An Argument for Regulation of the Reciprocal Trade (Barter) Exchange Industry
Daniel Evans, Ormita Commerce Network

It is well known that trust is the corner-stone of the financial services industry.
Keynote speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, The Asian Banker Summit 2012 “Trust as a Pillar of the Industry”, Bangkok, 26 April 2012.

Introduction Trust is a critically important ingredient in the recipe for well-functioning markets and a successful and vibrant economy. Unfortunately, due to market scandals, incompetence and fraud, trust in our neighbours is something that is in shorter supply today than any other time in history. As Alan Greenspan once remarked: "[O]ur market system depends critically on trust—trust in the word of our colleagues and trust in the word of those with whom we do business."1 Despite outward appearances, public confidence in the integrity of the reciprocal trade exchange industry is alarmingly low. While numerous factors have contributed to this problem, one of the most potent is the widespread failure of reciprocal exchange networks of all sizes over the past 30 years. These failures include the spectacular collapses of large commercial exchange networks such as Bartercard (in USA, Canada, India, China, Hong Kong, Singapore, Turkey, South Africa, Jordan 2 3 ), BarterTrust/Tradaq (USA, UK, Canada) 4 , BarterNet/Intagio (Canada, Mexico, USA & Europe) and Bigvine (Australia, Canada, USA)5; through to the dramatic downsizing of the once-wildly successful government supported 6 Argentinean “Red Global de Trueque” community currency system 7 , which grew to a peak of nearly 1,000,000 participants and an annual trade volume of $4-600 million US dollars8 before dramatically halving in size almost overnight910.
1 R. William Ide III & Douglas H. Yarn, Public Independent Fact-Finding: A Trust Generating Institution for an Age of Corporate Illegitimacy and Public Mistrust, 56 VAND.L.REV. 1113, 1114 (2003) (quoting Federal Reserve's Second Monetary Policy Report for 2002: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. 11 2002)(statement of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System));see also Elizabeth Warren, Wall Street's Race to the Bottom, WALL ST.J., Feb. 9, 2010, at A19 ("Banking is based on trust."). 2 Bartercard PLC Interim Results for the six months ended 30 September 2005. Bartercard Ltd, (Company Registration Number 1823753) Report and Financial Statements, Year ended 30 June 2008. Bartercard Ltd Circular, "2 for 5 Open Offer at £10 per share and a Notice of Annual General Meeting", 23rd January 2009. Bartercard Ltd, Annual Report dated Year ended 30 June 2009. 3 It must be stressed that these cessations of business are not indicative of all Bartercard operations. Bartercard maintains largescale reciprocal trade exchange operations in Australia, New Zealand, Thailand, United Arab Emirates United Kingdom and possibly elsewhere. These operations may not have been impacted by failures of other Bartercard licensees elsewhere and the author specifies that no inference should be drawn in relation to the failure of some Bartercard branded exchanges and the apparent success of others. The writer chooses not to speculate on the reasons for such failures or successes. 4 James Stodder, Reciprocal Exchange Networks: Implications for Macroeconomic Stability, Rensselaer at Hartford, August (2000). 5 Susan L. Groenwald, A look back at the barter industry, BarterNews, Issue 62 (2005). 6 *But not regulated 7 Heloisa Primavera, The social currency from the Global Barter Network in Argentina; Back to old times or new tools for the III millennium? (March 1999). 8 Miguel Yasuyuki Hirota, The RGT (Red Global de Trueque)- Global Barter Network – in Argentina. Univ. of Tokyo, (2005). 9 M. Colacelli & D. Blackburn, Secondary currency: an empirical analysis. Columbia University, (2006). 10 Ruth Pearson, Argentina's Barter Network: New Currency for New Times? Bulletin of Latin American Research, Vol. 22, No. 2, pp. 214-230, (2003).

