With newly emerging local community currencies like Encointer’s, acceptance points take a risk, especially early movers while the community isn’t fully established: They give the community credit in the form of giving out their product today in exchange for the promise to getting another product or labor back in the future. Fortunately, this risk comes with immediate upsides: new customers. However, as we have experienced in Zurich, our first community, the risk actually grows with the popularity of the system before the promises of getting something in return actually pay out.
Our first approach was to offer acceptance points a limited buyback guarantee: Up to a certain amount, the community initiators would buy the local community currency back from acceptance points to give them relief from their exposure. To a certain extent, this makes sense for all parties because the community leadership needs currency for promotional activities like handing our vouchers to try out the system with low barrier of entry. Still, this obviously doesn’t scale because a buyback guarantee ends up being a subsidy for consumption to the community which needs to be funded externally.
After one year of Leu, the most pressing issue are high balances on the accounts of the most popular acceptance points. This is painful due to two reasons:
- Demurrage is like a constant expense
- Illiquidity: As long as Leu can’t be used to pay for supplies or labor, they are illiquid
- Risk of total loss because the currency experiment might fail and stop to be used
This, understandably, has led the most popular accaptance points to narrow their offering (narrow the choice of products that can be paid in CC or just accept CC for a fraction of the payment).
Some acceptance points have gathered and have founded an association which shall support the CC and also protect the interests of acceptance points. Such an association could help reduce risk for businesses and also help closing economic circles. So, let’s explore what such an association could do if it had a pot of national currency as a security.
The particular association of acceptance points in Zurich is called “LEA”, so let’s use this as an example, along with “Leu”, the community currency of Zurich
Assumptions
- Only formal businesses who accept Leu as payment can join LEA
- There is only one association like LEA in the Leu community
- Someone is willing to provide an initial reserve pot to reduce the risks for all members of LEA in solidarity. It can be the businesses themselves or an external grant
Requirements
- The reserve is used in sustainable fashion.
- The case of total loss is treated fairly among members: Who took more risk should be allocated a higher share of the reserve
- There may be no disincentive to accept new members to LEA
- There has to remain a strong incentive for members to help closing economic circles
- Making a high earnings in Leu should be a reason to celebrate, not to worry
A simple buyback guarantee without a refill mechanism would conflict with requirements 1,3,4 and possible 2 as well.
Proposal: Community Dissolution Reserve (CDR)
Such a reserve is distributed to all members of LEA in the event that all members unanimously decide to no longer accept Leu because Leu is considered a failed experiment. In consequence, this event will dissolve the association itself as well.
In the event of dissolution, the reserve is paid out to all members according to the risk and loss they took during the time they accepted Leu.
In concrete terms:
- The higher a businesses’ Leu balance B at the time of dissolution, the higher the share
- The higher the cumulated demurrage D a business has suffered, the higher the share
A simple intuition could be to divide the reserve R according to the formula: S_i = R * (B_i + D_i) / (sum over all members(B + D))
If a new business applies to join LEA which is expected to be very attractive to Leu holders, there could be a disincentive for existing members to accept the new member because their share in the reserve will go down. I would not expect that this is problematic because with new popular businesses accepting Leu, actually, the risk of failure of Leu as a whole also decreases.
Of course, LEA is free to come up with rules for entry and exit of members. Maybe members need to buy into the reserve guarantees and the above formula is applied upon exit of a member.
What amount of national currency should be in such a CDR, initially? One way of approaching this could be to sum up the exposure of all current members and state that the reserve should at most that much (because it is more, the members have an incentive to dissolve):
R < B + D
Another guideline could be to incorporate the circulating total supply T of Leu (along the reasoning that a dissolution of Leu could start by all individual Leu holders quickly cashing out all their Leu as long as they still can (the equivalent of a bank run, just that the acceptance points would be the target)
R < T
The problem with both formulas is that the inputs change over time and that the risk factor tends to grow with success of Leu. T is an indicator of community popularity. But this just means that R should be a level that the members feel comfortable with at the time of raising the initial R. Should Leu be a big success, there should be significant returns for LEA members that can be used to augment the reserve.
Considering requirement 4 (incentive to close economic circles: Pay your suppliers and workers in Leu), the reserve R should be significantly smaller than the upper limits in the above formulas