What just happened?
The cash flow of SME’S is frequently depleting due to disruptions in supply chains and sales while managing fixed recurring costs. At LawMiracle, we believe the use of digital complementary currency (CC) seems likely to be one of the few viable ways the SME’s can offset the impact of COVID-19.[1]
What does this mean?
With the effects of the COVID-19 still intact, it is time for us to question the future of the global economy operating through the use of physical currency. During the lockdown, market fluctuations have varied in states. Despite such growth stagnation in lucrative offerings such as the shares prices in the pan-European Stoxx 600 index, two investment instruments are experiencing an upward trend.[2] These are digital money and fintech. For the purposes of this article, we will solely focus on analysing the subject of digital money and its relationship with CC.
It is self-evident that as a community, we need money to buy daily necessities in life. This is because we live in a monoculture society. It follows that most of the currency used in the world has the same bank debt issuance system. This means that if the banks fail, the entire economy fails. According to the IMF, between 1970 and 2010, there were 145 banking crises, 208 monetary crashes, and 72 sovereign debt crises, which have affected at least three-quarters of the 180 countries that are members of the IMF.[3] In response to the economic fallout of COVID-19, the world will witness a period of intense competition, and currencies experience periods of substantial scale depreciation.[4] While many large organisations may survive due to Business Continuity Plan installed in response to such an event, the toll will have a significant impact on SME’s.
How does this affect the legal industry?
To deter such financial damage, many private businesses and state districts have designed and implemented CCs such as BizX[5] and Brixton Pound[6], which help diversify the type of money that is being circulated. A complementary currency is a type of currency that can be used in individual businesses that accept it as an alternative to the official, national currency.[7] Subsequently, this type of currency enables countries to eliminate the artificial scarcity built into the banks.[8] It can be argued that this form of money is beneficial for SMEs primarily dependent on the current banking regimes for credit. Furthermore, it acts as a valuable tool for businesses to engage in supplying offerings in demand when the money is scarce, and there is ongoing uncertainty in the market, such as resource depletion.[9] There are thousands of complementary currencies in the world, but they never go mainstream as there were no suitable procedures to cover the operating costs. However, these CC’s are now starting to digitalised as seen in Hull, England, where the digital currency ‘HullCoin’ was inspired by blockchain technology. This could help the SMEs weather the impact of COVID-19, but such procedure may cause potential economic implications which law firms may need to look at when advising their clients.[10]
While CC’s are advantageous in terms of territorial development as it creates resources and potential outlets, it is essentially a network that solely promotes a development model for businesses that accept its currencies. This may be a disadvantage to some companies who use the national currency to carry out a trade and operate in an area where most companies work with compliance with the alternative currency of this network.[11] This is because the businesses within the network will get better value for money for trades made with each other, creating more resources and capturing a larger share in the market than its competitors.[12] From a legal perspective, this network may potentially engage in anti-competitive conduct, singling out the non-network businesses by price variation, causing likely exits of these businesses from the relevant market.
Secondly, only state money and the conventional means of payment are recognised as proper money. Recognition of the monetary nature of these complementary currencies will only take place if it can convert into other coins or the state currency.[13] However, most of these complementary currencies have not been recognised by any official monetary institution, whether private or public. This means that most network arrangements are not subject to supervisions and regulation by central banks of their respective countries.[14] From an insolvency perspective, it means that businesses who have utilised the currency to operate their business but have now decided to exit the network due to witnessing more substantial growth in trading in national currency will face the risk of exiting the market with no returns to the wealth that they have accumulated during COVID-19. Furthermore, it will force these businesses to restrain themselves from expanding, if the network itself does not grow, and this may vice versa lead businesses who use the national currency to dominate the market, causing multiple market exits of network businesses.
Written by Amarjit Tark
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References:
[1] Rachel Hocking, ‘How UK SMEs can weather the impact of COVID-19’ (World First Blog, 22nd April 2020)
[2] Alex Axelrod, ‘COVID-19 Outbreak and Crypto Market’ (Finextra, 8th April 2020)
[3] Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber, ‘Money – Sustainability: The Missing Link’ (Triarchy Press, 2012)
[4] Michael Greenwald, ‘Digitizing the dollar in the age of COVID-19’ (Atlantic Council, 22nd April 2020)
[5] Visit https://www.bizx.com/
[6] Visit http://brixtonpound.org/
[7] Norman Miller, Are community currencies a better way to shop?’ (BBC Worklife, 27th April 2020)
[8] James Chen, ‘Complementary Currency’ (Investopedia, 23rd May 2019)
[9] Ján André Montoya, ‘An analysis of the BizX Commercial Trade exchange: The Attitudes and Motivations Behind its Use’ (Portland State University: PDXScholar, 11th June 2018)
[10] Norman Miller, Are community currencies a better way to shop?’ (BBC Worklife, 27th April 2020)
[11] See French Local Currency example in Marie Fare and Pepita Ould Ahmed, ‘Why are Complementary Currency Systems difficult to Grasp within Conventional Economics?’ (Open Edition Journals, 15th June 2019)
[12] Marie Fare, Pepita Ould Ahmed, ‘The Complementary currency systems: a tricky issue for economists’ (HAL, 7th November 2014)
[13] Marie Fare, Pepita Ould Ahmed, ‘The Complementary currency systems: a tricky issue for economists’ (HAL, 7th November 2014)
[14] Marie Fare and Pepita Ould Ahmed, ‘Why are Complementary Currency Systems difficult to Grasp within Conventional Economics?’ (Open Edition Journals, 15th June 2019)
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.