Tuesday, April 19, 2011

BitCoin: A Natural Experiment for Credit Union Development?


Over the course of the past few months, Bitcoin, an open source peer-to-peer on-line currency, has been quickly gaining traction and acceptance, to the point where the "Bitcoin economy" is now valued at several million dollars. A full explanation of the nature and broad implications of the phenomenon is beyond the scope of this essay (to learn more: the short version and the long version), but, while following its development, it occurred to me that the expansion of the Bitcoin economy might offer some potentially fascinating insights into the dynamics of credit union development. The sudden, almost spontaneous growth of a new monetary system and economy is not something one can observe everyday, and the ways in which forms of co-operative credit emerge within it might offer new insights into the models of scholars such as Ferguson & McKillop and Ian MacPherson.

At present, the Bitcoin economy is small enough that, as far as I can tell, credit is virtually non-existent. All transactions are made in "cash," and the "credit money" that does exist within the system was likely obtained from intermediaries in the form of Dollars, Euros, etc., and then converted into Bitcoins (btc). However, as an increasing number of providers of goods and services begin to accept btc, it is conceivable that, once all of their obligations can be met in btc, certain kinds of firms will start operating exclusively in that currency. Once that happens, demand for credit within the system will begin to grow, as btc-exclusive merchants will need short-term loans with which to cover fluctuations in their businesses, as well as longer-term credit to finance growth.


To meet this demand, it is likely that individuals who are "wealthy" in btc will initially step in to become "bankers" by offering personal loans. However, given the fact that the btc system makes transaction costs incredibly low and thus the barrier to entering the credit markets is marginal, it would make sense for co-operative credit, in both informal and institutional forms, to quickly emerge. If its developmental path conforms to Ian MacPherson's model of co-operative development, we will likely first see the creation of groups of btc users sharing a "common bond" (such as being collaborators on an open source project) who pool their savings and make low-interest loans to their members. The common bond will serve as a barrier against fraud and irresponsibility, since debtors would face social consequences from their peers should they default on their obligations.

Once a number of these "populist" (in MacPherson's terms) credit unions are operational, it will become clear that some groups' members have greater demand for credit, while other groups have more savings than prospective loans in which to invest them. To rectify this, net-saver credit unions will likely start making loans to net-borrower credit unions on an ad-hoc basis, and, as the practice becomes more common, it might be institutionalized into a "meta-credit union" that would be co-operatively owned by its members institutions (akin to a "corporate credit union" in the United States).

This projected path is based upon a detailed understanding of the historical development of credit unions in a number of different countries, but the Bitcoin economy includes several unique elements which will likely substantially impact the way in which the credit system's development unfolds. Most prominent is the absence of the state. As one of the core elements of Bitcoin is its encryptability, the creation of private credit unions outside of the purview of the government will likely change the way in which Bitcoin credit unions operate. While there are a few historical examples from the beginning of the credit union movement of credit unions operating successfully without government charters, the vast majority of its development has been heavily influenced by rules originating from the state. As such, the development of the credit union movement within the Bitcoin economy will provide credit unionists with an unprecedented opportunity to observe the dynamics of the institutions in a totally free market environment. The crises that occur and the institutional innovations that emerge from them might potentially have deeply interesting implications for co-operative credit institutions everywhere.

A second unique element of the Bitcoin economy is the fact that the total money supply will, by design, cap off at around ~22,000,000 btc. As the money supplies in which virtually all credit union movements have developed have been at least marginally inflationary, it will be interesting to see how a stable or even de-flating monetary environment will affect credit union growth and structure.

In any case, the Bitcoin story is only just beginning, and the demand for credit is not yet such that the credit union movement can be said to have properly entered this new economy. Nonetheless, there are a handful of interesting projects already afoot that seem to reflect its spirit. For instance, on the project planning page fivegrinder.com, a member of the Bitcoin Mutual Aid Association has proposed offering low-interest loans from the organization's treasury. Similarly, Rain Droplet, which accepts btc, describes itself as "an open decentralized community credit service." Finally, on the Bitcoin Forum there has even been explicit talk of forming a "Bitcoin Credit Union." Who knows if any of these projects will succeed, but they all point to the potential of the hundred-fifty year-old "credit union idea" to continue making peoples' lives better in the digital age.

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12 comments:

  1. Borrowing with repayment in bitcoins is like naked shorting and hasn't worked out well at all for those who have tried.

    Should a credit union wish to seek an opportunity, offering a Bitcoin-denominated account, such as the gold-denominated bank accounts that are likely to be found in Utah, would be a valuable and needed service.

    Currently, the closest to that is the ability to sell Bitcoins on the Bitcoin OTC (Over the Counter) market and then receive payment instantly on PayPal or Dwolla. Dwolla is a credit-union backed payment alternative.

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  2. Given the current size and level of development of the btc economy, that would make sense. However, as values stabilize once the currency's growth phase finishes, currency fluctuation risk would likely be much lower than now, presenting a variety of possible opportunities that are currently too risky...

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  3. Also, the game is different when the collateral revenue backing up your loan is denominated in btc...

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  4. > when collateral revenue backing up your loan

    Credit unions lend based on future revenue streams?

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  5. A small one theoretically could; it would depend on the trust the credit committee has in the ability and potential of the debtor to make good on his/her loan. The gemeinschaft quality of a "populist" credit union means it can take credit risks that a traditional institution that lacks access to the same sorts of social knowledge would never spring for...

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  6. They are not very different compared to the rest of the banks they provide almost all the same services that a bank has to offer like credit card and debit card facilities, savings account, and current accounts etc. They are there to help you and not manipulate you. It is a legal organization and can be trusted completely. The institution is owned by members and not stake holders. This makes the interest rate fall more compared to the other general banks. Banks do not like credit unions in fact they hate the them. They have a complete hatred relation.
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  7. Banks do it for a single reason that’s profit. But credit unions are non profitable and thus they help each member. Thanks for posting.


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