In just a few months Wales will have a mutual credit system, the Celyn, thanks to a £100,000 Foundational Economy Challenge grant from Welsh Government.
The Celyn is based on the Sardex in Sardinia, which generated €50 million in transaction volume in the past year alone, and has more than 3,000 businesses on board.
So what exactly is the Celyn, and how will it generate similar returns for businesses here in Wales?
Is the Celyn a Welsh Bitcoin?
The Celyn is not a Bitcoin-style cryptocurrency.
It is a centralised digital system with the credits, or Celyns, traded for services and goods, rather than being used for speculation as with Bitcoin.
Who’s behind it?
Celyn is not only inspired by Sardex, it is being set up by Circular Economy Wales as a business partnership with Sardex.
The team who set up the successful Sardinian system are bringing their 11 years of experience to Wales to help CEW with the mapping and design before running a 12-month pilot from July 2020, and the final system from July 2021.
The Sardex team has successfully set up mutual credit systems in a number of places outside Sardinia, so this experience is vital.
Can it work here in Wales?
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Wales is similar to Sardinia in that SMEs make up 99% of our businesses, so this has the potential to significantly boost our economy.
If Wales had initiated a copy of the Sardex in 2008, and it had followed the same growth trajectory, Welsh SMEs would now be strengthened to the tune of £256m in additional liquidity.
Where does the Government come in?
Welsh Government has funded the pilot, but the Celyn is not a state-run currency and there is no plan or need for HM Treasury to become involved in its management or governance.
The governance structures and processes will be closer to that of cooperatives, community organisations, and non-profit foundations.
Is it legal and can it be converted to a pound?
The Celyn is not e-money and is not convertible with the pound or any other currency.
Essentially, it is just a way to keep credit or debit scores between the businesses involved.
There will be a commonly accepted unit of account, so a Celyn will be equivalent to a pound in the sense that a service or product that costs £10 could also cost 10 Celyns.
Does that mean you can only trade in pounds or Celyns?
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The Celyn is a complementary, not alternative currency, which means that above £500 you can have mixed trades involving Sterling as well as Celyns.
In fact, the Sardex team have found that the larger the payments the higher the likelihood that both currencies will be used.
Do you have to pay VAT on Celyns?
What’s the adage about life, death and taxes?
The Celyn won’t enforce tax compliance, but on any commercial transaction VAT is (or should be) debited or credited in legal tender (i.e. pounds).
As the Celyn is based on a digital system, all transactions are tracked and can be made available to the HMRC upon request and businesses will be able to add the relevant tax on transactions.
Can it work in any trading conditions?
The Sardex was set up in 2009 after the global banking crisis, to help businesses in Sardinia trade surplus in a time when banks restricted credit, and this is commonly seen as a big part of its success.
However, the Sardex was successful because it enabled the generation of zero-interest working capital to businesses eager to trade, not because the Euro was weak.
Zero-interest working capital is just as popular today, for business growth, not just survival.
The fact is that Basel III regulations on risk allocation to loan applicants, which came into effect in response to the financial crisis, still make it extremely difficult for SMEs to access bank credit.
What safeguards are in place?
Structurally, members are not allowed to accept more than, on average, 10% of their turnover in Celyn credits.
This protects businesses, as below 10%, zero-interest working capital can be very helpful for cash-strapped SMEs in need of debt financing, while above this limit there can be a risk of insufficient opportunity to spend the Celyns, and/or the Celyns could crowd out the pounds that are still needed for tax payments etc.
The Celyn isn’t backed by Sterling but by the products and services that the businesses creating the credits will sell in the subsequent 12 months. In other words, the trust underpinning mutual credit as a financial instrument is strongly dependent upon, and reinforces, the productivity of the local economy.
It is this mutually reinforcing interdependence between the social and economic dimensions of trading that will help increase the resilience and growth of the Welsh economy.
Is the Celyn compliant?
There are two levels of compliance currently, European and 海角视频.
In the EU the Payment Services Directive (PSD) II aims to create a more integrated European payments market, making payments safer and more secure and protecting consumers. Sardex (and therefore the Celyn) is PSD II-exempt because mutual credit is not e-money and because its market reach and depth are limited.
The limited network exclusion is addressed also by the Financial Conduct Authority (FCA), which specifies that for convertible means of exchange such as shopping centre gift cards the ‘limited network exclusion’ applies as long as the volume traded does not exceed £1m.
Since the Celyn is not convertible, the PSD II and FCA exclusion thresholds do not apply, it is outside the scope of regulation on payments in both jurisdictions.
The EU Anti-Money Laundering (AML) Directive 5 distinguishes between crypto-currencies and local complementary currencies such as mutual credit:
Local currencies, which are also known as complementary currencies, that are used in very limited networks such as a city or a region and among a small number of users should not be considered to be virtual currencies.
Although the implication of the above is that mutual credit does not come under AML, PSD II, or FCA regulation, the Celyn conforms not only to tax transparency but also to AML and KYC (know your customer) good practices to guarantee a safe and high quality of service to its users.