What is a mutual credit currency?

Modern money is often called ‘fiat’ money. The Latin word fiat means ‘let it be’; most money is essentially spoken into existence by banks when they issue loans. It exists as a set of entries in the bank’s ledger: a credit on the borrower’s account and a debit on the bank’s account. This affords banks an immense amount of power over the supply and flow of money.

Mutual credit works similarly from an accounting perspective, but has vastly different consequences for an economy. Each party in the system has their own single ledger that records every exchange they’ve participated in. When two parties agree to exchange something of value, the buyer’s account is debited and the seller’s account is credited by the same amount.

Negative and positive balances can be interpreted in a few different, complementary ways:

  • A negative balance is a ‘debt’, but to the economy at large rather than to any individual. This interpretation is a somewhat negative framing, though, and not popular among mutual credit proponents.
  • Stated in more positive terms, when they go into a negative balance, a buyer is creating their own money, backed by their promise to deliver future value to the economy.
  • Conversely, in choosing to receive a credit from a buyer, a seller can be thought of as accepting the buyer’s money into the system on behalf of the entire economy. This credit then becomes a tradeable promise that anyone can redeem for goods and services that the initial buyer can offer.

Mutual credit tends to be appropriate for community currencies. Often, a local economy falls into a depression not because people don’t have goods and services to exchange, but because there aren’t enough units among them to facilitate trade. This is a major risk of bank-debt money: in controlling the supply, it creates a scarce money. This ends up confusing the money’s dual purposes as a measurement of value and a store of value, which causes supply to stagnate. Mutual credit, as a non-scarce currency, becomes simply a measurement of value.

Bank-debt money also comes with conditions: interest must always be repaid on a loan. That means there will never be enough money in the system, because the bank always asks for more than it’s given. This causes people to either extract value from other places, resulting in ‘externalities’ such as econological destruction and poverty. Mutual credit typically does not carry interest, which keeps value within the system.

Holochain is a great match for building mutual credit currencies because each agent carries their own ‘source chain’, a ledger of actions that they’ve taken. Its local-first design, in which each participant contributes their own computing power and communicates directly with other participants, makes it suited for community currencies, especially in communities that can’t afford server maintenance expertise.


NB: HoloFuel is intended to be our first example of a Holochain-based mutual credit currency, designed specifically for facilitating transactions for web hosting. You can also read more about mutual credit on Holochain in @artbrock’s article Beyond Blockchain: Simple, Scalable Cryptocurrencies. (Note: it was written before Holochain existed, but replace the term ‘Ceptr’ with ‘Holochain’ and it’s pretty applicable.)


A post was split to a new topic: Sovereign money and mutual credit: what about freeloaders?

Thanks Paul - I think that’s a great introductory summary. Some comments to hopefully elaborate.

“Fiat” is “their” money - corporations, banks and gov. (cbag?) - a token for settling taxes basically, that promises to give you the government you (or some others?) pay for. It certainly isn’t your money or mine, as you can tell when you spend it and, as ever, it’s gone and gone for ever. Their money is linear, competitive, extractive, elitist and exploitative. Its form is that of a fictitious commodity, maintained as scarce by privileged issuers, and necessarily creates a rich-poor power system favouring the rich. And there’s very little we can do about that.

Mutual credit is sovereign issue of money that resonates within its network and is always there for redemption by the issuer. It’s truly “our” money and circular by form, function and design. “Our” money is collaborative, cooperative and common. Circular means it comes back to the issuer.

On the “debt” word - it really doesn’t apply here. A debt is an arrangement between two agents - Joe hasn’t yet paid Fred and so still owes something to him. This interpretation is 100% dependent on the idea that m/c isn’t really money.

The core premise of mutual credit as a money is that when Fred accepts Joe’s transfer of co$345 in currency system “xxx” then Joe has paid. Fred is “credited” - he holds promises issued by Joe. Joe has declared his commitment to provide services/goods in the “xxx” community. M/c is money and payment extinguishs debt.

