon the Layer 2 digital money system run by the banking sector, reducing their political power.

So, some of the earliest CBDC proposals I came across were from monetary reformers who wanted to knee-cap private banks by getting the central bank to allow this. Here’s a classic 2016 example of this strategy from the savvy UK monetary reform group Positive Money.

Notice that they frame it as innovative technology rather than a political move. They know very well that central banks already issue electronic money, and that the real objective is to open up access to it, but CBDC gets positioned as a fancy new digital thing. This is a great strategy, because digital automation is a standard part of transnational corporate capitalist ideology, which means national capitalist states - which are subservient to the overarching ideology - have to take it seriously. In other words, you can disguise a monetary reform campaign against the banking sector as a technological innovation, and trojan horse it into the political realm via politicians’ inability to reject automation.

Monetary reform groups could also hack neoliberal ideology by framing this as promoting ‘choice’ and ‘competition’. Rather than asking a state to legislate against banks, you get the state to compete: so, imagine a person in the UK facing a choice between opening an account at Barclays, and an account at the Bank of England. Given that the Bank of England issues Layer 1 base money that’s technically safer than Barclays digital casino chips, they just might outcompete Barclays, weakening our dependence on the banking sector (and its crisis-inducing tendency to issue excess Layer 2 money into shit like housing speculation).

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Meditation 4: Ask the question, ‘If central banks underpin private digital money, why would they compete with it?’

Having noted that some groups see CBDC as a potential weapon against the banking sector, let us now meditate upon the fact that the average central banker isn’t that radical. In fact, one of their core mandates is to maintain the stability of the banks. The monetary reform version of CBDC asks them to deliberately undermine their banking pals, so it’s controversial at best.

But how then do we explain the sudden rise in central bank experimentation with CBDCs? Were they inspired by the monetary reform movement? No. There’s something else going on. What is it?

Well, one common story goes something like this: private sector digital money players are growing so fast that they’re leaving central banks in the dust, and central banks are trying to play catch-up. In this view, CBDCs are not emerging out of a democratic push to reduce the undemocratic power of the commercial banking sector. Rather, it’s because central banks are dinosaurs who are nervous about being outmoded by new digital players, and who are reluctantly clawing for territory and relevance by going digital.

Many techy people seem to think this is what drives CBDC development, but this meditation is designed to cast doubt on that. So let’s dive in.

Layer 2 bank-issued digital money has existed for a long time, and accounts for over 90% of the money supply in countries like the UK, but the central bank hasn’t historically felt an existential ‘threat’ from this. Why not? Just like casino chips derive their power from the legal guarantee that you can take them back to the cashier to redeem for cash, the digital ‘casino chip’ money issued by the banking sector derives its own power from the implicit guarantee that it can be redeemed for state cash. Layer 1 state money underpins confidence in Layer 2 bank money, and to suggest that the latter will somehow overcome that dependence, and transcend the very money that underpins it, is weird.

I’m not saying this can’t happen, but it’s worth dropping naive versions of the belief that central banks are trying to ‘catch up’ with Layer 2 and 3 private sector money issuers. If anything, new private sector players are making the central bank even more important. Consider, for example, PayPal. Every Layer 3 PayPal unit only has power because it’s backed by Layer 2 bank chips that are partially backed by Layer 1 central bank money. Why would a central bank feel pressure to compete with an entity that they not only underpin but also have regulatory power over? It’s like a parent feeling pressure to compete with their five year old child. The kid might be confident, but they’ll very quickly lose that without the support of the parent.

One of the most virulent versions of this story concerns stablecoins. Most people probably realise that PayPal is not about to ‘outcompete’ the US Federal Reserve, but because stablecoins are new and carry the (dwindling) rebellious aesthetics of crypto, they are sometimes seen as a feral wild-child that could disrupt everything. In reality though, most major stablecoins are Layer 3 systems just like PayPal, albeit implemented on a decentralised network architecture rather than a centralised IT system. Big stablecoin players like Circle USDC heavily rely upon the US Federal Reserve continuing to do what it does. So, meditate upon the fact that central banks are the big franchisor bosses at the centre of national monetary systems, granting private sector franchisee players the right to issue units that carry the dollar, pound, yen or rupee symbol.

