Liquidity Networks: local trading systems using a debt-free electronic currency

Posted on September 23, 2011 by admin 6 Comments

Graham Barnes

No currency will work unless people accept it from each other so this novel money will be put into circulation as a way of rewarding those who are accepting and spending it most.

Around the world, conventional currencies such as the euro, the dollar and the pound are in short supply because of the current economic crisis. A liquidity network (LQN) is designed to ease this shortage by creating and distributing a supplementary debt-free currency so that businesses and individuals can trade locally without needing the conventional sort.

Money essentially performs three functions: it acts as a means of exchange, as a store of value and as a unit of account. A liquidity network aims to fulfil only the first of these. It would enable people to buy and sell goods and services in a specific geographic area. The generic name for an LQN’s electronic currency is the quid but each local system will probably give a special name to its own version. For example, the emerging Kilkenny LQN group has named their unit the Katz after a very successful local hurling team, the Cats.

As quid can be spent only inside the local area, a healthy quid supply will boost local trade. If euros become scarcer and scarcer, the relative importance of an LQN will increase. Quid will free up euros for ‘out-of-area’ transactions and places with an LQN will become more competitive than those without.

Imagine if a million euros went into circulation in your town overnight but they were super-euros — euros that could be spent only in your area and which spawned extra super-euros in your account if you spent them quickly. A much higher level of trading would take place as the new currency passed rapidly from person to person and from business to business. This super-euro is the quid.

Liquidity Network structures and design

Each LQN will be run by a local organisation within a framework and guidelines set down by a national support organisation to which they all belong.
An important function of both the local and the national organisations is that they recognise and reward Positive Behaviour — behaviour considered to be beneficial to the specific LQN or to the acceptance and success of the LQN movement in general.

The key aspects of the LQN design are:

  • Accounts are not allowed to go into the red. Transactions are processed instantly and because there is no debt, there is no need for credit checks nor a legal process for debt recovery.
  • Quid are given rather than lent into circulation, the only condition being an expectation of (defined) Positive Behaviour by the recipient.
  • Some Positive Behaviours — for example, spending one’s quid quickly after one gets them or dealing with an increasing number of people — are rewarded after the event.
  • If someone fails to maintain a trading level for which they have been rewarded, the quid they were given can be gradually withdrawn. This is to ensure that the supply of quid can be reduced to maintain its value if the overall level of trading falls.
  • All trading is carried out electronically by mobile phone or over the Internet. This enables the LQN to calculate rewards or account reductions. There is no paper currency.

The LQN design team also have strong preferences:

  1. for Open Source software development and Open Hardware
  2. for organisational structures recognising the advantages of the Viable Systems Model and sociocratic approaches
  3. for the development of publicly visible Trading Reputations based on Positive Behaviours, as a means of building mutual trust among LQN users

The detailed design of each LQN will be developed with local LQN partners and local circumstances may dictate specific tactical decisions. The team’s preferences above should be seen in that context.

Wherever the LQN concept is discussed, people are excited by it. The challenge now is to design and implement strategies that will create the critical mass of earning and spending required for a successful LQN. The Feasta group is concentrating on two particular approaches:

  1. A local authority–backed LQN: The LQN would give the local authority a specific amount of currency, for example 1 million quid, to spend into circulation by paying a portion of its staff salaries with them. In return, the council would agree to carry on accepting quid, at par with the euro, in payment of local rates, rents and service charges until it had either earned-out its advance in performance rewards or had returned any unearned advance to the LQN. We are currently discussing this arrangement with councils in Dundalk, Kilkenny and Ennis.
  2. The ‘TradeTrust’ route: A trade exchange network using euros is set up with the support of the local Chamber of Commerce. This network has all the features of an LQN, i.e. instant electronic transactions and no credit, except that the transactions are in euros, so users have to provide (or be provided with) a euro float. Once the exchange is running, the trading levels provide a good guide to the amount of quid that each account needs to provide the liquidity for the amount of trading it is doing. The appropriate quid amounts can then be issued and the euros withdrawn. A group in Cork intends to follow this route.

