All Metaverses Are Created Equal

Life, liberty and the pursuit of consensus.

Dateline: Berlin, 4th July 2022.

I wrote this piece a quarter of a century ago, for the Financial Times Virtual Finance Report in March 1997, a decade before Bitcoin and the merest thoughts of defi. July 4th seems a good time to repost it!

When exploring a complex subject such as the interrelationship between the emerging online environment, the changes in underlying economic structures and the practical financial tools needed to do business in such an environment, it’s often useful to work by analogy. Now it’s all too easy, and in fact it’s almost traditional in management consultancy circles, to use trite and inappropriate analogies which don’t really satisfy any reasonable set of requirements. I think these are that the analogy should somehow facilitate meaningful analysis of the subject under discussion and should also have some predictive component to make business planning easier.

It’s therefore mildly useful to try and develop a reasonable analogy for the evolution of financial services in the virtual world, both to help with immediate business planning and to help drive worthwhile discussion about longer term issues.

Manifest Destiny

The analogy most frequently used in connection with the Net is that of “The New Frontier”, which rests on a comparison between the opening up of the American West in the last century and the opening up and development of cyberspace today. Might this analogy help to stimulate thinking? Let’s examine it in more detail.

The American frontier was pushing west throughout the nineteenth century, expanding a single market with a single currency. The invention of the refrigerated railroad car (for example) made it possible to produce food on the frontier and trade it with distant centres of population. Similarly, once Western Union had invented the first electronic money, it was possible to shift capital to the frontier (in order to exploit resources there) instantaneously.

The process of homesteading by which the vast expanses of the midwest were brought under control and turned into productive economic resources is very interesting. Essentially, the land was parcelled up and given away (rather like IP addresses). In order to encourage people to take up these parcels, the government had to make them large enough to be economically viable. But even when the size of the land parcels was increased to 160 acres, there were still not enough takers.

Ranching and herding were simply not productive enough on a small scale and the need to create viable homesteads was hampered by a lack of surface water and a lack of wood for fencing. The first problem was solved through the use of windmills which drew up ground water and, further west, by massive federally subsidised irrigation projects which (even to this day) made it possible to grow crops in areas where there is no economic basis for doing so.

The fencing problem wasn’t solved until Joseph Glidden, a New Hampshire farmer, invented a way to mass produce barbed wire in 1874 and it became cost-effective to fence off areas and enforce property rights. After all, if your cows can wander all over the place, you wouldn’t husband them in the same way as if you could keep them put. David Banbom, in his book Born in the Country—A History of Rural America (John Hopkins Uni. Press, 1995), describes the transformation thus:

Ranchers began claiming land and throwing up fences around it. They discovered that closer attention to their cattle and their range enhanced their ability to survive an enterprise with high risks and low margins. Ranchers began managing their range more carefully and rotating cattle on it systematically…

Does this analogy illuminate the early days of the web? On a limited scale I think it does. It tells us that, for example, the branding of cattle—that is, the ability to clearly mark property as belonging to somebody—didn’t really help that much. If I can attach some kind of digital watermark to an image I have created then I can certainly get the modern day equivalent of a lynch mob (lawyers) after you if you ‘steal’ it.

What I really want, of course, is the barbed wire to stop my content from wandering in the first place, which is where developments in cryptography, smart cards and secure networking come into the picture. The smart card is particularly important in this respect, because there is good reason to think that protecting content without a hardware token is a hapless exercise. Software can always be copied, whereas only one person can have a smart card at a time.

If, then, the frontier analogy has any predictive component it is that the new kinds of barbed wire—what Kevin Kelly referred to as the “technologies of disconnection” in Out of Control (Addison Wesley, 1994)—are the key technological advances that will make cyberspace productive. But is there an analogy that might reveal more about banking, finance and money?

How about this one: A superpower is bogged down in a distant guerrilla war. The superpower must resupply its army, victorious for a generation, thousands of miles away from home and it has become a very costly endeavour indeed. Support for the war at home is tentative, and is dividing both the people and the political leadership. The guerrillas are supported by the superpower’s greatest enemy, a nation that is providing both financial and military assistance. The war drags on and the casualties mount. Generals are disgraced. The rebels continue to gain momentum, even though they are occasionally beaten.

Vietnam? No, this is British North America in 1782.

The Madness of King George

Kenneth Davis’ marvellous description in Don’t Know Much About History (Avon , 1990) I think leads us in to an analogy worthy of serious examination in the world of finance: The American colonies at the turn of the 18th century: A new space, a new economy and a need for a means of exchange at a time when bullion for coins was scarce because Britain wouldn’t export any.

The colonists used sea shells (known as wampum) for their medium of exchange, a form of cash borrowed from the native Americans who were, in effect, the central bankers of this monetary system, converting the shells into animal pelts which were used to store wealth and for external trade.

(There is a wampum belt on display in the British Museum’s History of Money exhibition, which is well worth a visit.)