Meditation 5) Meditate upon my hot take

We still have to deal with the inconvenient truth that central banks seem to be dragging themselves towards CBDC. I told you earlier that we don’t need more hot takes, but I lied, because we do need this one. Here it is:

There’s a high chance that central banks are reluctantly experimenting with (opening up access to) CBDC because their private sector partners have fucked up by attacking the public money – physical cash – that underpins confidence in private sector money.

If I was to put a Marxist hat on, I’d talk about the ‘contradictions of capitalism’: when a bunch of corporations all individually pursue their individual interests, they often collectively create conditions that undermine their collective interests.

For example, commercial banks are private profit-seeking entities that want to automate everything to cut costs. This means they want to get rid of all their physical branches, which in turn reduces the ability for businesses to deposit cash, which in turn pushes more businesses towards ‘going cashless’, which in turn sends signals into the public that there is something unacceptable about cash. Banks also want to shut down their physical ATMs, which in turn reduces the public’s access to cash, which in turn makes cash seem relatively more inconvenient than before.

This is convenient for the banks, because while they undermine the Layer 1 cash infrastructure, they are also doing everything within their power to steer people into their Layer 2 digital payments systems that give them revenues and data. They are helped in this task by the card companies like Visa and Mastercard, which make all their profits by getting people to stop using cash, and who have drip-fed the public anti-cash propaganda for decades (check out Cloudmoney for more on this). In the background, Big Tech players like Amazon are on board with all of this, because they want to automate everything, and cash is resistant to automation.

Each individual bank is privately run, and see an anti-cash stance as being in their private interest. They are predictably doing what you’d expect a capitalist corporation to do, and they don’t think about the broader consequences of that. When I say ‘broader consequences’, I don’t only mean the ‘externalities’ that are pushed upon us as a result of a cashless society (like possible mass surveillance, censorship, exclusion, resilience problems, centralisation of power etc.), but also things that will come back to bite the banking sector. One of these is the fact that the power of their Layer 2 digital chips depends on the public believing they can be redeemed for state money, but the banks are collectively eroding the state money infrastructure in order to boost profits.

So, big private sector players have individual incentives to destroy cash, but collectively that screws them over. For a long time central bankers didn’t think too much about this, and have allowed it. Since the pandemic, however, the private sector anti-cash drive was massively accelerated, because Big Finance, Big Tech and Big Retail weaponised the public’s temporary fear of physical contact to amplify the anti-cash automation agenda that they already had. Suddenly central bankers are more aware of the possibility that the contradictions of capitalism could undermine financial stability. So, what pops into their head? Layer 1 money underpins Layer 2 money, but Layer 1 money is being eroded, so to save Layer 2 money we must give the public access to a new form of Layer 1 money.

Coming up in Part 2…

The old balance of power between Layer 1 and 2 money depended on a kind of differentiation in vibe. Cash is public, offline and privacy-preserving, while digital bank chips are corporate, online, privacy-invading and require accounts. These differences historically have given them different spheres of influence: cash is the state money which is good for small-scale local transactions settled on the spot, and it also forms the mental image of ‘money’ for most of the public. Bank chips, by contrast, are easier for large-scale and distant transactions, but they are invisible and intangible and derive their power and imagery from state money. But now we’re seeing cash being undermined in the places where it was historically strongest - the local and the physical - and the balance of power is getting wrecked.

For central banks, this is creating conflict between their different mandates. In order to maintain stability, the central bank feels pressure to create a new alternative - CBDC - but when public money comes in a digital form its vibe changes, and it suddenly feels a lot closer to being in direct competition with the banking sector. In a nutshell, central banks are being pushed towards direct competition with the private sector players they are supposed to promote. Oh the terrible irony.

In Part 2 I’ll introduce five more meditations where we’ll reflect on issues that spring up around this. For example, why is it so politically unthinkable for the central bank to just promote cash instead of CBDC? If CBDC causes contradictions for them, what tweaks will they introduce in an attempt to resolve those? Could CBDC be crafted to promote Layer 2 and 3 systems? We’ll also look at whether Bitcoin has anything at all to do with this, and the monetary geopolitics of it all.

Part 2 of this piece can now be found here.

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Many people believe that their national currency is a single currency, but that it appears in different forms. A person comparing a dollar bill with a dollar bank account balance may believe those are just different versions of the same thing, like comparing an acoustic guitar with an electric one, or a physical train ticket with a digital one. The same thing in a different form.

