Governance mechanisms

Communities with mutual credit have risks related to someone being unable to pay back debt or drop her negative balance to zero.

Based on the parameters described before, we can have 3 types of governance to be applied depending on the purposes of the community.

1.- KYC (Know Your Customer). Before allowing a member to enter the community and get a negative balance, she must successfully pass an identification process and provide the required information for the community to trust in her ability to pay a certain amount of debt when needed.

This approach is very suitable for small communities or clubs where the KYC process can be done easily.

2.- Credit limits. This is the most recommended way to secure mutual credit financial systems.

The most common way to implement this is by not allowing untrusted members to have a negative balance. As an example, if someone wants to buy a product or service provided by the community, she must first buy credits of the mutual currency in an exchange platform or gain credits by providing the product or service.

This mechanism also opens the door to other rules like allowing an amount of credit or negative balance to users depending on the past activity in the community. As an example, Holofuel allows an amount of credit in proportion to the computing services provided by a user in the last 3 months.

This is a very good way of governance when instant payments are required. It is easy and flexible and will be the most used mechanism to secure mutual currencies.

3.- Credit insurance. In this case, an external community performs the KYC process, and credit scoring of agents, setting credit limits and fees. This approach is good when products or service purchases are not 100% paid before getting them. Examples could be home decoration, construction, or software projects. I think this kind of governance will be very rare to be found in the future.