The drawbacks of free money

The fact that in both of the above cases quid are given into circulation is one of the obstacles facing an LQN, as the idea that money can be ‘given away’ encourages the thought that quid are of no value. In addition, there is an initial worry that there is no way to sanction participants who retire from the scheme immediately after spending the quid they have been given. But then the penny drops and the worriers realise that all the quid already spent are in other accounts and will be spent again and again and again around the local network.

Once an LQN is operating on a reasonable scale, fear of losing trade to rivals will be a key factor in encouraging traders to stay in the network and others to join. Getting people to join in the start-up phase may be more difficult. It is becoming more obvious that we need to appeal to both intrinsic and extrinsic motivations. We have been somewhat surprised recently to notice that while our own motivations for developing LQN are largely intrinsic, we have assumed that we needed exclusively extrinsic (economic) motivations to encourage participation. But does an LQN project grounded squarely in a distrust and dissatisfaction with mainstream economics really need to couch its propositions solely in terms of economic benefit?

For traders the advantages of joining — their extrinsic motivations — are administrative efficiencies:

  • instant transactions with no credit. If insufficient funds are in place the transaction doesn’t happen.
  • simplified electronic transactions with well-designed User Interfaces.
  • low transaction costs (compared to banks) and maintenance fees.
  • and being on the inside track of a new growing local marketplace, such as that offered by the members’ directory section of the LQN website.

However, we are beginning to suspect that intrinsic motivations — support for one’s local community, local activism vs. national “sitting on hands,” building trust via transparent transaction behaviour — may be as or more important than extrinsic ones and that LQNs should harness these feelings in their marketing messages.

Rewarding positive behaviour

A progressive and proactive local council will want to be seen as a driving force at the heart of an LQN initiative that embodies the social cohesion needed for competitive modern localities. To earn their advances, councils will be required to pay a portion of their employees’ wages in quid. The advantage of this is that it enables the council to avoid redundancies and reduce short-time working. Other positive LQN messages should also be adopted and communicated by the council, such as the extra quid given when users spend quickly.

Individuals and traders are rewarded when they accept quid for the first time, quickly spend the quid they have earned, increase their monthly quid turnover and have more quid dealings with more people. They will also be aware that although some of the quid they are given as a reward may be taken away if they fail to maintain the performance for which it was given, quid that they have actually earned through their wages or trading will never be taken except to pay the normal monthly account maintenance fee.

Limitations of the quid

I noted at the start of this article that the quid is not a store of value. It is designed to incentivise local spending. Of course, individuals and businesses need to save — for retirement, to even out good and bad years and for capital purchases — but they will need to use currencies (or goods) other than the quid for these functions.

Nor is the quid suitable as a unit of account except within an individual LQN. Quid are not ‘backed’ by the euro or by any other source of value. LQNs will not offer formal quid-exchange services between LQNs, although we expect to see such services being offered by LQN participants and would see their emergence as evidence of success.

Over time, quid will almost certainly lose their value against the euro. If the euro gets scarcer, its value in terms of quid will rise and the one-for-one parity maintained by a council will need to be broken. The quids used by different LQNs will acquire different exchange rates with the euro and thus with each other.

The urgent need to get the first LQN running

The Feasta group has already completed much of the groundwork to enable communities to get started on developing their own LQNs. We have written the basic software, demonstrated the transfer of quid from mobile phone to mobile phone, defined and modelled the reward algorithms and drafted the legal documents under which a local LQN and the national support organisation would be set up. We also have an opinion from a senior counsel that an LQN would comply with Irish and EU law. All we need now is a sound, broadly based invitation from a community.

So far, though, community leaders seem not to regard their situations as desperate enough yet to overcome their reluctance to try novel solutions and risk failure. In fact, that was exactly what we were told at a meeting with officials from a Regional Development Authority. In any case, the officials said, the unions would reject the idea of their members being part-paid in quid even if they knew that all the major local shops would accept them.

