March 3, 2017

Leveraging Financial Innovation to Create a Balanced Financial System

Complicated derivatives, excessive bonuses, amoral incentives, irresponsible loans and, excessive leverage and asset bubbles are continually highlighted as issues our current financial system faces. However, the real fundamental financial issue of today is the severe imbalance between the financial world and the real world in which we live in. The real world, in which value is created through the use of precious resources and care is not taken to preserve them. This imbalance is at the root of the problem, but how can we address it?Our financial system is responsible for the efficient allocation of money and moving it from points of excess to points of need. But money has become so much more than a simple oil that allows the economic machine to run smoothly. Money deeply affects our behaviour as individuals and as a collective society. It gives us a feeling of individual freedom, yet anchors our dependency on others across the world. Additionally, we use it to express the value of everything: products - of course - but also intangible things such as health, wealth, safety, political power and, human lives. With that in mind, can we really trust our current financial system to facilitate the well-being of the real world?To answer these questions we need to understand what money is. To most people, the nature of money and the world of finance is a mystery, despite the fact that we use it for everything we do and in doing so, influence its function. A survey by Motivaction International and the Sustainable Finance Lab revealed that among 23,000 people, in 20 countries, less than 20% of the respondents were aware of the fact that commercial banks create more than 95% of the money in circulation.This money comes into existence in the process of interest-bearing credit (and debt) creation and relies upon an ever-expanding economic system, that cannot be sustained by the finite system we call earth. Financial system innovation is, therefore, a critical factor and important enabler to create a balance between the financial world and the real world. The money system is a social construct (we humans invented it) and therefore it can be re-designed to include incentives that influence more desirable outcomes. These systems can be complementary to our current monetary realm and create a more diverse and resilient financial system. With financial technology innovations, such as blockchain, it is possible to create these incentives and nurture economic value at the local level by preventing wealth from ‘leaking away’. It provides new social institutions for collaborative consumption and ‘product service systems’, and can facilitate resource-sharing and reuse markets for unwanted goods. But pro-environmental behaviour can also directly be addressed, for example, rewarding citizens who participate in recycling programmes or the development of new green technologies could be rewarded, through for example a cryptocurrency based on renewable energy.An example of such a system is the WASTED Reward System, which aims to incentivise citizens to recycle and create awareness regarding plastic waste in Amsterdam Noord. Plastic waste of participating households is tracked through QR codes and linked to their personal account. For every 5 bags of plastic they recycle, they are rewarded with 5 coins, which can be spent at local shops and restaurants. For example, 5 full bags of plastic are worth a 3-course meal! This programme not only enhances local economic activity but also increases awareness of plastic consumption and results in a cleaner neighbourhood. Currently, the scaling opportunities for such a programme are limited due to the need for manual operations (i.e. a physical currency that has to be collected and distributed). Therefore a digital version of the currency based on blockchain technology is being developed together with Circle Economy. This digital currency will also be able to be used in webshops and make it easier to monitor and evaluate its use. At Circle Economy, we embrace this challenge and together with Sustainable Finance Lab, we aim to leverage financial innovation to enable the circular economy.

Interested in learning more about this project or helping us to overcome this challenge?

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