If you’re one of these people, you may be suffering from the dreaded OTOMI - the One-Type-Of-Money-Illusion - and it could be preventing you from understanding many crucial topics in monetary politics. For example, it could block your ability to understand the politics of cashless society (covered in my book Cloudmoney), because it may lead you to believe that digital money is just an ‘update’ to cash: the same thing in a more modern form.

It has many other consequences. It could lead you to misrepresent, or misunderstand, ‘fractional reserve banking’. Many people suffering from the OTOMI believe that the state is the creator of money, so when told something like ‘banks create money’, they get flustered as their brain tries to process how one type of money is created by two different players, which can lead them to all kinds of conspiracy theories about banking. It is in fact true that banks do create money, but it’s very easy to misinterpret what this means if you’re carrying the OTOMI.

If you’re suffering from this affliction, take comfort in that you are not alone, and in the fact that it can be cured through a simple metaphor. Let’s visit the casino.

Cash vs. Casino chips

Picture yourself walking into a casino with $100 in cash. You hand it over to the cashier, who puts it into a till and counts out a number of casino chips for you. Imagine them pushing those chips outwards across the counter, issuing them to you.

There are now two classes of thing here:

1. State-issued cash behind the counter, now owned by the casino

2. Casino-issued chips in your hand, now owned by you

It’s important to stress that you no longer own the cash. You own the chips, which are privately-issued legal promises - IOUs - that can be redeemed back for cash. If the casino tried to confiscate your chips without giving you any cash back, they would be stealing from you, and, similarly, if you tried to keep hold of your chips while grabbing cash back, you’d be stealing from them. It’s like that phrase “you can’t have your cake and eat it too”: you can’t simultaneously demand to own the cash, and the IOU that promises you cash. It’s one or the other.

This is confirmed by the fact that if you lose all your chips to another punter at the blackjack table, you can’t go back to the cashier to demand anything. The winner of the chips, by contrast, has increased their ability to demand cash back.

The punters know the relationship between the cash and the chips, and also find it very easy to make a distinction between them: The casino has the former. The punters have the latter. The former look like dollar bills. The latter look like coloured plastic disks. The former gets called ‘money’. The latter gets called ‘chips’. The first is a kind of ‘layer one’ base system, while the second is a ‘layer 2’ system. Two different classes, but linked together.

Digital Casino Chips

Let’s now imagine that the casino decided to digitize its operations. Rather than pushing physical chips to you across the counter when you give them cash, the cashier simply opens a database on the casino computer and credits an account under your name with digital chips. Perhaps you download an app where you can see that balance, or perhaps they give you a physical device, like a wearable wristband that you touch upon a terminal when you wish to lay down digital chips on a table. There are different ways to technically implement such a system, but the digital chip is a Layer 2 IOU just like a physical casino chip would be, and whoever has these at the end of the night can take them back to the cashier to redeem for Layer 1 cash.

Money in your bank account is ‘digital chips’

The casino model I describe above is actually the best starting point for understanding your bank account. Here’s why.

Many people get ensnared in a series of linguistic traps when they talk about bank accounts. A person ‘deposits cash into a bank’, and then is told that they have a ‘bank deposit’ which represents ‘money in their account’. It makes us think that a bank deposit is cash ‘inside’ our account, but this is very wrong.

To rewire this understanding, just think of the casino model. When I approach a bank with cash and hand it over to them, they - like a casino - take ownership of it and issue out ‘digital chips’ to me, which are recorded in my account. When you see units in your bank account, you are not looking at ‘money I put inside the bank’. You’re really looking at ‘second-layer digital chips issued out to me’. The term ‘bank deposit’ is just a confusing and unhelpful way of describing ‘bank-issued digital casino chips’.

This means that, on a day-to-day basis, we (mostly) use two separate types of money, with different issuers:

1. Layer 1 state-issued physical cash

2. Layer 2 bank-issued digital ‘chips’, that promise access to the first layer

Both, however, get given the same name. In the UK, for example, both the state-issued cash and bank-issued chips get called ‘pounds’, and are both classed as money. They also carry the same symbol, and because the digital chips have no physical body, newspapers and photojournalists often just represent them using state cash imagery (to truly show UK ‘digital money’, however, you’d have to show images of units recorded in datacentres controlled by the likes of Barclays Bank and RBS).