Also, the “credit” word is easily mistaken here. The conventional use of the term means one agent is allowing another to undertake a debt to them - yet another power relationship where the person or business “given credit” is on a hook, generally enforceable by the powers that be there vested.

In m/c, in contrast, Joe acknowledges / values / confers credit on Fred for whatever service or goods Fred has provided to Joe (or maybe a friend of Joe). Credit is a positive mark on Fred’s record. Joe has work to do, if he is to remain credible, and that’s easy if Joe is willing, because the money is there.

There is however a further elaboration of the m/c form that is I think particularly relevant to the holo community.

Historically, m/c has been promoted as system centric. Conventionally, systems are created - timebanks, b2b networks, LETSystems - and people and organisations (business, non-profit, government) join them and become “users” of that currency. This is all very central and patriarchal, with the agents defined as subsidiary parts of some formal or informal corporate entity. This is often workable, indeed can be a required feature - that an authority controls the agents.

What will become more common is that agents recognise and are recognised as sovereign - that there really need NOT be a formal network, any more that using a hashtag on twitter means membership of a formal community.

An agent - person or organization - can better see themselves as accountable individuals earning and spending as though they are in the centre of a vortex, a smoke ring, where their spending into the cloud of others using that currency distributes throughout that cloud and generates demand for their services, their earning. The agent doesn’t know or need to know how it happens, they are responsible for their own business and NOT for that of anyone else. So long as it works for the agent it makes sense to do it; when it doesn’t, when either earning or spending is tiresome or otherwise unproductive of value, the agent reduces (or ceases) use of that channel.

Agents will play in many different smoke rings, as they find fit.

You see how this relates to holo.


Thanks @pauldaoust - this is a much needed conversation. I’m a big fan of mutual credit, and would always advocate them for distributed systems.
I do think there’s different dimensions at play while using them as fundraising instruments since they don’t operate on the same scarcity principles as equity/crypto. They tend to be value stable, and the promise to early backers is a kind of a ‘discount’ rather than low valuations. (Like Holo, as you rightly pointed out)
Just thought I should put this out there since there are a few apps thinking about fundraising models right now, so it would be nice to have a conversation going.


Great concept. Keeping the ledgers transparent will allow community members to support the account with depts and request for services from it. This way creating balanced value through the whole community ecology is possible!


Just read “Utopia for Realists: And how we can get there” and found a great example that happened in May 1970 in Ireland. The bank employees went on strike with a lockdown of about 85% of the country’s reserves. Some quotes from the book:

The result: Nothing much happened at all. The Irish started issuing their own cash. They continued writing checks to one another as usual, the only difference being that they could no longer be cashed at the bank. Instead, that other dealer in liquid assets - the Irish pub - stepped in to fill the void.

In no time, people forged a radically decentralized monetary system with the country’s 11,000 pubs as key nodes and basic trust as its underlying mechanism. By the time the banks finally reopened in November, the Irish printed an incredible GBP 5 billion in homemade currency. They were able to manage so well without banks because of social cohesion.

But of cause there were problems: Companies had problems acquiring capital for big investments.

Question: Would we be able to create something like this as a system to fall back on when the next financial crisis hits us (e.g. in 2020)? Is there something in the works?


Looks like real world m/c is a real thing in China where “businesses are short of cash. Instead, more than $200 billion in i.o.u.s — known in the dry world of finance as commercial acceptance bills — are floating around the Chinese financial system, according to government data.”


Irish Question, Irish Answer

a simple solution, elegant and unplanned.


What i really hate is the business guided creation of fiat money( taking a loan from banks with a “so they say” good business plan) , almost the whole human creation is guided by silly business plans, and we can touch the consequences…
i guess we could do much better, many things that don t necessarily brings money , could be bringing real value for life in general, and we don t do it cause of fiat money system… thats silly, and everything is getting sillier with time passing…
Money is liquid will, too important thing to be left to this ridicoulous system.
Our will is getting sick…

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Just published the first of a series on mutual credit; hope this bit of history showing the natural evolution of gift → IOUs → mutual credit (and why barter was never a viable option) is simple and understandable. Please feel free to share with anyone who is trying to understand – it doesn’t talk much about Holochain. And it has scribbly animations! :slight_smile:


Is there any type of PoW or PoS involved with the mutual-credit inception?

nope, not unless you want there to be. It’s not inherent to mutual credit, but it may be necessary for preventing fraud if you’ve got a really big networks of participants who are unknown to each other and aren’t pressured by an real-life motivation to behave themselves.

