Cost Recovery Mechanisms for Complementary Currencies

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Introduction

Bernard Lietaer:


"All payment systems cost some human effort to be kept in operation, and typically also infrastructure expenses. While some may be able to be covered in the complementary currency itself (typically labor), there is often a hard currency component (computers, Internet service or telephone expenses) that need to be covered one way or the other. When that aspect hasn’t been thought through, the operation and maintenance of the currency system tend to gradually deteriorate, service is provided in a haphazard way, with the consequence of slowly degrading satisfaction of the users. In short, unless some income is generated to pay for the work performed the system is probably not going to be sustainable in the long-run. The first step is to make a clear separation of what costs need to be covered in conventional money, and what part can be covered with the complementary currency.

There are two types of budgets to be made in each of these currencies: a start-up and an on-going operation budget.

Next, the options to generate income are chosen, for each type of currency involved. These options are limited, what follows is an exhaustive list."


Typology

No Recovery:

The first option is not to recover any of the costs. For the complementary currency component of the costs, most mutual credit systems simply open an account for “general overhead” and the people doing work for the system, are credited and this overhead account is debited.

For other systems, or for the conventional currency component, not recovering any costs is sustainable only if the design of the system is such that no such costs are incurred in the first place, or if there is a “sugar-daddy” organization that is willing to either provide or raise the funds to make the system operational and keep it going. Some peer-to-peer systems are actually designed to incur no costs, and therefore do not need membership or recovery mechanism either. That is the case for instance with the WAT system in Japan, based on bills of trade issued by businesses among each other.


Flat Fee:

The second classical option is to have a flat fee. That can be a periodical membership fee (typically yearly or quarterly) or an entry fee that participants pay to the central operation to be able to participate. In some cases, there are higher membership fees for businesses than for individuals. This is usually done to cover the conventional money component of the costs.


Transaction Fee:

Transaction fees fall in two categories: those that are based on a small percentage of the amount involved, and those that are a flat amount for each transaction. They are typically levied at the moment of the transaction, although some provide a monthly total instead. The transaction fees are normally levied in the same currency of the transaction itself.


Interest, demurrage, and other time related charges:

In the section on store of value we discussed the issues around interest, demurrage, step functions, or expiration deadline currencies. Of course, such time related charges produce an income – although only in the type of currency involved in the transaction – and that income is a perfect candidate to cover the running expenses.


Combination:

Many systems use a combination of the above.

Typical examples of such combinations include:

- Charges on both positive and negative balances beyond a certain level (i.e. demurrage and interest).

- Membership fees are also often used to cover the conventional money expenses, while other one or more of the above mechanisms deals with the complementary currency costs.


Discussion

Advantages and Disadvantages of the Cost Recovery Mechanisms

Bernard Lietaer:


"Of course, keeping the costs as low as possible is the best approach of all.

Particularly if the costs in conventional currency are high, a complementary currency system is predictably going to have difficulties over time. Costs in complementary currencies are easier to deal with because, particularly with mutual credit systems the recovery problem can be dealt with easily within the system itself.

Whenever cost recovery mechanisms are needed, there are some advantages and disadvantages in the different solutions listed above. One key criterion to keep in mind is to try to use the costs recovery as an incentive that is lined up with the objectives of the system. For instance, normally it is highly desirable to ensure that the incentives to circulate the currency are lined up.

In that sense, the worst recovery mechanism is transaction fees, as those provide an incentive not to trade with the currency. In contrast, membership fees and demurrage fees both give incentives to trade and are therefore preferable." (http://www.global-community.org/gc/newsfiles/25/Community%20Currency%20Guide.pdf)