Reciprocal exchange corporations still in operation have also not been without their difficulties, with the founder and CEO of ITEX being jailed for related accounting fraud11, while the former president and financial controller were subjected to heavy SEC fines12. Even industry associations have also not emerged unscathed, with the National Association of Trade Exchanges (NATE) having been engaged in longrunning public spats and litigation with its former Chief Executive Officer13. This has led many to doubt the stability of exchange groups in general1415. Failures have also manifested in astoundingly large numbers in local trade exchange networks – most of which have collapsed quite soon after getting off the ground16. As a former IRTA director put it: “In addition, many of these companies … had a flawed business model. The model … where transaction fees were charged in trade dollars rather than cash, and where deficit spending was encouraged as a way to “prime the pump. There were many barter exchange failures, a number of wellmeaning exchange owners (and some not so innocent) who defrauded their customers in the process of trying to survive, and many small businesses hurt in the process.”17 This breach of trust — in the form of deficit spending by exchange operators, poor credit control procedures and fairly reckless risk-taking by some, and in the form of dereliction of duty by others — has led the industry to have an astounding 1st and 2nd year combined business failure rate of almost 93%18. The fact is that barter exchange failures regularly occur, and such failures contribute to the overall lack of trust in the multilateral exchange mechanism. Furthermore, such failures usually cause losses to: 1. Shareholders 2. Reciprocal exchange network members19 No specific knowledge is required to start a barter exchange and network, directors and managers do not need to have any qualifications or background in economics, finance, banking, credit control, business management or even basic maths20. No one will even check if you have a high-school diploma. Perhaps because of the non-regulation issue, many of the fundamentals of basic financial services management have been ignored by both the International Reciprocal

11 SEC Vs ITEX Corporation, Terry L. Neal, Michael T. Baer, Graham K. Norris, Cynthia Pfaltzgraff and Joseph M. Morris, CIV. No. 99-1361 (HA) (D. Ore. September 27, 1999). Litigation Release No, 16305, 28 September, (1999). 12 [SEC v. Itex Corporation, Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris, CV 99-1361 BR, D. Ore.] (LR-16536; AAE Rel. 1256); (In the Matter of Cynthia Pfaltzgraff, CMA - Rel. 34-42753, AAE Rel. 1255, File No. 3-10198) 13 See lawsuit in Lake County Pleas Court, Lake County, Ohio, Case No, 09 CV 0035 between Plaintiffs New England Trade, Inc., International Monetary Systems, and Alamo Barter, and Defendants, National Association of Trade Exchanges, Thomas H. McDowell and American Trade Exchange and subsequent settlement agreement dated 5 November, (2009). Copies available online at www.barternews.net (Retrieved 11 June 2012). 14 Gabriela Cerioli, Bartering – Here to Stay? IPS News, 9 April (2009). 15 Bartercard is still a member of IRTA despite a history of licensee failures. 16 Historical records of “live” trade exchanges for the years 2005, 2005, 2006, 2007 and 2011/2012 are available from the author 17 Susan L. Groenwald, A look back at the barter industry, BarterNews, Issue 62 (2005). NB: Susan Groenwald is a former director, International Reciprocal Trade Association (IRTA) and first-ever recipient of an IRTA Lifetime Achievement Award. 18 Reciprocal Exchange Network Survey, XO Limited (2006). 19 It should also be noted that, although not examined in this paper, this list can also be extended to include employees, creditors of the reciprocal trade exchanges, and others. 20 G.Calvo & C Végh C, Currency substitution in developing countries: an introduction. IMF Working Paper, 92/40, (1992).

