What’s the plan?
The Welsh Government has awarded Circular Economy Wales £100,000 from its ground-breaking £4m Foundational Economy Challenge Fund, to fund the development of a Welsh digital currency, the Celyn mutual credit system. This initial funding covers a consultation and a pilot in North Wales.
The model - based on the exchange of services and goods, without the need for conventional payment method – is hoped to boost the Welsh economy by £250m and further enhance economic development to create more resilient communities.
How would Celyn work?
Celyn would work as a business-to-business credit mutual system, to help small and medium sized enterprises businesses exchange services and products with other local companies, without using the British pound or other state currencies.
Mutual credit systems resemble credit unions – not-for-profit organisations which provide competitive rates – and like local currencies, their intention is to benefit the local economy. But contrary to the Bristol Pound, for example, Celyn is not backed by the pound sterling. It is a form of digital currency, not a cryptocurrency. The distinction is important: digital currencies are centralised, while cryptocurrencies are decentralised, regulated by the community, and Blockchain-based.
Celyn is largely inspired by the successes of Sardex, a similar system which was introduced to overcome the effects of the 2007-08 financial crisis in Sardinia. Sardex itself was inspired by the Swiss WIR and the European Payments Union, which helped combat the effects of the Great Depression and WWII, respectively.
Why is Wales replicating this model?
Traditional currencies are slowly making way for new digital barter systems, and it is true that Wales and Sardinia share similarities. Both regions have a business demography dominated by SMEs at 99% and Sardinia is an autonomous region of Italy, and Wales, a devolved region of the UK. This political leeway gives Wales greater freedom in establishing the digital currency, and greater independence in its application and regulation.
Besides, with Brexit bringing many uncertainties, implementing a model proven to assist in times of economic turmoil seems sensible. Although chances of another financial crisis like that of 2008 happening are slim, moving towards a separate form of currency could lead to a stronger and more autonomous Wales.
What are its limitations?
Because currency is a matter reserved to Westminster and the UK itself is constrained by European law – at least for now – the constitutional legality of Celyn is questionable. Its development depends not only on the Welsh Government’s definition of money and currency, but also on UK law under the Financial and Services Markets Act 2000, as well as on definitions found in the EU’s Markets in Financial Instruments Directive and E-Money Directive – although Wales will likely need to produce some subsidiary laws to make up for the lack of legislation surrounding this area.
As a centralised digital currency launched by the Welsh Government, Celyn may also require the Welsh Treasury to take on an extended role, or the establishment of a separate treasury, to ensure it is appropriately managed and governed.
Finally, many SMEs in Wales trade with the rest of the UK in pounds. This makes it hard to persuade non-Welsh firms to partake. It may even be difficult to persuade Welsh firms to join. Sardex was successful and appealing because it offered a stable alternative to an irregular fluctuating currency in the context of a major financial crisis. In comparison, the pound sterling is strong and stable.
Will it succeed?
Many important factors vary from one region to another and there is no guarantee that Celyn will succeed in Wales.
But as Welsh Deputy Minister for Economy and Transport, Lee Waters, said at the launch of Foundational Economy Challenge Fund last November, the aim is "to fund experimental projects that are collaborative and innovative, test which governmental interventions works best, and challenge the conventional ways of doing things".
With further state-run digital currencies in the pipeline in China, Brussels and Canada, it will be interesting to see the results of the Welsh Government’s initial consultation in North Wales, and whether it inspires more regions to adopt the model.
Rachel Hillier leads Capital Law’s financial services team www.capital-law.co.uk