The net effect is that people seldom distinguish between these forms, collapsing them into the OTOMI. Make no mistake though: a person looking at ‘dollars’ in their Chase bank account is looking a Chase digital chips, whereas someone looking at units in their Wells Fargo account is seeing Wells Fargo chips. Given that there are over 4400 different US banks issuing these chips, the Layer 2 US dollar is actually at least 4400 different currencies with the same name.

One of the factors that obscures this is the fact that banks run big payments networks between themselves to link their separate digital chip systems together, such that a holder of Wells Fargo chips could transfer, via a number of steps, to a holder of Chase chips, giving rise to a feeling of a seamless transfer of generic ‘dollars’. This only works because banks move state money reserves between each other in the background (somewhat like casinos who’ve agreed to transfer cash to each other if their punters try pass chips from one establishment to another).

But banks have a superpower that casinos do not

I use this metaphor of casino chips to show the distinction between Layer 1 and Layer 2 systems, but we must be careful to not push the metaphor too far. Probably the biggest difference between banks and casinos is that banks are able to issue out far more digital chips than they have in a state money ‘behind the counter’. This is because of a process called credit creation of money, or ‘bank creation of money’ (sometimes called ‘fractional reserve banking’, although this is a more archaic phrase that sometimes carries the dreaded OTOMI with it).

This is a technical topic, but the short version is that banks not only issue out new digital chips to people who hand over cash to them, but also to people who ask for loans. Imagine a person arriving a casino with no money but requesting chips nevertheless - this is pretty much what happens when someone approaches a bank and asks for a loan. They’re not asking to be given cash that’s stored there. They’re asking the bank to issue new digital chips to them.

Remember that a chip is a liability to its issuer. Whoever ends up with those chips can come back to demand cash, so - in the case of a casino - it’s not in their interest to randomly issue huge numbers of chips to customers who don’t actually deposit anything. These chip liabilities put them at risk, so they only issue them if they get something in exchange.

It’s the same with banks, but they issue digital chips in two different situations for two different things:

• Digital chips for depositors: they issue Layer 2 chips to normal depositors in exchange for Layer 1 cash reserves

• Digital chips for borrowers: they issue Layer 2 chips to borrowers, in exchange for a loan agreement in which the customer promises to return a larger amount of Layer 1 money to them in future than what the chips promise to them now (in a sense, the bank ‘buys’ a higher-value long-term promise by issuing lower-value short-term promises, but exposes itself to risk in the process).

So, unlike casinos, where the cash and chips stay in sync, with banks the two forms diverge: the Layer 2 digital chips that they issue expand far past the Layer 1 government money held by the bank, as the bank extracts loan agreements from that second class of customer. This is why the money supply (of second layer chips) expands as banks make new loans, and contracts as those loans get paid back.

Why this matters for understanding ‘cashless society’

If the technicalities above are a bit tricky, don’t worry. What matters is to understand that we live with at least two different types of money, the first issued by the state, and the second issued by the banking sector.

As mentioned, people who suffer from the OTOMI often believe that the move towards a cashless society is a process by which the One-Type-Of-Money simply upgrades to a more advanced version of itself. In reality, the move towards cashless society is the result of a battle between two different parts of a hybrid monetary system. It’s the situation in which Layer 1 state-issued physical cash is overrun by Layer 2 bank-issued digital chips.

In reality, a cashless society is a type of enclosure, in which the only form of money in society becomes digital bank chips (a bit like being stuck in a network of casinos where you can no longer exit). I write a lot about the consequences of this elsewhere, but the important point to take away is that digital bank money is not an ‘upgrade’ to cash, any more than a casino chip is.

‘Cashless society’ vs. ‘bank-chip society’

The phrase ‘cashless society’ annoys the hell out of me because it references something that is not present - Layer 1 cash - rather than something that is present - Layer 2 digital bank chips. It’s been a big frustration of mine for a long time, as my recent tweet shows:

Perhaps the only phrase that captures what’s present is something like the Casino-Chip Society, or maybe the Bank-Chip Society, but you can see why the digital payments industry wouldn’t want such a reframing to take place. They want people to think that digital money is basically just an upgrade to cash, so it helps to not draw attention to the chip-like nature of digital units. Confidence in the Layer 2 system is psychologically dependent upon people believing that those chips are essentially equivalent to public money. And, much like a casino chip might start to feel suspicious if you were no longer able to redeem it, people might start to feel suspicious if they saw their digital balances as becoming increasingly unredeemable.

