THEME 8: FLOSS and Financial System

Free Software for Sustainable Money

In January 2008, a Central Bank finalized the implementation of open source ERP software to implement all its banking operations which had previously failed to be implemented using Oracle Application. This implementation includes currency issuing, money transfer, checkbooks, cash movements, etc. Reasons for the initial failure in 2004 of a proprietary approach are worth noticing: with proprietary software, the development cycle – at least 3 years for such a large project – can be longer than the software application release cycle. Once the project is implemented, proprietary libraries which the project was based on were deprecated, leaving no option to the Central Bank than redeveloping their application. Moreover, lack of fast response time with the headquarters of proprietary software vendor and, in the absence of access to source code, scalability problems could not be solved efficiently for such a custom development. This explains why, open source was adopted in 2005 by the Central Bank for its most critical system. Nowadays, the Central Bank has a team of engineers capable of mastering the source code and the internals of their most critical application, from the operating system (GNU/Linux) to the relational database (MySQL) and runtime environment (Python/Zope). Adoption of open source creates an IT environment which can be sustained and extended during 10 years, 20 year or more, without depending on the decisions of proprietary software vendors, known for purchasing each other and deprecating critical business applications used by large organizations.

Sadly, most Central Banks, most Banks and most Microfinance Institutions still use proprietary applications for their core infrastructure. They are putting the world financial system at risk by using applications and libraries which are likely to be deprecated in the near future. Proprietary IT based on obscurity was officially recognized as a risk by Luxembourg, which is sponsoring in 2009¹ a project in collaboration with Central Bank to review the IT infrastructure of Microfinance and find ways to make it more transparent and more reliable. By being younger, less concentrated and with less lobbying power, Microfinance – which represents up to half of the credit risk in some areas – is a perfect space to field experiment new regulation policies for the financial industry. Rather than setting risk assessment based on the transfer of simple accounting reports to the Central Bank, Luxembourg is pushing towards the implementation of new IT protocols and – possibly – new software capable of automatically controlling IT system reliability in micro-finance institutions leading to reliable reporting of credit risks. This approach is in line with the idea, highlighted by René Ricol in its report to French President Nicolas Sarkozy² about findings in the role of software in the financial crisis³ - that Banking operation software contains much useful credit risk information which does not appear on the accounting software counterpart.

What will make Microfinance a better testing ground for such an experimentation is the large number of open source banking software which is already used: MIFOS⁴, Octopus⁵, ERP5⁶, etc. Integrating vendor independent monitoring and supervision software will be highly simplified in an environment of source code transparency. First results are expected to be visible in 2010. There will then be no reason to prevent the introduction of Open Source software to monitor the operations of the Banking industry; just as network monitoring software is used by telecommunication regulation agencies in the telecommunication industry⁷.

What's next? Free Money.

Now that open source software exists to run a Central Bank, anybody in the world can create his own currency. Whether such a currency is called money, miles, points, or any other term, it is now possible to create a large scale financial system without government and without banks. Orange is already entering this game in West Africa⁸, using the “Call Unit” as a currency which can be traded between subscribers. Asian governments are considering the introduction of electronic regional currencies to sponsor tourism in certain areas. Religious and political communities are also considering to create their own currency which will be managed in line with their ethics and values (ex. Tobin, Islamic finance, etc.).

Thanks to globalization, the notion of money, as we know it today with Euro, Dollar, Japanese Yen etc. will no longer be the sole kind of money used for trade. Just like the Wir currency in Switzerland, new forms of currencies, which are not managed by states, will be used for trade and in particular for electronic trade and mobile trade. If some countries want to prevent that, others will welcome it and benefit from it. This is where Open Source has a major role to play.
First, let us recognize that legacy Telecommunication industry is already playing the role of banks in West Africa and Japan. Legacy telecommunication industry is well known for its greedy behavior and its refusal of free competition or democratic control⁹. Passing Laws to regulate this industry and introduce competition could be very difficult, as was the experience in Europe with unbundling xDSL Internet access. The same phenomenon – lack of regulation - which has lead Banks to create the financial crisis could well happen with telecommunication industry once it enters the business of money. There is little hope for a more transparent, more democratic and better regulated financial system on this side of business.

Second, Open Source can help create a democratically regulated and sustainable financial system by providing software for online communities to create their own currency, and by developing currency exchange markets between communities. Since Code is Law¹⁰ on the Web, as Lawrence Lessing demonstrated, publishing the source code of such a software and providing it to community members - an assessment and monitoring right of the runtime environment, along the principles of “TIO Loyal”¹¹, can guarantee self-regulation without State intervention.

Too good to be true? Religious communities in poor Islamic countries, which are tired of paying 10% to transfer money to Western Union and suffer from the financial crisis at the same time, are already building such a system, in open source, to stop depending on Banks which they no longer trust. The new currency uses a mobile phone for all cash operations and is based on pure Internet infrastructure. It can be used anywhere in the world for local payment of goods in the street, for public transportation, phone calls as well as for money transfer. Trust in the currency is guaranteed by the reputation of the religious leader, who plays the same role as the king for older European currencies. Trust is consolidated by the fact that most trade activities of religious community members happen within the community itself, without any formal relation with any State. In addition, savings are guaranteed to be invested in real economic activities in line with the principles of Islamic finance. Such a currency, based on the economic power of communities of million people, could soon become the first example of a new kind of transnational currency if not the first example of Free Money.