Nevertheless, the group believes that the liquidity crisis will worsen and that communities will increasingly want to respond locally rather than wait passively for national interventions that may or may not arrive.

Sometime soon, then, we expect the first visionary community leader from among the councils and communities where LQN dialogues are taking place to ask for help. He or she will realise that the risk to their personal credibility is unimportant compared to the potential beneficial impact of an LQN to their friends and neighbours. They will see that ‘business as usual’ is not an option. When they do, the LQN team will use all the energy, commitment and creativity at its disposal to make sure that these pioneer adopters gain the maximum benefit for the places from which they come.

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6 Comments

  1. Geoff Wales
    3 years ago

    This electronic money cannot survive and is morally unfair. The money fails on a number of points.
    1. The individuals who receive it first have an advantage over those who receive it last. As the first receivers lower their cash holding, and more cash enters circulation, there will be a tendency for prices to rise and the last receivers will pay more for the same product. This is one of the most profound problems with FIAT currency.
    2. There is nothing to prevent the administrator from creating more Quid. This is the problem which affects the Euro. The Growth and Stability Pact failed, because governments could create more money than was permitted.
    3. The Quid will lose value relative to a more stable currency, such as gold. If confidence in the Quid falls, which is inevitable, then its exchange value against other money will fall and hyper-inflation in the Quid will be inevitable.
    4. The version of the Quid does not seem to provide a facility to promote capital accumulation. Tools and investment can only be accumulated with savings and the Quid appears to be unsaveable, and spending is rewarded, whereas saving and investment is not.
    5. If someone earns quid and wants to save for a rainy day, it appears that the administration can withdraw this persons Quid. This is theft.
    6. Finally, and most important, the Quid raises the power of the Local Authority above free market participants. Staff in the local authority will be able to buy food, when poor people who have to earn money will not be able to do it. The people who first receive the Quid will not have earned it by providing services. This is also a feature of modern FIAT currency.

    The Quid will fail and the final holders of Quid will be the greatest losers. The Local Authority will be the greatest winner, because it will have started with the free money and spent most of it. Also, Local Authority services are not normally traded, so there is no reason for Quid to return to the issuer.

    Like the King who debases gold coins by adding copper, the Quid suffers from the same flaws, but to a greater extent.

    Reply

    • Bruno Ricardo
      3 years ago

      1. The first receivers have an oportunity cost: it is called liquidity in euros.
      The last receivers have the most advantage. They don´t wait 30 to 90 days to receive the money from the buyers anymore. They don´t need to spend 10% in short term interest, provided by banks, the credit inside the net is availabale at ZERO cost.
      2. NO, the administrator doesn´t create any money because it has no product to sell (maybe some administrative services and a e-commerce website fees, nothing more). It is the transaction that generates it´s own money. this is called trade credit as oposed to finance credit.
      2. The complementary currency is 100% insured. It is not possible to use deleverage or leverage factors. Money supply is equivalent to money demand inside the system.
      4. Of course not this kind of money is not intended for investment is intended for working capital needs. So it is the oposite. More euros are released from Working capital to long term investments. Also this lowers the desirable return risk because more money (euros) is available and less is circulating in the credit circuit. Also projects that were considered not profitable now turn to have an acceptable rate of return

      5. MOney is a way of storing value only in the last century. IN past history, other objects or land were used as a mean to value storage. And you can still have euros. We are talking about complementarity not substitution,

      7. Again: people to earn internal currency most buy it in euros. In other systems, not quid, they can ask for a credit and they offer their own garantees: promise of services and goods for their communities. At any time the member should be entitled to ask for a refund in euros with a little percentage cost of exiting.

