Introducing Humanity Cash — The role of community currencies in a more resilient economy
By Fennie Wang
Humanity Cash, in partnership with the Schumacher Center for a New Economics, announced the soft launch of digital BerkShares, a local currency that has circulated in the Berkshires, Massachusetts since 2006 — from paper notes to the blockchain, the old meets the new. BerkShares are backed 1:1 by federal dollars held with two community banks, with transactions settled on the Celo network. This keeps reserves recirculating locally as loan capital through our community banks, while BerkShares digital tokens patronize small businesses and save them on card processing fees.
With this launch, we are also announcing Humanity Cash to the world. We’re a public benefit corporation and our mission is to build a more sustainable and human-scaled economy. As we have demonstrated in the case with BerkShares, Humanity Cash works in collaboration with participating local banks, local businesses, and local non-profit organizations to foster stronger community connections by facilitating and encouraging local production and patronage. Against the backdrop of highly concentrated and extractive payment and banking networks in the U.S., Berkshares leverages blockchain to strengthen local economies with programmable digital currencies, while empowering smaller banks to act as guardians for their communities’ financial networks. More wealth can now stay in our communities. Don’t just buy local, pay local.
The idea for Humanity Cash emerged slowly in the midst of the pandemic in 2020. Back to my parents’ home to escape the isolation of New York City lockdown, I was afoot, disillusioned by my time working in decentralized finance (DeFi) long before the term became part of the mainstream financial lexicon. The tech is interesting, but as always, the issue (and the solution) is never simply the tech alone. The original world wide web was designed to be democratic with peer-to-peer information sharing, yet Web2 has proven to be a game of platform monopolies. Likewise, without grounding technology like DeFi within a broader theory of change, Web3 will end up like Web2: retrenching structural inequalities under the banner of decentralization. DeFi as it stands today is fundamentally about first access to capital: capital begets more capital. As an example, validator networks today are highly concentrated amongst large players that are increasingly industrialized.
Yet decentralization is the correct zeitgeist. Our economy is more centralized than ever, from our financial system to our supply chains. COVID has revealed the cracks of centralization, showing how fragile and non-resilient economies are to systemic shocks. At the same time, platform monopolies have continued to grow, widening inequality. The center cannot hold.
But how do we achieve a more authentic decentralization?
In the summer of 2020 I began to explore community currencies more deeply. A fundamental tension of all ecosystems, including monetary systems, including blockchain, is the balance between efficiency and resiliency. A broadly used currency is highly efficient given its breadth, yet it may be at the expense of local economies that provide resilience in the broader economic ecosystem. For example, a community that relies more on local production of wheat may be less susceptible to COVID supply chain issues or knock-on consequences from the war in Ukraine, one of the world’s largest wheat producers. The core thrust of community currencies is to restore resiliency to the monetary ecosystem by focusing on the balance of trade within localized economies, particularly those situated within a larger monetary regime.
In times of crisis, community currencies, sometimes called complementary currencies, can function as an alternative source of funding to facilitate local trade and productive activity when national currency is scarce in the case of severe recessions or as a means to organize productive activity at the local level in the absence of productive capacity at a national level. For example, when the only bank in the town of Tenino, Washington closed during the Great Depression, the local government issued a wooden currency to continue the facilitation of trade. This wooden currency is still in circulation today and was utilized in the town’s COVID19 relief program, which distributed $300 a month to those with a demonstrated economic hardship to help them meet their basic needs. A similar approach was taken in post World War I Germany with the creation of “notgeld”, an emergency scrip that was issued to combat hyperinflation and stabilize the economy.
In the absence of a deep crisis, the role of community currencies is to create more balance in the flow of funds within regions. This is the primary space in which Humanity Cash operates. We work with community banks, credit unions and community organizers to create locally controlled, locally responsive financial tools and payment systems. With a broad currency, economic activity can easily flow out of a region to larger corporations headquartered elsewhere, sometimes even offshore. Most visibly on Main Street, this means the loss of mom and pop shops that cannot compete with Walmart and Amazon. More insidious and harder for the layperson to see is how our financial system extracts liquidity from our local economies even when we patronize locally owned businesses. Most likely you pay with a Visa or Mastercard card issued by a large bank like Chase or Wells Fargo. Not only does the small business pay the card networks on average 3.5% off the top just to accept the transaction, money kept with the banks that issue these cards are large banks that do not actively serve our local communities.
