Investment Finance - building the Network, Crafting the tools

There are previous posts on this topic in the 'Drafting the Members Agreement' thread, but this topic needs its own channel. I will attempt some distillation of this previous work in a few posts here over the next days.

5th Jan, Pat Conaty:
"I have been talking to Stuart about reaching out to the CDFIs in the West Midlands as they are lending to small businesses and social enterprises. He is getting interest from two of them already - one in Birmingham and one in Coventry.. I suggested this way forward to this group already and explained this to Dave but the penny did not seem to drop.
Have a look at this video about WiR and see how they operate with mutual credit but as they are also a co-op bank, they make longer term loans.
https://www.youtube.com/watch?time_continue=37&v=VyQSNUH345Y
CDFIs make longer term loans. I played a lead role to found the CDFI movement in the UK in the mid 1990s. Then we had only ICOF - now Co-operative and Community Finance.
CDFIs if mutual credit could be explained to them could be early adopters and help pilot the system with their existing members and secure the benefits and savings this video highlights.

7th Jan, Pat Conaty:
"A few further comments here for you, Dave and Dil to consider.
Social finance is an area where I have worked on innovation since 1983.
I have been involved in credit union development since the early 1980s, with Lets Link UK in the 1990s and with the CDFI movement since its emergence in the mid 1990s. I worked then with folk moving Mercury Provident (a community benefit society) to morph through a merger into Triodos and with other folk viz. the early stages of Charity Bank when it was Investors in Society - a CDFI for about 6 years until 2000 or so when it became a bank. WiR is a regional co-op bank and this is worth noting when one thinks longer term about what Mutual Credit might end up morphing into.
I do think it is not so much the Phone Co-op or Co-op Energy we need to win over but Mid Counties Co-op the parent. I know somebody on their board who might be an ally but only when our collective plan is more firmly and clearly worked out.
Yes it is not the best video of WiR but there are few of these in English online. The main reason for sharing this was to show that like with LETs (that got this wrong) and other mutual credit solutions, both mutual credit and conventional money plus conventional finance are part of the mix to meet everyday liquidity and investment needs for members. It is this healthy mutual finance toolkit (assuming development loans are from a non-predatory source like a CDFI or regional co-op bank like WiR) that makes for a strong and resilient application secure for lift off. Stafford Beer would describe this as a co-operative viable system.
Okay Sardex has not achieved this way forward. Maybe this is a weakness and i suspect it is. Have a look at this very good FT profile of Sardex that you may not have seen. Giuseppe Littera got things going in 2006 in his head when he was studying at Leeds University here. I think Giuseppe is the member working with Stuart at Credex.
https://www.ft.com/content/cf875d9a-5be6-11e5-a28b-50226830d644
Do note a few key success aspects. First it is the territorial network building, clarifying the Common Bond area and the trusted relationship development that can become socially magnetic because it is a good money for addressing needs in the locality and region. Second patient finance is required. CDFIs as I have said could in some cases provide patient finance once our plan is social investment ready.
Both Big Issue Invest and Bridges are unique CDFIs as they specialise in the provision of Community Development Venture Capital (CDVC). Other CDFIs only make loans. However it should be noted that both Charity Bank and Triodos also have affiliated CDVC arms. Had Sardex not sorted out local stakeholder engagement at the territorial level, identified the Common Bond area (in their case Sardinia) and found a patient source of equity, they would never have got this far. They almost failed. These are key ingredients for success and we need them all.
On a CDFI in London, there never have been many. Responsible Finance is the trade body for all CDFIs and you can look online for the ones in the South East. Parity Trust is one in Portsmouth and Southampton. The best person to chat to first is Faisel Rahman the founder of Fair Finance in East London. He is savvy and a relative of Mohammed Yunus. He knows me well. Also when it comes to patient equity investment, Big Issue Invest and Bridges are both in London.

In our core team chat on Friday we discussed an approach to handling investment which develops from both Chris Cook and Thomas' thinking/experience.

Chris Cook's 'nondominium' approach is a model for providing investors with a fixed return on capital that depends upon their effective alignment with the project's success (unlike bonds), but offers them no direct control (board seats) or eternal extractive rights (dividends). Essentially, investors buy usage rights tokens ( at some discount) which give fixed claims on the future value-creation of the business.

Thomas' experience and resulting strong advice is that the core team/organisation/management should not believe that it is valid to run up enormous credit deficits to pay for launch/development/growth of the network.

My proposal (which needs a great deal of scrutiny, please!) attempts to marry these two points. It goes like this:

• Investors in the project (this applies equally to cash investors and the core team who may be working without pay) are awarded tokens which can be converted into Mutual Credit units in a controlled way.
• This conversion is controlled over time in proportion to the currency flow in the network, according to some adjustable model that indicates safety. Units credited to investor accounts would be balanced by debits to the core accounts.
• Thus conversion of tokens would be faster if the network grew well, giving investors good reason to contribute to success. Tokens would originally be sold at a discount, giving investors a fixed profit ratio.
• At the same time, the market would be boosted, as investors would use their purchasing power to buy goods and services (either for their own use, or to sell on).
• once an investors tokens were exhausted, they would have no further necessary role in the organisation.
• a mechanism would be included in the members agreement to allow for introduction of global demurrage on the basis of the same model - allowing reducing 'money supply' / core debit in a controlled manner over time if indicated.