The concern here is that, if it’s cheap to both create and run a node, then you could create a bunch of malicious Sybil nodes and overwhelm the ‘immune system’. All you need to do is generate a keypair and fire up the code, and every node has equal power in validating a section of the network’s data because there’s no skin in the game as there is with mining or staking. While this shouldn’t matter in theory – because risk is spread out over so many people – I do suspect that it could reach a critical point where the number of malicious actors overwhelms the good actors’ ability to gauge the quality of data they’re seeing.

But rather than PoW or PoS, I’d rather see a more low-cost Sybil protection mechanism. Proof-of-personhood is good, because that prevents you from creating too many nodes. But this often involves KYC, which some people are not comfortable about. (@resilience-me has some interesting thoughts on anonymous proof of personhood; search this forum for ‘Pseudonym Pairs’.)

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The evolution of mutual credit, Ryan Fugger’s invention from 2003, “multi-hop mutual credit”, solved the fake accounts problem. Pseudonym Pairs is good for global consensus, mutual credit (what it became after multi-hop model was realized) is only an agreement between two people at most, therefore doesn’t need any consensus algorithm like PoW or PoS since there is no consensus.

Here is a promotional image I made for for Pseudonym Pairs a few days ago. The test net is still just 4 people + one joining this month. It can grow by doublings, 2, 4, 8, 16… 1 billion.


thanks for jumping into the conversation @resilience-me ! Never occurred to me that trustline networks, a la Ripple, remove (or seriously reduce) the need for proof of personhood, but I think you may be right.

Interesting thing about Ripple: neither @mwl nor Ryan Fugger describe it as mutual credit, but the Trustlines documentation does (Trustlines is basically Ripple on Ethereum). Could create a lot of controversy if we wanted to talk about the distinctions; am I right, Michael? :wink:

(Great graphic BTW @resilience-me)

Thanks for the mention.

To tell the story of Ripple the best I can, I think Ryan called it mutual credit. It is mutual credit, it just takes it to the natural logical next step, making it more mutual credit than earlier concepts of mutual credit.

From page 3 in Ryan’s second whitepaper from 2004,

There’s no reason why many mutual credit networks in different denominations couldn’t operatesimulaneously on the same servers.

He has acknowledged being inspired by Michael Linton many times. His invention solves fake accounts completely. My invention from 2012 (link), makes it possible to add a guaranteed basic income to it.

That I happened to end up also building a global “proof-of-person” is a long story…

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True, he does describe it as ‘going beyond’, and TBH I really like it (I’m a sucker for a clever idea). The critique I’ve heard is that what it lacks, that mutual credit has, is the idea of a group of people stewarding a common pool of credit rather than being accountable to specific peers for specific amounts of money.

From my PoV it doesn’t seem like group credit was superior, just that no one had found a way to scale money without a community before Ryan Fugger suggested scaling it in the same way the internet scales. I know Holochain is based on group mutual credit.

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I’ll go with Ryan - that Ripple isn’t mutual credit. Mutual credit is an internal process in a community and Ripple was designed expressly as a way out of that collaboration - the credit holder getting out with what they can. “IOU” terminology generally indicates an interest in claim and assignment - which could perhaps be called “mutual liability”, but who wants that?
So recently I’m deprecating “mutual credit” - a term devalued by its general application - and restating as mutual commitment / common money, which speak better to what makes such systems work in my view.


The logical validators of a mutual credit transaction are the two participants and maybe “the network” as a group agent to enforce the agreed-upon credit limits.

@mwl did you ever use credit (account positive or negative balance) limits in a mutual credit/commitment/common money network? If so, how and when were they enforced??