The irony is that those chips derive much of their power from their association to the state money system, all while their issuers try to compete with and undermine the state money system. It’s a bit like a situation in which Uber becomes the only means of transport, while the company demands that the state maintains the public road infrastructure. The banking sector essentially wants the central bank to keep managing public confidence in money, while allowing the industry to erode access to public cash.

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Chips-for-chips

Our monetary system doesn’t just stop at the second layer though. Imagine taking a casino chip and handing it to the operator of a gaming arcade or theme park in exchange for a token that can be used within their premises. You’re using a Layer 2 chip to get a Layer 3 chip.

There are thousands of Layer 3 systems in our monetary system. For example, PayPal will accept Layer 2 bank chips from you, put those into their own bank account, and then credit you with Layer 3 units in your PayPal account. You can then move those to other PayPal customers (or request to redeem them back).

Most Layer 3 systems don’t (at least officially) have a ‘fractional reserve’ element. They’re a normally fully backed, which means every Layer 3 chip is supposed to be matched by a Layer 2 chip somewhere else in the system. If you see 100 dollar units in your PayPal account, you’re supposed to assume that PayPal is holding 100 dollar chips in its bank account somewhere (or at least something that can be easily sold for dollars, like US government bonds).

Perhaps the most talked-about new contender in the Layer 3 category are backed ‘stablecoins’ like those issued by companies like Circle. Circle will have normal Layer 2 chips in a bank account, and will then issue Layer 3 chips that can be moved around within a blockchain network architecture, rather than a centralised architecture of the kind PayPal would use.

PayPal and Circle are big players, but there are many tiny issuers of Layer 3 money. In the US, this could include pretty much every business that issues dollar-denominated vouchers and gift cards, or gaming platforms that issue online game currencies. If you have an account with any non-bank institution that also has a money balance associated with it (for example, a Euro balance in stockmarket account, a pound balance in a UK online horse-betting platform, or dollar units in your Uber Cash account), they’re probably going to be Layer 3 chips. Some of these get rebranded with a new name - such as ‘Amazon Coin’ - in which case they get called ‘virtual currencies’, but in essence they’re just Layer 3 chips.

OTOMOI-TF to TLOMMI-TF!

As mentioned, many people live with the idea that there is one-type-of-money (OTOM), with one issuer (OI), in two forms (TF), physical and digital. Let’s call that OTOMOI-TF. What we’ve seen, though, is that a national currency like the US dollar is not a single currency. It’s an ecosystem consisting of:

1. The base US dollar, issued by two players (the Fed and the Treasury)

2. Layer 2 US dollars, issued by over 4400 banks

3. Layer 3 US dollars, issued by a constellation of thousands of private players, from small town theme park operators to colossal players like Facebook

So what we have is (at least) three layers of money (TLOM), with multiple issuers (MI), in two primary forms (TF), physical and digital. This is TLOMMI-TF. By using this framework we can build a much more fine-grained analysis of the politics of money, because we can cut monetary systems into conceptual slices:

• TLOM: We can analyse the interaction between the three layers

• MI: We can analyse the dynamics of, and relationships between, the issuers - central banks, state treasuries, commercial banks, Venmo, Amazon, local country fair, online gambling company etc.

• TF: We can analyse the differences that occur when the different issuers issue their different layer tokens in digital or physical form

10 monetary topics that this can help us understand

With these conceptual slices in place, we’re in a much better positions to understand current battles going on in the monetary system. For example:

1. Cashless society: Probably the biggest meta-battle going on right now is between Layer 1 state money issued by central banks and treasuries in physical form and Layer 2 digital bank chips. The ‘cashless society’ debate is really about whether the Layer 2 players should take full control, or whether a balance of power needs to be maintained by protecting the cash system. I’m a big advocate for defending the balance of power.

2. Central bank digital currency (CBDC): The banking sector has been attacking the cash system for decades, but confidence in their Layer 2 chips depends on the public being able to redeem them for state money. This is now inspiring a new debate about whether there needs to be a new Layer 1 money issued by central banks in digital form, called CBDC. In reality, Layer 1 CBDC has existed for decades, but it’s traditionally called ‘reserves’ and is only accessible to banks who use it between themselves. The CBDC debate is really about whether access to digital state money should be extended to all of us.

3. Stablecoins: I already mentioned these above, but stablecoins are issued by a range of different players and offer, like PayPal, an alternative to holding Layer 2 banking sector chips, while (hypothetically at least) being better at preserving some level of anonymity.

