Just as in the traditional money system, MONEY 2.0 participants in need of funds exceeding their own limits (e.g. for investments) will have to borrow the money. However, since in MONEY 2.0, the right to issue the medium of exchange rests with the market participants, the lender isn't a bank (potentially creating money out of thin air), but other market participants, who are willing to lend money from their current savings.
In order to connect borrowers and lenders, there are two basic models:
1. The open money market. In the open money market, participants borrow directly from other participants. Participants are free to agree on their own terms, and there is no middleman earning a commission for the transaction. On the other hand, participants also carry the transaction risk - it is up to them to do research on their potential partners, and/or to agree on securities. The open money market is essentially a sophisticated classifieds system in which potential borrowers can find potential lenders, and vice versa. While any market participant is free to create such a system himself, a default open money market platform needs to be part of the MONEY 2.0 software.
2. The credit matching institution (CMI). Credit matching institutions accept savings and grant loans. All transaction risks are carried by the CMI (if a borrower defaults, the CMI still owes the saver), which is why the CMI will typically require securities from their borrowers. CMIs paying interest may choose to either pay interest only for savings that they can match with loans, or for all savings. Essentially, credit matching is the core task left for traditional banks, once their privilege to issue money has been removed.
It is important to realize that, in MONEY 2.0, currency administration and borrowing/lending are entirely separate. While currency administrators are bound by a strict set of rules and operate for the benefit of all participants, the potential business of coordinating borrowing and lending is a private affair. In a worst case scenario, a mismanaged CMI may damage its customers, just like any other mismanaged private business might do - potential issues with CMIs (such as defaulting loans) can, however, never undermine the integrity of the currency, or hurt unrelated participants who aren't customers of that specific CMI. Therefore, society as a whole (or its representative government) cannot be held ransom by private institutions and be forced to pay for the mistakes (or the greed) of a few.
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Details
• Typical CMIs draw profit from the spread between savings and loan interest. Margins and interest rates are determined by the competition between different CMIs, as well as the alternative deals that participants could make on the open money market. In many ways, CMIs operate like traditional "banks" - however, since the term "bank" is commonly associated with the privilege to issue money, this document uses the bulky term "credit matching institution" (CMI) instead. The terminological distinction also serves to emphasize the fact that today's banks aren't necessarily tomorrows CMIs.
• Since CMIs can only lend money that others have saved, they are essentially restricted to full-reserve banking. While, in theory, this means that a saver has to commit his savings for ten years so a borrower can obtain a ten-year loan, such inconveniences can be easily avoided by allowing savers to pass on the loan they have granted and let other savers replace them. Just as in traditional banking, CMIs can also offer higher interest rates for savers who are willing to commit their savings for longer periods of time.
• It may come as a surprise that an alternative money system allows for interest payments on savings and loans. Interest, however, is part of our monetary reality, and with MONEY 2.0 being entirely open, interaction with traditional money is not only unavoidable, but also desired. If MONEY 2.0 were to ban interest, potential savers would most definitely change their savings to traditional currencies, where they can charge interest, or resort to black markets. Interaction, however, is always a two-way road: The fact that participants in MONEY 2.0 can issue interest-free money, in conjunction with a balance fee, does not only allow for very low (or even negative) interest rates in MONEY 2.0, but also reduces the overall demand for traditional loans, and therefore has a dampening effect on the interest rates in the traditional money economy.
• Even though CMIs are private institutions, MONEY 2.0 administrators have the tools to make them adhere to certain standards of conduct, e.g. by only allowing those who have signed an agreement to be plugged into the MONEY 2.0 software, thereby granting them privileged access to MONEY 2.0 participants. (Privileged access could include a loan matching system, in which participants authorize their trusted CMIs to automatically accept loans that meet certain requirements, or other goodies.)
• In MONEY 2.0, interest rates play a certain role in determining other system parameters, most notably transaction fees, balance fees and account limit decay. If loans become too expensive, system administrators may have to adjust these parameters to ensure that attempts to artificially inflate individual money creation limits remain unprofitable.
• Typical CMIs draw profit from the spread between savings and loan interest. Margins and interest rates are determined by the competition between different CMIs, as well as the alternative deals that participants could make on the open money market. In many ways, CMIs operate like traditional "banks" - however, since the term "bank" is commonly associated with the privilege to issue money, this document uses the bulky term "credit matching institution" (CMI) instead. The terminological distinction also serves to emphasize the fact that today's banks aren't necessarily tomorrows CMIs.
• Since CMIs can only lend money that others have saved, they are essentially restricted to full-reserve banking. While, in theory, this means that a saver has to commit his savings for ten years so a borrower can obtain a ten-year loan, such inconveniences can be easily avoided by allowing savers to pass on the loan they have granted and let other savers replace them. Just as in traditional banking, CMIs can also offer higher interest rates for savers who are willing to commit their savings for longer periods of time.
• It may come as a surprise that an alternative money system allows for interest payments on savings and loans. Interest, however, is part of our monetary reality, and with MONEY 2.0 being entirely open, interaction with traditional money is not only unavoidable, but also desired. If MONEY 2.0 were to ban interest, potential savers would most definitely change their savings to traditional currencies, where they can charge interest, or resort to black markets. Interaction, however, is always a two-way road: The fact that participants in MONEY 2.0 can issue interest-free money, in conjunction with a balance fee, does not only allow for very low (or even negative) interest rates in MONEY 2.0, but also reduces the overall demand for traditional loans, and therefore has a dampening effect on the interest rates in the traditional money economy.
• Even though CMIs are private institutions, MONEY 2.0 administrators have the tools to make them adhere to certain standards of conduct, e.g. by only allowing those who have signed an agreement to be plugged into the MONEY 2.0 software, thereby granting them privileged access to MONEY 2.0 participants. (Privileged access could include a loan matching system, in which participants authorize their trusted CMIs to automatically accept loans that meet certain requirements, or other goodies.)
• In MONEY 2.0, interest rates play a certain role in determining other system parameters, most notably transaction fees, balance fees and account limit decay. If loans become too expensive, system administrators may have to adjust these parameters to ensure that attempts to artificially inflate individual money creation limits remain unprofitable.