Updated: May 5
A Community Inclusion Currency (CIC) is way to transparently establish a credit system to enable local markets to thrive and link together, forming resilient and inclusive economies. While these steps are a simplification of a process that involves a lot of planning, modeling and governance - it is important to share our understandings and we invite collaboration as we use and develop open source technologies, models, and practical methods.
Step 1 Primary Backing.
Involves establishing the amount of currency (aka tokens or promissory notes) being issued against some backing. (This is the backing of your currency's primary market.) A CIC issuer (a group or individual) needs to establish that these CICs, as promissory notes, have legitimate backing in goods and services over time.
In example, an individual business could back a CIC with staged redemption of a year's worth of goods or services (goats and hair cuts). Practically bringing together a group of individuals or businesses and determining their commitment level to backing over time is an art. Groups like Sardex.net have developed techniques for how to establish such commitment and buy in. With humanitarian organizations like Red Cross these commitments could be in donations over time (i.e. the CIC could be redeemed for donations in National Currency or goods) as we are currently doing with the Sarafu CIC. Note a key function of the primary backing is to keep the value of the CIC stable locally.
If a CIC has 100,000 EUR of backing committed from a group of, say 10, business over a year and each business is allocated 10,000 CIC tokens, those businesses could begin to trade with each other while seeking to keep their balance at 10,000 CICs (called credit clearing). Determining how many tokens to create involves an estimation of how much any one business can both spend and redeem them over time and the size of the network begin created. If you are bakery and have committed 10k EUR of bread over a year to be redeemed in CICs (and are allocated 10k CICs) - will you be able to spend those CICs again as fast as you redeem them? And if not, how many can you afford to accumulate? If all 100,000 CIC tokens come back to you what would happen to your business? Are you guaranteed to be able to spend them? What if an issuer goes insolvent and you can no longer redeem the CIC for the primary backing? In step 2 we seek to de-risk the CIC by creating a contractual guarantee - while also creating a way for future CICs to be created and even traded with other communities.
Step 2 Guarantee a Reserve
While Primary Backing alone has created stable currencies with examples around the world like Canadian Tire Dollars, issuer(s) can avoid pitfalls that have caused thousands of such systems to stagnate or collapse by adding a reserve (aka collateral). A reserve gives CIC holders a guarantee of redemption while also creating a mechanism to create more CICs and connect one CIC to another with automated pricing.
Reserves help to:
Increase trust and acceptance of a larger community.
Guarantee backing of the CIC in case of issuer insolvency or delays in redemption of the primary backing.
Establish an automatic exchange value of one CIC to another without having to audit the primary backing.
Establish a transparent and fair way to create and destroy CIC tokens.
A reserve can be created transparently on a mathematically binding blockchain based contract with strict permissions and equations that govern the exchange of CICs for the reserve (aka Bonding Curve).
A CIC issuer(s) must decide how to setup this contract - below are the current options for setting up a CIC reserve contract (also called a Converter contract in the Bancor open source contract suite): 1. In what currency should the reserve (collateral) be? We are using DAI (a stable coin to the US dollar) but it could be any token that is trusted. 2. How much reserve to put in? We set a 'full' reserve (collateral) level at 25% of the supply of CIC (Sarafu in Kenya). Also called a Target Reserve Ratio (TRR). 3. Who can use the contract? White-listing. Can anyone access it or only known people? For legal reasons organizations issuing CICs must often know who is using the contracts. 4. What is the starting and maximum fee for using the contract if any? A conversion fee is a good security mechanism and adds some resistances to moving in and out of the contract.This fee goes into the reserve pool. 5. Who controls the variables of the contract once it has been deployed? These include changing the conversion fee (if any) up to a fixed maximum, changing the white-list and connecting to other CICs (Registry of CICs).
Once the contract has been designed and the collateral has been obtained - (eg. the issuers may be turning US dollars into DAI or creating their own reserve token) and added to the contract - the contract will also take control of the CIC token itself and will be solely able to issue or redeem CICs based on the variables given above and the equations below (aka bonding curve equations). We start out CICs in Kenya with an exchange price of 1. (See the equation above that determines the exchange price.) The reserve is considered full at a fixed community chosen Target Reserve Ratio (TRR) to the CIC in supply. When the reserve is full (say at $25,000 Dollars in Reserve and there are a total of 100,000 CIC tokens (backed by goods and services of the issuers) and the TRR is also 25%) then the exchange price to reserve is 1. (1:1) We will discuss exchanging between CICs and reserve in the next section.
Step 3 Open Reserve to Market:
Again, getting past steps one and two are not trivial and require a lot of considerations and good governance! But once in alignment the contract holding the CICs collateral created in step two can be open to the greater world (whitelisted or non whitelisted).
Enable Redemption: With a reserve in place, anyone holding CICs can redeem them for committed goods and services (primary backing) or money in the reserve. The less reserve there is the less National Currency is redeemed for the same amount of CICs based on the equations below (aka the bonding curve). If someone cashes out 1,000 CIC tokens from a full reserve in our example they will pull out roughly $985.10 Dollars from the reserve. This limits how fast people will remove their CICs.
Enable Creation: In addition anyone can also add money to the reserve and create additional CICs. The more reserve there is the less amount of CICs are created for the same amount of National Currency. As the reserve was already reduced in the last example; now, if someone deposits $985.10 Dollars into the reserve they will create 1,000 new CIC Tokens - this encourages people to fill back in the reserve (see the equation below).
The group that should be most interested in creating more CICs when the exchange price to reserve is low - are the initial issuers themselves. They among all others should be able spend the CIC at full value among themselves and their community - because that was their initial purpose and they are still backing the CIC with their own goods or services. eg. If someone knows they can buy a goat (primary backing) using CICs 1:1 with national currency and they are now able to create some cheaply by adding reserve, they have an advantage to fill back up the reserve and buy some goats. This incentive to refill the reserve can be considered a beneficial arbitrage and creates additional price stability beyond the primary backing. Humanitarian organizations will add reserve and create CICs as the reserve empties in order to leverage their donations into positive social impact. The reserve can be considered a revolving CIC stability fund.
While CIC acts as a promissory note against the primary backing, it is also practical to consider a CIC as a share of both the primary backing and the reserve. In a sense it is also a share of, and investment in, the economy using it. In addition, that economy can be connected to other economies using other CICs. Because a CIC can convert to its reserves and that withdrawn reserve can be added to another CIC - the exchange value to reserve serves as an automated price maker between the CICs and also measures the relative trade imbalance between the two economies - creating an incentive to clear trade deficit.
The economic data available from CIC contracts and trading on a public blockchain gives a lot of insight to a CIC backing, volatility and uptake. Check out https://dashboard.sarafu.network for an overview of a CIC being used in Kenya right now by the Red Cross to support thousands in vulnerable communities and build resilient economies. See our white paper here as well as the open source Bancor smart contract suite we are using. Here you can see a very basic initialization and usage of the bonding curve equations.