4. The sandwich: banks control the Layer 2 system, but see a future in which they might end up sandwiched by competition from a hypothetical Layer 1 CBDC and Layer 3 stablecoin systems (which admittedly plug into them). This is why banks are currently lobbying against CBDC to water it down (e.g. demanding limits upon its use), while demanding that stablecoins be regulated in the same way that banks are.

5. Monetary sovereignty in an age of unregulated Layer 3 dollars: If you’re the governor of a small central bank in a country that’s low on the geopolitical pecking order, you may face the prospect of your citizens getting access to digital dollar stablecoins issued by the likes of Facebook. This may undermine your already tenuous monetary sovereignty, and raise the prospect of your country become a vassal within a Layer 3 corporate-issued dollar system. In this context, you may feel some pressure to push a local Layer 1 CBDC to compete with that, even if it upsets your local banking sector.

6. Layer 1 cold wars: Alternatively, perhaps China sees an opportunity to erode dollar dominance in weaker countries, pushing out a CBDC yuan that can be used by my family in Zimbabwe. This could feed back to players like the US Federal Reserve, who may feel some pressure - imaginary or real - to compete in a kind of CBDC arms race, even if the powerful US banking sector hates that idea.

7. Layer 1 alternatives to CBDC: my friend Rohan Grey has been at the forefront of proposing a new type of privacy-preserving Layer 1 digital money that could be issued by the US Treasury instead the Federal Reserve, via the E-Cash Act proposal. It plays on the political differences between the two different issuers of Layer 1 money.

More generally, taking the layered approach helps to explore perennial topics like:

1. Eurodollars: chips for US dollars need not only be issued by US entities. For example, a European bank, which may or may not hold Layer 2 dollar chips at a US bank, might issue dollar chips to European customers. This is the so-called ‘Eurodollar’ market.

2. Deposit insurance: many governments guarantee Layer 2 digital bank chips up to a certain amount, making them conceptually as safe as Layer 1 state money. This leads to obscure debates about whether those Layer 2 chips truly can be considered as privately-issued, or whether they are better thought of as a form of state money that has had its issuance delegated to the banking sector. To me, a state-insured bank-issued chip is not the same as state-issued cash, especially given that the former isn’t considered legal tender in most countries, whereas the latter is.

3. The shadowbanking sector: I highlighted three layers of money, but - much like it’s tricky to tell where the outermost layers of the atmosphere end - it’s tricky to demarcate an exact final layer to the monetary system. US dollar bonds, for example, are promises-for-future-US-dollars issued out by the US government, but they can be exchanged in a ‘moneylike’ fashion. There’s also the entire shadowbanking sector, in which short-term debt instruments, repos, money market fund units and so on, are passed around. A person interested in monetary politics must also wade into the murky depths of these Layer 4 type systems

Why this matters for understanding ‘fractional reserve’

Many people still suffer from the belief that banks take money that was put inside them by depositors, and then lend that out to borrowers, but this is classic OTOMI-style thinking. The person is imagining Layer 1 state money entering a bank, and then that same Layer 1 money being sent off by that bank as a loan to someone else. In this framing, banks are a kind of shadowy intermediary for state money, deceptively telling us that our money is there when it isn’t.

The reality, as described earlier, is that banks are not intermediaries for state money. They are money issuers in their own right, issuing chips that are out of sync with their reserves in order to harvest loan assets.

The old OTOM conception of fractional reserve banking can be summarised as ‘banks keep a fraction of the Layer 1 money that is put into them, and then lend the rest out’. The much better TLOM conception, by contrast, is ‘the Layer 1 state money held by banks is a fraction of the size of the Layer 2 chips they issue out’.

The outwardness of digital money, and money as a liability

I’ve worked with monetary reform groups in the past who do try raise public awareness of the fact that ‘banks issue money’, but one of the first mistakes people make when hearing this is to imagine that the banks are issuing money to themselves (a bit like a casino giving chips to itself). In reality, banks are issuing money outwards to people like us, and that’s something that puts banks at risk.

The casino chip metaphor is great for conveying this ‘outwardness’ of digital money issuance. It also helps us to see that there are consequences to excessive money issuance for the bank: the bank is issuing something that it experiences as a liability, not as an asset, and it can backfire on them if they do that excessively. If it were to, for example, just conjure up $40 billion in new chips without having a plan about where to get reserves to manage possible chips redemptions, they can bankrupt themselves.