As an example, ongoing modelling of the economy (which is a definite element of our approach) might suggest that an injection of 2% of additional supply into the market would have low risk of deleterious effects. In this case investors would be allowed (collectively) to convert tokens into credits to a maximum of 2% of the previous period's trading volume during the following period.
Obviously, the exact details of these arrangements would be important and require careful consideration, but at this point, in-principle comments/suggestions/criticisms would be welcome.

It may be useful in considering the above proposal to add that in discussion of fees, we have been thinking about flat fees versus transaction fees. So far, the thinking is that flat fees alone might be the way to go at launch, but that moving to transaction fees once they can be low enough to feel negligible (1 or 2% perhaps) might make sense.
Transaction fees could offer an alternate approach to demurrage for reducing the 'money supply'/core debit.

Considering UKMCN as a multi-stake-holder co-op startup, we surely should be able to access some support/advice? But are we too strange / specialised / ambitious to 'fit' with exiting provision?
Here are some potential sources of such support. Any comments?

• Platform6 co-op? Any good? Should we join?
• Any views on us getting support from the Hive?
• Do we know anyone in Fairshares co-op that we could talk to?
• I am inclined to think (from experience) that specialist co-op consultants like this one tend to have rather tight niche/funding conditions, and may not be worth talking to, but are there ones appropriate to our case?
• I have had some positive experience with Seeds for Change - might be useful in terms of governance development.
• Community Shares Other recommendations?

Co-op finance - straightforward business finance from a co-op. Likely to be fairly careful lenders - as they should be - may be hard to get much from them on such an ambitious / risky venture - but if we have a small funding gap after attracting significant support, thy might be worth approaching.
https://coopfinance.coop/borrow/#eligibility

https://ioo.coop/directory/stack/

A proposal for investability: relates more directly to the Credit Commons Protocol Foundation track than to OCN, but still relevant here. Comments please!
https://docs.google.com/document/d/1s8x1vs-YHj9NrA7o3hUD1rPGLvEoTnjeWfLF5u24NEY/edit?usp=sharing

Matt Slater sent me this via email of a proposal from @chriscook1 :

Interesting

"An Energy Credit Obligation (ECO) instrument is simply a promise issued by an energy producer in exchange for value received from an acceptor. An ECO holder has no right to demand payment in £ sterling, so it is not a debt instrument. There is no right to demand delivery of energy, so an ECO is not a derivative (forward/futures) instrument. The ECO confers no right of ownership such as a rent or dividend, so it is not an equity instrument. Finally, it is not purely an authenticated receipt or proof of value received or expended without any additional obligation – so it is not a Fintech Coin instrument like Bitcoin."
https://bellacaledonia.org.uk/2018/08/21/energising-scotland-introducing-the-eco/

The investability proposal linked above is an attempt to apply exactly this thinking to Mutual Credit.

• Q: what is the 'value unit' that a Mutual credit network provides?
• A - the mutual credit unit of account.
• Q: _What would a 'Mutual Credit Obligation' (MCO) look like? _
• A - a token which could be exchanged - under contractual conditions - for a Mutual Credit account credit.
• Q: How could such a credit be redeemed by a Mutual Credit network?
• A: on the basis of a surplus in the network's 'transaction fee' account.
• Q:[@thomashgrecojr made this point] I thought one aim of Mutual Credit was to decouple the MC unit from fiat currency? Doesn't this MCO directly value the worth of an MC account unit in fiat?
• A: oops, yes, it does.
• Q: So can you do anything about this?
• A: (after some thought) yes, we can: instead of a simple MCO token, we sell MC Auction (MCA) tokens. When there is a surplus in the transaction fee account, we can sell these credit units at auction - where the only accepted payment is MCA tokens - thus decoupling the price of the MCA from the value of an MC unit.
• Q: that sounds complicated - why do we have to do this?
• A-1: We don't - but we do have to raise finance (see the P&L thread). Please make other suggestions!
• A-2: well it is a little complicated - but not at all complicated in comparison to all sorts of existing financial instruments that are used every day. If we are serious about making MC a contender for the future engine of a better economy, we have to understand, accept and embrace the idea that people will come up with all sorts of complex financial instruments on the back of the simple MC premise. In fact, we have to pray that people will want to - that will mean we are getting somewhere!
• A-3: No, it's not complex at all - much simpler than a mortgage, or your credit-card contract.
• A-4: who cares if it's complex? Investors who can't cope with this level of complexity won't understand Mutual Credit anyway.
• Q: So, how does this raise investment finance?
• A: We sell MCA tokens at a discount - less than we believe/predict they'll be worth when they are finally exchanged for Mutual Credit. If this prediction comes true, then investors will make a one-off profit.
• Q: But I thought we were against profit? Aren't we building capitalism if we do this?
• A: Good question. No. What we are doing is using the only significant existing store of value (accumulated capital) to build the Mutual Credit Commons.The key is that aren't paying profits in fiat - but in non-inflationary trade through the MC network. In order to access any 'return on investment' , an investor will have to have an account in the MC network to receive the credits thy have 'bought' at auction with MCA. To access the value of this return, they will have to trade with members of the network - buy things from them - increasing the trade volume of the network, and affirming the value of MC tokens (which will make the next auction go better)...
• A-2: We are using the addiction to short-term returns of investors to get them to fund us to hollow out the fiat money system that allows them to accumulate capital. This is exactly what capitalism did to feudalism: offer it a sweet deal (we'll give you gold for your land) that ensured it's eclipse. Feudalists could see what was happening, of course, and moaned about it (hated the 'nouveaux-riche, despised people 'in trade' ) - but they still 'sold off the family silver'.