In reality, these systems are membership-only closed networks or clubs where small to medium business (typically less than 50 employees) trade their surplus capacity using a currency that is proprietary to each network (most businesses do not operate at full capacity, for instance, many hotels operate at 60% occupancy rate). These small businesses could include a florist, Web site designer or lawyer.
Instead of trading with, say, U.S. dollars and having to sell their products/services at huge discounts (in buying power) in the open marketplace, they trade with ITEX credits or BarterCard credits, which can only be earned by selling to another business or the network, and can only be redeemed for goods/services from another merchant in the network. The result for participating businesses is that they keep their buying power, but from a limited set of businesses: same buying power with less choice.
These networks work almost conversely to the national money-based marketplace we are all familiar with. In our marketplace, money is relatively more scarce than the people who accept it. In a barter network, people who accept the club-only money are relatively more scarce than the money, which gives essentially artificial demand (compared to the actual demand on the open marketplace) for their unsold products/services. For instance, some members drive 100 miles to buy wine from another member, simply because they have credits they earned and that member accepts their credits.
The functions of the operators of these networks are interesting:
- supply/demand monitoring and balancing: when a business applies for membership, their business is reviewed for relevance. Obviously, you don’t want to have too many businesses providing the same goods/services, since it would defeat the advantage of a membership-only marketplace.
- credit allocation. Depending on the network’s rules, the member may have to earn credits before it can spend them, or it may be able to get a certain quantity of credits just based on the relevance of their business to the network, i.e. expected demand for their goods/services. So, a business with very relevant offering gets credit, while one whose business is already overrepresented may not or may get a smaller credit. In some networks, the actual creditworthiness of the business as measured by credit bureaus might be a factor as well.
- debt collection. If a member leaves, debts may be seeked using standard legal debt collection procedures (in national currency this time).
- risk management. In some cases, a member goes out of business with a negative balance. To compensate for these losses, the trade network will typically tax all members a small fee on a regular basis, in the propriety currency, not national currency.
- banking. The network needs to keep track of accounts, credit extended, as well as provide various ways for members to use their balance (check, online, mobile, etc.). The network also generates tax filing reports (barter transactions are taxable in the US via form 1099-B). There is typically no foreign exchange service provided (exchange of trade dollars for national money) and no interest earned/charged on positive/negative balances.
I’m not saying that barter networks are the panacea. I think they serve the need of their members, but most importantly or their shareholders. In contracts, community currencies server the purpose of their community: neighborhood, social network, etc. Yet, there are several things that community currency systems can learn from these barter networks:
- Self-sustainability. A closed community with a proprietary monetary system can sustain only if the system is self-sufficient. The system has to be thought as a self-sustaining ecosystem, and great care must be placed on the participants encouraged to join so that not a single category is over-represented, and so the currency circulates. (Similarly, an open community with its own monetary system that would offer convertibility to other currencies must have balanced flows of goods/services (trade balance) with other communities using other currencies, or will risk a run on its currency: trade matters.)
- Fault-tolerant credit system. A credit bureau and a loss pool is probably necessary if the network is quite large. The credit bureau is a pre-emptive tool, and the loss pool is just a practical answer to the reality of business cycles.
- Strong debt fulfillment incentives. Debt collection is a problem in a community currency, and IMO this can only be solved by making membership something valuable enough to the member that it would do anything possible to not default on its debt. This can be achieved by making membership socially desirable to members i.e. something they can use to advance their status within their society. The stronger the incentives, and the lower the debt default risk, the stronger the currency.
- Reliable and secure operational infrastructure.