Mutual Credit Line

Mutual credit is a multilateral exchange network in which money created endogenously within the network serves as a medium of exchange.

What Is a Mutual Credit Line?

Mutual credit is a multilateral exchange network in which money created endogenously within the network serves as a medium of exchange.  
Mutual credit is a closed system in which deposits will match the total amount of deficits, maintaining a perfect equilibrium. This enables money to retain its value as each money unit in existence is required by someone within the system in order to close their debt. A mutual credit line between trusted traders allows them to save on interest rates and not carry the stigma of debt as one person’s credit cannot exist without another’s debt.

Mutual credit lines are credit lines that are issued to members that join a mutual credit network and are issued in the mutual credit currency of that network. Each member receives a certain amount of credit that they are able to spend, based upon the rules and/or practices of that particular network. The credit line enables a member to spend that amount of credit by purchasing a good or service from another member. It is the maximum amount of credits the member can spend, which will be represented by a negative balance for their account.  Members repay their mutual credit lines by making sales to any other member of the network. Their negative balance is then reduced by the amount of the sale(s) they make.

Each network can determine how they want to issue credit lines, such as using traditional credit scores, bank account data or non-traditional means, such as qualitative measures of trust.  Mutual credit lines enable credit to be accessible to anyone with the risk of the default spread across the entire closed system. If a default takes place, the system deviates from a perfect equilibrium at a zero balance, which can be mitigated by purchasing excess currency units and providing something of equal value.  

Why Are Mutual Credit Lines Needed?

The issuance of credit in today’s structure is easiest to access by those who need credit the least. For instance, sole proprietors, freelancers and micro-entrepreneurs face a lack of access to credit with traditional facilities, especially those in communities where there is a lack of adequate financial infrastructure. 

Mutual credit decentralizes the issuance of credit and unlocks liquidity in resource-rich but cash-poor communities to generate value growth, increase exchanges and generate economic activity. In a centralized economy, the issuers of the currency and the credit are disproportionately rewarded for their activity and thus results.
Author: Ashley Taylor Buck, founder of ReSource

Ashley Taylor Buck is a blockchain entrepreneur who joined the early Ethereum community in 2014 with a vision to further social mobility with this new economic paradigm. She co-founded ReSource to empower local communities and small businesses to grow cooperatively by offering credit to each other. Previously she was the first employee of ConsenSys, a Community Microgrid Specialist for LO3 Energy/Brooklyn Microgrid, pioneered the Cyberthreats and UN Sanctions program for Compliance and Capacity Skills International, and founded a community and events space ReGenCy in Brooklyn.