      I hope it helps

      Reply

  2. Bruno Ricardo
    3 years ago

    3. About inflation: This hyperinflation it´s impossible if the system is 100% insured. The system must provide by contract or insurance that all money inside the system is fixed to the euro and convertible
    So if you have 2.000.000 euros in internal liquidity that means that there is need to be 2.000.000 euros in insurance. This is why insurance companies exists. And this is why they like this business of new currencies – more sales of credit insurance. No need to put aside all those euros. This operations have much lower risk than the specutative ” Credit default swaps”. This is real business, real consummers, and the market prices nowadays are globally determined. These local communities will still be connected to the world and maybe will raise their exports.

    Reply

  3. Graham Barnes
    3 years ago

    Geoff – As the article says and Bruno re-explains in his point 5, Quid are designed to be spent, not saved. So your points 3,4 and 5, which assume that Quid should also act as a store of value are not relevant. Savings are accomplished via another currency or asset.

    Your points 1 and 6, however need consideration. Our current thinking is that the currency may well give an advantage to some users over others – our view, though is that the advantaged users will be those who are already most active in the local economy. But this is true in any case for the euro or sterling economy. However, if the currency is to succeed in its aim of boosting local trade, we have to look out for inadvertent creation of barriers to competition for new or growing (locally) members.

    The Quid probably will devalue with reference to sterling or the euro, but since it is not directly exchangeable with them, and is effectively a closed economy, this becomes primarily an issue for the scheme governance – to make sure that the amount of currency in circulation matches the amount of economic activity.

    Incidentally removing Quid, as long as it is based on rules well understood at the outset by all scheme members, is not theft. The currency is initially spent or given into circulation on the express understanding that it is for spending.

    Bruno – there seem to be some misuderstandings in your post too. There is no credit within an LQN. Currency is spent or given (with ‘strings’) into circulation and if insufficient currency exists to make a transaction it isnt made. Thus there is no need for credit insurance or legal/ debt issues.

    Your point about not needing to wait for 30-90 days for settlement is a good one. Indeed if debt-circuits exist in the euro economy prior to scheme launch, it is quite possible that these could be cleared as a series of linked back-to-back transactions. Understanding the nature of local economic circuits is an important critical success factor for an LQN.

    Reply

  4. American
    2 years ago

    Your basic currency design is flawed. One basic design to eliminate all of the listed concerns is to have a debit/credit combined system. Imagine that you have a credit card with which you can have a negative balance combined with a debit card with which you can have a positive balance. Users in the system can carry either a negative or positive balance. Their negative balance limit depends on their credit rating just as it does today. It’s basically a electronic form of a general ledger.

    Think of it as an old time merchant who allows customers to buy on credit. When someone wants to make a purchase on credit the merchant opens his general ledger and makes an entry for that transaction. The amount of credit he extends to that person of course depends on their credit worthiness. If these people establish themselves as very credit worthy then perhaps their credit limit will rise.

    With this system there is no money in circulation because when the system is reconciled all debits cancel out all credits. This prevents those managing the system from counterfeiting the currency thus preventing inflation.

    When someone firsts signs up for the system they are issued a currency card which looks just like any other card. It can be used with existing point of sale systems of participation merchants. For person to person transactions there is also an internet interface or perhaps even transaction kiosks.

    Anyway, this new user has a very limited credit score which restricts the amount of goods and services he can purchase. The currency has a logic based credit database coupled with its transactional database. When a user submits a transaction it is queried against this credit database to see if the amount is allowed within his credit worthiness just like todays credit cards. If the user exhibits a good history of credit worthiness then their limit will be adjusted automatically according to the predefined credit database logic. So this credit part of this system is very similar to when large banks use today. The difference is that users can also carry a positive balance. In fact for every one negative monetary unit there is an equal positive monetary unit thus the net balance is zero.

    Reply

  5. Nat
    2 years ago

    Regarding Geoff’s point 1 and 6, instead of giving the money to local authority staff could the quid be given to the poorest people in society on top of any benefits already given to them?
    I imagine that, initially at least, the people willing to provide services in exchange for quids will probably be people already in despearate need of extra liquidity (such as the unemployed). This would further mitigate the issues raised in points 1 and 6 above.

    Reply

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