Posted by: cjenscook | 07/03/2010

Simply The Best

As the new mayor of Reykjavik, Jon Gnarr now stands in the position of Robert Redford’s character in “The Candidate” who turns to his campaign manager having become a US Senator against all the odds and says…

“…and now what do we do?”

Dozens of advisers and academics have been descending on Reykjavik to advise the mayor on solutions ranging from the Gold Standard to a Reykjavik Bank. But as Dr Narsi Ghorban put it:

“21st century problems cannot be solved by 20th century solutions”

Best Finance
In 25 years of market development and regulation – six of them as a director of a global energy exchange – I gained many years’ practical experience in developing market structures and products.

It was Napster which first woke me up to the effects of the direct instantaneous connections of the Internet. I looked on astonished as a 19 year old – by inventing online music file-sharing – single handedly made obsolete the entire business model of the global music industry.

This realisation was reinforced by a visit to a major oil broker where I was intrigued to find that negotiations in the global market in cargoes of crude oil had migrated from telephones – where traders could manage only a couple of parallel conversations – to Yahoo ‘instant messaging’ chat-rooms where they could manage dozens.

The oil traders had done this because (a) it worked; and (b) they could: the fact that it was also (c) free, did not actually occur to people who routinely spent a thousand dollars on a night out, but it did occur to me.

Since 2005 I’ve been working in Scotland with the Nordic Enterprise Trust (NET) and with a little seed funding from the Norwegian government we have developed some simple but radical new partnership-based legal and financial structures as a framework for direct transactions. In the same way that the music industry has seen a move to direct ‘Peer to Peer’ connections, I got to thinking about how the financial system might look if the current middlemen like banks and insurance companies were transformed to a role as service providers.

Even a couple of years ago, before the Credit Crunch, such a transition was unthinkable. But now that banks everywhere fear to risk what little capital they have left, then the more far-sighted banks may well be interested in a complementary approach to new business.

The partnership-based structures we observe are emerging globally, from the UK to Japan, and from the US to India, and doing so because, quite simply, they work.

My case is that Peer to Peer Finance – which consists of Peer to Peer Credit and Peer to Peer Investment – is, in all probability, Best Finance.

Best Credit
Everyone is used to banks providing the credit (time to pay) which is necessary for the circulation of goods and services and the creation of productive assets, to the extent that we cannot conceive any other way of doing it. But the fact is that enterprises routinely extend ‘trade’ credit to each other (‘B2B’), and to their customers (‘B2C’) . The reality is that if X gives Y an IOU in exchange for goods, and Z is then prepared to accept X’s IOU in payment from Y, then the result is a monetary system.

So the source of credit is not the bank, but ourselves, through our ability to create value such as goods and services. The role of the bank – as a credit middleman – is actually to provide a framework of trust by coming between buyer and seller, and providing a guarantee backed by the pool of capital provided by shareholders. NET’s simple but radical approach is for a framework of trust to be provided by buyers and sellers collectively as a Guarantee Society: this is not an organisation – it does not own anything; do anything; or employ anyone – it is simply an agreement.

Our proposal to the Best Party is that they facilitate Reykjavik businesses and citizens in coming together and agreeing – through a simple and consensual ‘umbrella’ Reykjavik Guarantee Society agreement, that they will mutually guarantee the credit which is to be granted directly from businesses to each other, and from businesses to citizens directly.

Best Credit will be interest-free, but not cost-free, and requires no deposits. How does that work?

Firstly, there will be a service charge to cover the costs of providing the communications platform, accounting system, and management services. Secondly, both sellers and buyers will pay an amount into a ‘Reykjavik Pool’ in case of defaults. One innovation is that with the agreement of the seller, buyers may settle credit not just in ISK but in any form of ‘money’s worth’ acceptable to the seller, such as fish, or maybe in due course energy units or even land rental units.

The result is a Peer to Peer credit system which operates on a ‘not for loss’ – or cost recovery – basis, and where banks cease to be middlemen bent on extracting profits, and transition to a role as service providers sharing surplus.

Best Investment
Everyone is used to the Twin Peaks of Investment: Equity and Debt. Equity is property ownership generally but most people think of it as shares in a Limited Liability Company. When we distinguish between Public and Private we actually mean owned by the State, and owned by a Limited Company, respectively.

Debt, on the other hand is credit created by banks, loaned at interest to borrowers, and secured by claims over productive assets such as land. The outcome of Equity and Debt is to create two conflicting legal claims over the same productive assets.

Now, in Scotland there are not just the two verdicts of Guilty and Not Guilty, but a strange third verdict of ‘Not Proven’. In the same indeterminate twilight zone are also to be found new partnership-based legal forms which bring together Public and Private within municipal partnerships. The City of Glasgow now has five of these, which borrow conventionally from banks (or used to).

NET’s innovation is the simple but radical Capital Partnership which brings investors inside the partnership on the basis of sharing production or use value. This has very interesting outcomes.

By way of example, Reykjavik could set up a Reykjavik Property Partnership agreement, and invite distressed home owners and their equally distressed banks to make their properties and debts subject to the agreement. An affordable rent is then set, and indexed to rental values, and a pool of Reykjavik rentals is thereby created.

The Alchemy is simply to divide this rental pool into proportional Units – say billionths – and issue these to the banks in exchange for their debt, and to co-owner occupiers in return for any equity. Now the picture is completely changed for both banks and home owners. The banks have an asset far more valuable than any distressed debt can ever be. The occupiers, on the other hand, pay an affordable ‘capital rental’, and if they pay more than that due they acquire more units. Even better, if they maintain the property themselves they will be credited with ‘Sweat Equity’ units.

A second possibility is to create – within an Energy Partnership framework agreement – Units redeemable in payment for energy. Using such a unitisation model, Reykjavik Energy – which is already a partnership – could rapidly be refinanced interest-free with credits denominated in energy, rather in a conventional debt-based currency. If they are adopted – and anyone familiar with Pay as You Go mobile phones; Air Miles; or loyalty schemes operated by shops will understand Energy Units – they would rapidly be used beyond Reykjavik.

Best Practice
We believe that the Peer to Peer Finance models for credit and investment may in fact be Best Policies, which currently lack a Party to implement them. Jon Gnarr leads the Best Party, which currently lacks Policies to implement. Maybe we should talk?



  1. Jct: Sounds like a municipal LETS. All they have to do is add human time as one of the backings for their currency and they are a Local Employment-Trading System.

  2. Shrewd comment, John.

    In fact the backing of a guarantee society is human time and knowledge.

    In a default situation the ‘pool’ would settle credit, and the defaulter could ‘pay his debt to society’ at an agreed rate eg by doing community work.

    A Guarantee Society provides a framework of trust (typically lacking in a LETS scheme) for the credit which is necessary for the circulation of goods and services and the creation of productive assets.

    Not dissimilar to the WIR, but without the central issuer of complementary currency.

    Productive assets will then themselves be the basis of credit by what I call ‘unitisation’ ie simply the issue of units redeemable in payment for use value.


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