In the US, almost half of our deposits are kept with just 10 banks. That is more than $11 trillion with just 10 banks, despite there being 4,750 community banks and 5,298 credit unions. The number of community banks have declined by 50% since 2000 due to market consolidation and competition with winner-take-all big banks and fintech platforms. The results are consequential. For every dollar of deposit kept with Chase Bank, only 20 cents goes back to the local community. Compare that to the community banks we work with where 70 cents of every dollar goes back to the local community. Community banks are critically important providers of financing for local commercial real estate (CRE) loans, small business loans and agricultural loans. While community banks hold only 15% of the banking industry’s total loans, they hold 30% of the industry’s CRE loans that finance multifamily housing, retail, hospitality and industrial projects, 36% of the industry’s small business loans, and 31% of farm loans. More dollars held by community banks means greater liquidity for local productive activity.
In late summer of 2020, I reached out to the Schumacher Center, the think and “do” tank that created the well-known local currency BerkShares. I liked the BerkShares model, which is backed by federal dollars held with local community banks and are accepted at approximately 400 local stores. While some community currency proponents are adamantly against any kind of fiat backing, the BerkShares model is simple and elegant; importantly, it enables small business owners to obtain liquidity to pay bills in USD if necessary.
Humanity Cash has transposed the BerkShares model into digital form; instead of swapping federal dollars for paper BerkShares notes at physical bank branches, we mint BerkShares tokens in exchange for federal dollars electronically deposited with our local banks. On the asset side, reserves are being redeployed by community banks to the local community; on the liability side, BerkShares digital tokens are exchanged within a closed loop of local businesses, creating a virtuous cycle. The role of the blockchain ledger is to displace the card networks, which saves our local businesses money, thereby reducing wealth extraction.
Let’s dive a little deeper into the structural issues with our monetary and economic systems.
It’s all about the (velocity of) money
As the Times reported in 2017, even prior to the pandemic, new business growth in America declined by almost half since 1980, creating a drag on productivity and employment. This slump has been attributed to the rise of big businesses with monopolistic market power, which can effectively squash new competitors. A heavily concentrated economy is a less resilient and vibrant economy. Communities that rely on a few large employers are permanently devastated when those employers leave. Workers have less bargaining power when there are fewer employers, often only those with large market power. And entrepreneurship, so central to the American milieu, becomes out of reach to ordinary Americans who seek to participate in the ownership economy, not the gig economy. When we decimate our small businesses, whether through old-fashioned market domination or new world robots, our communities suffer from blight and loss of culture, degradation of pride and missing local identity.
Community currencies posit that when a currency (primarily functioning as a medium of exchange) is restricted to facilitating transactions in a particular community, this would stimulate local economic productivity. There is suggestive evidence that local currencies have a higher velocity of money than national currencies. The velocity of money is a measure of how fast or how often the same dollar recirculates in the economy by facilitating multiple economic transactions. In other words, there is a multiplier effect. For every dollar injected into a community, it may create 3–4x the economic value, as in the case of BerkShares. The initial recipient, for example, may spend that dollar at the local grocer, who then spends the same dollar at the local bakery, who then spends the same dollar at the local diner before that dollar exits the community e.g. through the diner paying for a supplier outside of the local community.
The US Dollar, on a national level, currently has a velocity of 1.1, meaning there is effectively no multiplier effect. There is plenty of liquidity and money everywhere but our economic arteries and capillaries are in trouble. Money isn’t flowing to the communities that need them the most. Below is data from the St. Louis Federal Reserve Bank showing the trend of velocity of money since 1959. We are at historic lows, with velocity plummeting since a high of 2.2 in the 1990s. The most dramatic historic decline happened between Q1 and Q2 2020 when COVID hit. Velocity dropped from just below 1.5 to 1.1. While drops in velocity are often accompanied by recessions, as fewer people are spending, the velocity never recovered from the 2008 financial crisis.
The armchair economist in me theorizes that the reason for the sustained, historic decline in the velocity of the USD has something to do with concentration and centralization in our market structure. The number of jobs created by new businesses in the US has declined by one-third since the 1990s. Inequality has only worsened. In the US, there are 30 million+ small businesses that account for nearly half of all jobs, yet only 1.1 million are minority-owned. Even before the pandemic, small businesses struggled to compete with large corporations due to market concentration, and minority-owned businesses were even more stressed with fewer economic resources.
Relatedly, we have lost more than two-thirds of our community banks that serve small businesses since 1984 due to financial consolidation, with disproportionate impact on minority-owned banks. Our community banks are vital to the health of local economies, as they account for as much as half of all small business lending.