Trade Association (IRTA) 21 and National Association of Trade Exchanges (NATE). Highlighting this fact is that neither association openly publishes their annual returns or seeks criminal checks on members or directors of their respective organisations. It could be argued that, where member assets are at stake, the completion of such details should be mandatory, just as they are in all other fields of financial and asset management services22. Another contributor to the mix is the relatively easy access to free open-source (CYCLOS, Community Forge, Time Banks), free hosted (CES), paid hosted (BCI, BCLSoft, DoBarter, eValues, GETS, Virtual Barter) and/or stand-alone (TradeWorks, Platronix) software solutions for reciprocal trade exchanges. The rapid rise of such providers, combined with void in regulatory controls, means that literally anyone can start a reciprocal trade exchange network within a matter of hours. No Knowledge Can Be A Dangerous Thing A quick survey reveals that the majority of barter exchange operators tend to be soleoperators with little, or no, knowledge of basic economic principles and procedures and, for the most part, no experience in banking or economics. Many new start-ups come from members of existing exchanges who decide to start their own in order to reduce fees and, possibly, access unlimited free capital. While the idea of operating a barter exchange may be appealing, the fact is that a reciprocal exchange network itself is a parallel monetary system with an arguably similar number of complexities23 as the normal cash marketplace24. There are no publically available, agreed, industry-standard guidelines25 (or methods of enforcement) for sustainable trade creation, for credit criteria/credit control, for data security, for ethics and so on26. The fact is that very few barter exchange owners understand the complex economic principles which drive monetary supply. Countering this argument, of course, is the fact that, many bank managers don’t either. Fortunately bank managers don’t set economic policy; they simply operate according to a well-defined set of principles
From written and oral correspondence between Ormita commerce Network (Ormita) and the International Reciprocal Trade Association (IRTA), 21 November 2011 - 18th December 2011. Ron Whitney (IRTA CEO), Annette Riggs (IRTA Director) & Daniel Evans (Ormita CEO). 22 See Section 1507(a)(2)(A) of the SAFE Act, implemented by Section 365.103(d)(1)(ix) of the FDIC’s Rules and Regulations and the U.S. Mortgage Licensing Act of 2008. Fingerprint submission is also discussed in the preamble to the final rule on page 44670 of the Federal Register Notice. The role of a National Bank Director, The Director's Book, Office of the Comptroller of the Currency, October, (2010). Also see New Jersey Specific Financial Industry Requirements http://www.state.nj.us/dobi/banklicensing/rmla/new_corresmortlend.html (retrieved 12 June 2012). For New Zealand see Review of Suitability of Bank Directors and Senior Managers, Reserve Bank of New Zealand, Prudential Supervision Department Document BS10, March, (2011). Other examples are pending. 23 Masayuki Kokabu, Osamu Katai, Takayuki Shiose and Hiroshi Kawakami, Design concept of community currency based on fuzzy network analysis. Kyoto University, Department of Systems Science, Graduate School of Informatics, (2004). S.I. Boyarchenko and S.Z. Levendorskii, Search-Money-And-Barter Models of Financial Stabilization, University of Michigan Business School, The William Davidson Institute, Working Paper Number 332, July, (2000). Jun Daito, Sustainability Innovations and Local Currency Systems: Bridging the Green and Brown Agendas, University College London (UCL), The Development Planning Unit (DPU) University College, (2005). 24 Stephen DeMeulenaere, An Overview of Parallel, Local and Community Currency Systems, Complementary Currency Resource Centre (1998). 25 F.H. Capie, Dimitrios P. Tsomocos, Geoffrey E. Wood, E-Barter vs. Fiat Money: Will Central Banks Survive? City University, Bank of England, FMG, Said Business School and St. Edmund Hall of University of Oxford, 28 January, (2003). 26 Capacity Trade and Credit: Emerging Architectures for Commerce and Money. Z/Yen Group Limited. City of London Economic Development, (2012).
