Interest and the Role of Trade Exchanges

As cashless exchange becomes an ever more significant portion of total transactions in the economy, the regulatory issue will become a greater concern. It is important that trade exchanges NOT be perceived as issuers of credit, so as to avoid running afoul of banking regulations and possible tax liabilities. Everything that trade exchanges do needs to support the position that the role they play is that of “third-party record-keepers” and that it is the members themselves who provide credit to one another.

Paul Suplizio, former Executive Director of the International reciprocal Trade Association (IRTA), has expressed it this way:

“This means members with positive balances are the issuers of credit and the exchange has only administrative powers, delegated by the members, to regulate credit extension.”

It can be argued that the credit clearing process is simply one of generalizing (collectivizing) the longstanding practice of businesses transacting trades with one another on “open-account,” i.e., selling to one another on credit and allowing some period of time in which to pay.

It has properly been a cornerstone of the trade exchange business that there is no interest charged on negative account balances and no interest paid on positive balances. Therefore it cannot be argued that trade exchanges are acting as banks or lenders of money.

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3 responses to “Interest and the Role of Trade Exchanges

  1. Timely post, Thomas. I am setting up the infrastructure for a trade exchange now, and I believe I have the solution to this potentially dangerous dilemma.

    Namely, the trade exchange is a broker, paid on a per-transaction basis. There is no question of credit-issuance or interest charged.

    On the related issue, default should not be a problem, as credit should not be advanced. Participants should be limited to what they have already accomplished, or what they have deposited in the form of real bills.

  2. I completely agree on the positioning as “record keeper”. That said, I’m not sure whether the difference between a credit issuer and a record-keeper is in the practice of interest. I would say it lays in how default of a participant is handled. Is there a separate entity with assets and liabilities using its equity to deal with default, or is default handled by participants themselves, and if so how?

    • Being interest-free makes it easier to argue that the credit is not being advanced by the exchange operator. Defaults I think are typically written off agianst an insurance fund that is bundled into the transaction fees.

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