Interestingly, contracts between buyers and sellers were denominated in Sterling (which many of the colonists might never have actually seen) and quoted in gold or silver (which they didn’t have). When contracts fell due, of course, the gold payment in Sterling was commuted into some equivalent payment in wampum, or whatever. Technically speaking, the means of exchange, store of value, unit of account and mechanism for deferred payment were distinct.

The shortage of bullion for coins led the colonies to a revolution in money: the issuing of banknotes not as a means of substituting for some otherwise inconvenient means of exchange but as a means of creating money. There’s a very great difference between the issuing of banknotes as a claim on a bar of gold in a vault somewhere (because banknotes are more convenient for trade than bars of gold) and the issuing of banknotes because there isn’t any gold in the vault at all.

Starting with the Massachusetts Bay Colony in 1690, banknotes were issued by impoverished authorities to avoid the high costs and uncertainties associated with borrowing and the need to impose taxation. Since the entry level barriers to virtual financial businesses are very low, we might expect to see monetary experimentation on par with the young United States. It’s quite likely that the most revolutionary impact of e–cash might come from its ability to create new stores of value rather than its ability to act as a more convenient means of exchange.

(I am very proud of this 25 year old prediction by the way, and I remain far more interested in tokens than in cryptocurrency.)

What would it mean to create new stores of value? On the frontier and in the colonies the store of value was related to some physical good such as gold, or whatever: The United States was on a tobacco standard for twice as long as it was on a gold standard since tobacco was made legal tender in Virginia in 1642 (by the interesting device of outlawing contracts calling for payments made in gold or silver) and remained so for two centuries. The US gold standard, by contrast, lasted only from 1879 to 1971. Who would bet against a new standard emerging in cyberspace—the Air Miles standard, for example—that is not related to some commodity but instead represents a claim against future production?

If the colony analogy is to hold, we would indeed expect just such a development and the emergence of a whole new virtual finance industry as different from our existing finance industry as fractional reserve banking was from the striking of electrum coins in Lydia.

No Key Escrow Without Representation

Of course, if we stick with this analogy it tells us something even more interesting: That inappropriate taxation and unenforceable unfair legislation will lead to secession. Now, while I wholly agree with Francis Fukuyama that the Founding Fathers did not have economic efficiency as their primary motivation, it’s easy to see the roots of these disputes emerging: A distant colony where conditions are different, politicians taking actions they feel constrained to implement even while they are being advised that they are acting against the nation’s best interests.

(In 1774, Viscount Rockingham, who was Britain’s ‘Minister of War’ at the time said that a land war in America would be useless, costly and impossible to win.)

There is a very interesting parallel between the recurrent rows going on about online encryption and the row that went on in the colonies about taxation. In 1760s, the British government introduced the Writs of Assistance to clamp down on the evasion of customs duties. These didn’t work, of course, because the cost of enforcement vastly outweighed the revenues collected.

I should point out British government idiocy of this form was evenly distributed on both sides of the Atlantic. Similar legislation was introduced in England: the hated Cider Tax, which prompted William Pitt’s famous tirade in opposition:

The poorest man in his cottage may bid defiance to all the force of the Crown. It may be frail; its roof may leak; the wind may blow through it; the storms may enter; the rain may enter—but the King of England cannot enter; all his forces dare not cross the threshold of the ruined tenement!

This is as good a call for strong cryptography as anything since. Meanwhile, back in North America, the British government was concerned that the colonies might be overrun by their 18th century equivalent of today’s money launderers, drug dealers and child pornographers: the French, who still had a toehold in Louisiana.

The American historian Barbara Tuchman wrote, in her wonderful book The March of Folly (Abacus, 1985), that a consistent feature of the dealings between the British and the Americans in this period was that each side overestimated the goals of the other. The Americans thought that the British were concocting a huge conspiracy to enslave and subdue them when in fact the British were just being stupid. The British thought the Americans were aiming to subvert the Crown when they just wanted fair treatment. British intransigence, when compromise was both sensible and feasible, created rebels where there were none before.

Incidentally, another interesting connection between the eras is the way in which British politicians operated in almost complete ignorance of America. None of them had ever been there, they knew no Americans (unlike the merchant classes) and made no effort to learn anything about it. How unlike our own members of parliament today, who go to every effort to learn about the Net in great depth before making public pronouncements on censorship, control and taxation.

(I think this is an area where things have actually improved. Having given evidence to Parliamentary committees more than once, I do think that the level of knowledge around the web, cryptocurrency and digital assets has indeed improved.)

There’s no need to labour the analogy: as we all know, the colonists decided against the many benefits of British rule. As Edmund Burke was later to observe

The retention of America was worth far more to the mother country economically, politically and even morally than any sum which might have been raised by taxation, or even any principle of so–called Constitution.

Ultimately, then, should we regard cyberspace as a new frontier which will see a new means of exchange or as a colony that will develop new stores of value that will in time come to dominate? My feeling is that the latter view accords more closely to what is already happening.

The coming revolution will be more to do with the trading of tokens, liquid digital assets in a decentralised market than it will be to do with cryptocurrency. Whether one or more Metaverses will opt for self-governance I couldn’t say, but if they do, we shouldn’t make King George’s mistake and push them into independence!

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