The rise of the reputation economy

Major world economies are having big problems – and online alternatives to traditional economic structures are proliferating. But that’s not the interesting part. What makes new technologies like Bitcoin, the virtual currency, so threatening isn’t that they allow a select few to avoid taxes or buy drugs online, it’s that they may very soon represent a viable avenue for the whole world to do so.

New kinds of exchange platforms are providing viable means to exchange non-financial resources, or to exchange financial resources in a way that is more difficult to trace. At the same time, emerging markets are just about to come online. As they do, they are going to inherit these alternatives and provide the economic impetus to evolve them even further. At that point, it will be too late to put the genie back in the bottle.

In many ways, it’s already too late. The good news is that we can still do something about it.

The reputation economy

One of the more interesting trends in recently emerging technologies is the rise of new kinds of exchange platforms: Airbnb, which lets you exchange or rent apartments to strangers; Uber, which creates meritocracies for unlicensed car drivers; Skillshare, which allows ad hoc teaching arrangements; and Kickstarter, which facilitates crowdsourced funding.

What unifies them all is a reliance on our ability to get enough information about the person we are exchanging with to feel comfortable setting the terms on an individual basis. In other words, they are economies of reputation.

Much of the growing interest in these platforms springs from the conflicts we’re seeing in traditional markets. Lack of access to capital, slow market growth, poor employment rates – all of these are driving people to find ways to leverage value from other areas of their lives. Being able to rent out my car on Relay Rides on weekdays, while still using it at weekends, means I’m generating capital from a resource that was previously sitting idle. Teaching a class about a hobby via Skillshare does the same thing. Airbnb lets me make money from my apartment or to reduce the cost of accommodation for a vacation by facilitating an even exchange.

But while problems like access to capital or joblessness are significant in developed markets, they’re critical in developing markets. The ability to use every possible avenue of value, be it financial or relationship-based, is crucial to survival for many people in emerging economies.

That’s where these new technologies become very interesting, because reputation-based exchanges are how most human commerce was done in the past. It’s still the primary way value moves in one of the largest global economies: the black market. The black market is already the second largest economy in the world, but based on current growth projections it is going to be the biggest market in the world within the next 15-20 years.

An appetite for alternatives

The exciting (and frightening) thing about the black market is that despite its size and power, it’s still very nascent and not especially integrated transnationally. But that’s changing. Over the next 5-20 years, the two-thirds of the world’s population who aren’t yet online are going to start connecting via smartphones, tablets, etc. As they do, they’re going to be presented with a very different picture of what commercial means of exchange are available.

Being able to exchange non-financial goods and services on an international scale rapidly expands the potential value of these technologies. Suddenly, Skillshare or Airbnb become global propositions. Uber exports reputation across geopolitical boundaries. And new markets grow.

Banking’s Napster moment

All of this means that using the black market – be it via systems of trust exchange or through cryptocurrencies like Bitcoin – is not only a viable option, but the preferred one. I call this banking’s Napster moment.

Napster was a popular website that allowed anyone to download virtually any song for free. After a recording industry campaign, it was eventually shut down. But what happened next is characteristic of a pattern of development we’ve seen hundreds of times on the Internet since. Rather than giving up, developers created a new disruptive technology, BitTorrent, to do the same thing Napster did – except harder to trace and shut down.

Sites hosting BitTorrent files soon became the target of campaigns to close them down as well, and another round of anonymity and cryptography technologies were developed. Eventually, Apple released the iTunes store, which presented a reasonable compromise, but the “arms race” continues to this day, and continues to produce new, faster, more flexible ways to pirate content.

We’re seeing the same thing happen with reputation-based exchange platforms. Uber and Airbnb are both facing lawsuits in the US, and Bitcoin’s legal status is still open to debate, especially after recent developments in China.

And that’s where the real issue lies. Many of these platforms will be shut down, crushed by incumbents whose existing business models rely on an absence of digital competitors. But just like Napster, new, stronger, more flexible alternatives are bound to emerge.

The concern is that, unlike the iTunes store, these new alternatives won’t be bound by a marketplace grounded in regulated, considered economies. Instead, they will very soon be able to spring up wholly formed in a global black market that’s more than willing to take advantage of the anonymity and secrecy we’ve bred into it. Just as with Napster, we’re putting evolutionary pressure on reputation economies that optimize for disruption, rather than evolution.

An evolutionary approach

The good news is that there are other options available. We have a short window over the next decade or two to create new platforms and new commercial ecologies that integrate into existing economic and geopolitical regimes. By leveraging the scope and scale of these online platforms, we can radically expand the positive impact of regulated markets without the exaggerated risk of digital-only commerce schemes.

One way or another we’re going to have to consider the potential impact of these outside players. Acting now gives us a chance to steer the boat a little while longer, hopefully towards something globally sustainable and abundance-oriented. Otherwise, it’s going to be Bitcoin (or its descendants) versus traditional banking, except globally integrated, accessible and exchangeable – and all grounded in the largest, fastest growing and least regulated market in the world. Place your bets now.

Author: Josh Klein is an ethical hacker and innovation specialist in NYC. More information at www.josh.is.

Image: A trader is seen at the trading hall of the Shanghai Stock Exchange in Shanghai REUTERS/Aly Song