The thickness of thin air

When describing the processes above, it’s common for monetary reformers to say banks create money ‘out of thin air’, or ‘out of nothing’. Sometimes this has a subtext, which is the idea that money should be something that is dug out of the ground like a commodity, hard and certain. I’m a big critic of many aspects of bank power in society, but the phrase ‘thin air’ is often supposed to generate a kind of moral panic by suggesting something flimsy, ephemeral, fake or unreal, and that seldom helps our understanding of how these systems work.

I can issue a promise to someone by speaking it out, or writing it down, and in that sense I’m creating it out of ‘nothing’, but that doesn’t mean it has no power or reality. Almost all Layer 2 and 3 systems - from bank chips to gift cards handed out by Wallmart to units issued by an online betting platform are technically created from the act of a company making a legally binding promise that they can get sued for if they break. Thinking of these different layers of money as enforceable ‘chips’ within a legal system helps to highlight that ‘thin air’ is thicker than we may think.

Technical questions for money geeks

Once you have grasped this layering approach, you can start to play more freely with how the relationship between the different classes might work, asking productive questions like:

Do banks try maintain a fixed ratio between their Layer 1 reserves and the newly issued Layer 2 chips, or is the linkage a lot more loose? Do the two forms end up being semi-independent of each other? Do they first try get reserves and then issue chips after that, or is it the other way around? What agreements do they have with the central bank if they f*ck up in this process? What constrains their issuance of chips? How do the different official regulatory ratios (capital adequacy etc.) affect this? What is the relationship between central bank monetary policy and bank creation of money? Is it really central bank money issuance that may cause inflation, or is it bank chip issuance?

These are just some of the questions, and hopefully we can delve into those in future. I’ll be back soon with more on how to reframe ‘cashless society’, but in the mean time please do play with this framework I’ve laid out, and please do add further examples and questions in the comments below. I hope you’ve found this useful.

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This image has both an educational and a political agenda, but let’s first explore the educational side. We can use it to quickly hone in on the major players of the standard digital money system - banks and central banks - and to show their operations. Picture yourself, for example, making a bank transfer, or walking into a shop to tap your card on a contactless payments terminal. Both cases can be represented on this image by showing a blue payments request ‘beaming’ up to a bank from the ground, and another blue payments confirmation beaming down to whoever you’re paying. In the image above you’ll note that a blue beam enters one bank, and exits another, which means it is showing a payment between two people who bank at different banks. This in turn will require those two banks to deal with each other at the central bank.

Notice that the ‘beams’ have different colours. The ones going to and from the banks are blue, whilst the ones going from the banks to the central bank are red. This is because these beams are requests to move two different forms of money - bank-money (blue) and state money (red). In various earlier pieces I have noted that bank-money is promises issued out by banks, whilst state money is issued out by state institutions. Our attempts to move private digital bank-money between each other results in banks having to move state money between each other at the central bank, and you can see this ‘route’ playing out in the image. To read more about this, check out my piece on credit creation of money (often colloquially called ‘fractional reserve banking’).

The image can also be altered to show different styles of payment. For example, the image below shows a payment between two people who bank at the same bank. In this case, no central bank operations are required, because two people are simply reassigning bank promises issued by one bank between each other.

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How does this relate to my structure-function series?

I have written two pieces about the structure of money versus the ‘functions of money’, arguing that the former is often neglected in favour of the latter, which creates all manner of confusion. The first piece in that series was called How the 'Functions of Money' blind us to the Structure of Money and the second was called Overcoming Monetary Nihilism, but both called for stronger imagery of the structure of monetary systems. A system however, is a complex multi-part structure and this ‘hovering banks’ image should be seen as but one element of it. It does not show, for example, the complex interdependent network dynamics of a monetary system, but it does give us a quick and easy way to visualise the core institutions at the centre of monetary systems.

Beyond this educational agenda, however, this image has a political agenda, because it provides a way to quickly point out hot topics in monetary politics. Below I sketch some of those out.