Smaller banks with less than $1 billion of assets accounted for 82.4% of all PPP loans administered. According to the Institute for Local Self-Reliance, “states with a robust community banking sector will likely suffer fewer small business losses and less economic damage” due to COVID. As the charts below show, there is a strong correlation between the number of PPP loans given per 100,000 people and the amount of deposits held by community banks. Likewise, the map shows the amount of PPP loans per capita by state, with states having a stronger community bank network receiving, on average, more PPP loans.
Banks that service minority customers are also vital to economic equity, as only 1% of Black business owners receive bank loans within their first year of business, compared to 7% for white business owners. When communities lose their local banks, they lose their liquidity.
Humanity Cash theory of change
It seems daunting for a small startup to address these structural issues. Our approach is to leverage and strengthen existing networks of community support. Given the vital role that community banks play, how can we support them? Digitization of money, the advent of stablecoins and DeFi, as the current trajectory is going, will only displace these community banks and credit unions, whose principal strength is relationship banking and not technology. Our goal is to show a third way where the technology can complement what these banks do best: trust. Our vision at Humanity Cash is not to replace that community trust with trustless technology, but to create tools that enable decentralization and de-monopolization of banking and financial tools through leveraging the community trust of local organizations and financial institutions.
We recognize that values alone cannot substitute for a compelling and exciting product. We want to make Humanity Cash community currencies a new kind of experience, taking lessons from DeFi around gamification and incentivization. For example, credit cards woo consumers with cash back and loyalty points, which one coffee shop owner pointed out was really paid for by hard working small business owners like herself. That comes out of the interchange fee. As a coffee shop, they pay thousands of dollars per month on credit card fees.
Humanity Cash is getting creative and asking the question, can we generate endogenous value from the behavior of spending and paying local? Can loyalty rewards be sum positive rather than extractive zero sum? The theory here is that the behavior of spending and paying local has positive externalities, which can be measured and captured through the issuance of eco-credits, akin to carbon credits. These can be issued in the form of NFTs (or NFT series).
We can also play a vital role in articulating the policy case for community currencies as a prototype for the US Digital Dollar: the focus should be on empowering and strengthening the diversity of our banking and payments sector, encouraging local economic resilience and supply chains, ensuring financial inclusion, and providing a digital infrastructure to precisely target cash transfers to those who need it when they need it. That brings us to a critical point: we need to situate community currencies, and digital currencies generally, in the larger context of fiscal stimulus policies, cash transfer policies, and Universal Basic Income (UBI).
Humanity Cash is currently in the early stages of designing a first-of-its-kind UBI as community currency pilot with MIT, whereby funds are given in local dollars rather than federal dollars. The thesis is simple: When the money has to be spent with local small businesses, kept with community banks and disbursed using less extractive payment tools, we get more bang for our buck. There is a higher multiplier effect when those funds are situated in a local economy, therefore ultimately increasing tax revenues and saving the taxpayer money on the UBI program. Up until now, UBI studies have primarily focused on the economic and mental health well-being of individuals and families receiving cash transfers, but have not focused on the larger economic stimulus story, especially when those funds are used to benefit the community as a whole. We believe this is a bi-partisan approach to UBI that we can all support.
We are excited about the future. There is an incredible white space in which we have been fortunate enough to experiment and play. Could a US digital dollar be a federation of community currencies functioning as “side chains”? Community currencies can function as side chains in both the technical sense and economic sense (by way of analogy). The new side chain is the local supply chain: Our economy would be more resilient, without sacrificing undue efficiency, if we had healthy local economic supply chains of productive activity. Those ecosystems can settle their own transactions and then post to the main US Digital Dollar chain when economic transactions cross regional boundaries as represented by various community currencies.
Finally, what does a Web3 native cooperative bank look like? In the history prior to the creation of the BerkShares program, the Schumacher Center started a microcredit program called SHARE, and have worked on proposals for local banks to provide loans in BerkShares. I think there is also something incredibly innovative about asset-backed stablecoins; it is banking done in a net new way. Could Humanity Cash have community stablecoins backed by locally grown food? Could we issue these community stablecoins in partnership with community banks close to the ground of our local farmers?
Our grand vision is to enable human-scaled economies everywhere. As E.F. Schumacher said in Small is Beautiful, “Wisdom demands a new orientation of science and technology towards the organic, the gentle, the nonviolent, the elegant and beautiful.”
Humanity Cash is a public benefit corporation that creates digital currencies in to encourage the recirculation of funds within a community. We hope to contribute to the building of more resilient and sustainable local economies by connecting people, businesses, and the environment.
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