The ‘cashless society’

The image shows the digital bank-money payments system. This system, however, is in competition - or battle - with the physical state money system (aka. cash). While the banking sector is able to use digital state money at the central bank (represented in the image by those red beams), the only form of state money we can directly hold is physical cash, which roams around with us ‘on the ground’ as it were, out of the view of the major monetary institutions. I have written much about the erosion of the cash system (and the ‘war on cash’), but when we zoom out the decline of cash means that the relative power balance in the monetary system is shifting away from the state and towards the banking sector. What is referred to as the ‘cashless society’ is the situation in which we have to route all transactions via the banking system.

To return to the image, a ‘cashless society’ is one in which every transaction has to be ‘beamed’ through the banks, as it were. This has one immediate effect of bolstering the power of the banking sector, and making it gatekeeper to almost all transactions. This is turn opens the way for far greater levels of payments surveillance and possible censorship of payments. It also introduces key weaknesses into the monetary system - in that the central set of players can fail - as well as a host of concerns about who gets included or excluded.

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The rise of digital money is the rise of Big Tech

One of the most overlooked elements of the rise of the digital bank-money system is that it is required by Big Tech corporations. The latter cannot interoperate with cash, and to consolidate the power of Big Tech there has to be a transition to digital money. Put another way, the banking sector provides the infrastructure that enables Big Tech giants to get even bigger. This is most easily seen in the fintech sector, which specialises in providing integrations between Big Finance and Big Tech.

CBDC

The debate around ‘CBDC’ (or ‘central bank digital currency’) has gone a lot more mainstream in recent months, and you’ll probably see it popping up in the news. The debate is all about whether people should be allowed to have direct relationships with the central bank, rather than having to route everything through those commercial banks that surround the central bank.

There is a lot of politics in this issue, and every economic pundit in the world right now is adding their two cents to this debate. To understand the politics, however, just look at the image and ask yourself what happens if ordinary people start beaming payments requests directly to the central bank, and using the ‘red’ form of money there, rather than going via commercial banks and using their blue form of money. The answer should be fairly obvious. Firstly, the commercial banks will lose power, and potentially get destabilised. Secondly, the central bank will gain (or reassert) power, and potentially get new surveillance capacities. This poses a tricky set of questions: on the one hand such a move could help weaken an extremely powerful and domineering banking sector - which banking reform campaigners might welcome - but it could also give too much power to states, unless privacy protections were secured.

The ‘plug-in’ players

This image is incomplete in that it only shows the primary and secondary monetary institutions - central banks and banks. As I sketched out in my money in orbit piece, there is a whole universe of tertiary players that ‘plug in’ to the secondary layer, such as PayPal, Venmo and - increasingly - the so-called ‘stablecoin’ systems. These players do not market themselves as banks, but back themselves with reserves held in the banking system, so are tethered to it. Right now there is much hype and regulatory attention being focussed on stablecoin players - many of whom are using crypto technology (see below) to create semi-decentralised version of systems like PayPal. Be very careful when approaching these debates however: many Big Tech firms, like Facebook, are creating third-tier forms of corporate-issued money, but marketing them falsely as ‘crypto-currencies’.

So what about crypto-tokens?

You might have noticed that I’ve been putting out some critical pieces about Bitcoin (such as my piece on crypto countertrade, and Bitcoin’s conservative ideology). I do this because the crypto-token community likes to present itself as the anti-thesis of the standard banking sector - represented in our image - and as a solution to the problems found within it. I am deeply skeptical about many of the claims made by crypto hardliners, and also deeply concerned about the misinformation they routinely spread (and which is repeatedly taken at face value by the media). There is a role for crypto-tokens to play in the future monetary landscape - especially via the countertrade mechanism described in the piece linked above - but the crypto scene is rife with confusion, self-serving narratives, and also outright charlatans. This is why I am going through a phase of producing mythbusters about the sector, so expect more to come.

Three major points in summary

1. The ‘hovering banks’ image is a partial representation of one element of the structure of monetary systems

2. The banking sector has huge power in our society, and this is only increasing as the digital money systems that banks underpin spread. This in turn creates synergies between Big Finance and Big Tech

3. The crypto-token scene, exemplified by Bitcoin, makes a lot of noise about solving this problem, but you should be extremely suspicious of this narrative

See you next time!

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Last month I introduced the Global Money Top10 Countdown series for ASOMC Subscribers, along with a new set of visual images to go along with it (check out that link to get up to speed). This is the GMT10 April edition. Hope you enjoy!

Below you will find a video (it is Unlisted on Youtube so is not visible to anyone without the link), and I’m making use…

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