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given to them by those who (supposedly) do understand. One could potentially take the counter-argument a step further and point to recent failures in the banking industry however, reports show that “the crisis in the banking sector occurred not because of a lack of regulation – the sector has in fact been subject to a very extensive rulebook – but because of the ineffectiveness of that regulation”27,28,29. How A Mutual Credit / Reciprocal Trade Exchange Network Functions30 Federal currency is fiat and put into circulation through the creation of interestbearing debt. In a mutual credit (reciprocal trade) exchange network, goods and services ultimately pay for other goods and services, and money (which is just an intermediary device in the exchange of assets) is dispensed with. Members spend barter dollars with any other member of the exchange, thereby eliminating the need for a double coincidence of wants between members. As one member spends, another member earns. The sum of all barter dollars for all member accounts in the network is always zero even though some accounts will be in debit and others in credit. Thus, barter currency is not a form of “money” and is actually a form of specialised accounting. The greater the number of people who have “faith” in accepting “barter dollars” as a record of their obligations to others, the higher velocity that the currency may obtain. Unfortunately, exchange group members may receive little education about reciprocal trade, its potential uses and possible downsides (availability of products and services due to a smaller market than the cash economy) and many can end up finding it more difficult to use than cash. Arguably participants should understand the implications of being involved with limited set of trading partners, the cash costs required to “create” a new sale (a barter dollar) and the risks of not being able to redeem those barter credits should the exchange operator fail. The problem is that, with no public library or general guidelines published by either IRTA or NATE, there is no easily accessible source of information for the general consumer. The Problem of Deficits & Deficit Spending Unfortunately the following scenarios can, and does, happen: 1. The exchange issues too high a credit limit to a business that will never be able to repay it (or not be able to repay it within a reasonable amount of time). E.g. a florist is given (and spends) a $20,000 credit limit yet is only able to comfortably accept $500 in barter per month- resulting in the member eternally being in debt and “monetary supply” being restricted. 2. A member is not credit checked (or is having unforeseen difficulties) and runs up a huge commitment and then leaves. This can be resolved through careful

The Future of Financial Regulation, Policy Paper, the Association of Chartered Certified Accountants, (2012). Sabrina Pellerin, John Walter, Patricia Wescott, The Consolidation of Financial Market Regulation: Pros, Cons, and Implications for the United States, Working Paper No. 09-08, Federal Reserve Bank of Richmond, May (2009). 29 Stefano Pagliari & Kevin L. Young, Leveraged Interests:Financial Industry Power and the Role of Private Sector Coalitions, Balsillie School of International Affairs, University of Waterloo, May (2012). 30 This differs from the (misnamed) “Corporate Barter Industry”. For a comparison between “retail” and “corporate” barter see: Barbara Cresti, US Domestic Barter: an empirical investigation. Journal of Applied Economics, 37, 1953–1966. (2005).
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monitoring of all accounts and ensuring that each member has an active plan to trade out of any debt within a given time. When legal action is necessary to recover a debt any cash awarded to the exchange is often less than the total balance owing and the barter exchange owner almost always keeps this cash themselves even though they have a real obligation to repay the debt to the exchanges marketplace in goods or services - which they can acquire for the recovered cash and offer for trade dollars – thereby maintaining the balance of debits and credits across all members. Most barter exchanges simply do not have an internal mechanism for managing bad debts or poor monetary flow within their network because they lack the detailed knowledge of the economic principles required to operate a monetary system. 3. The exchange owners make purchases using barter dollars, thereby going into debt in the exchange, and never repaying this balance. Bartercard, for example, has openly states that this is something they regularly do: “The Company also has the ability to spend trade dollars with no obligations to the exchange. The Company has historically spent more trade dollars than it has earned.31” “The Group has historically spent more trade dollars than it has earned, which is in line with international standards on Trade Exchange fiscal management .... At 30 June 2008 the Group had a bartertrade credit balance (deficit) of $51,761,28632." To some, the attraction of owning a private and legal printing press for the express purpose of printing your own money that you never have to repay is addictive. When you see a member with something you want you just give yourself some barter dollars and go shopping, safe in the knowledge that no one can force you to pay it back. Exchange operators, too, have a tendency to insert particular clauses in their Membership Agreements, giving them the rights to self-spend into the exchange, thereby giving the potential to create deficits in the network, which can result in a loss of velocity in transactions between participants: “That I/We acknowledge, consent, and grant (exchange name removed by author) the right and power to borrow from the clients and spend within that Exchange System, an amount in trade dollars, which at any time shall not exceed two (2) years gross revenue of…(exchange name removed by author). That I/We recognize and grant to (exchange name removed by author), its shareholders, officers, and subsidiaries all rights and privileges to act as a client within the Exchange System33.”
Bartercard PLC Interim Results for the six months ended 30 September 2005 Bartercard Ltd, Annual Report dated Year ended 30 June 2009. Client Agreement of well known barter trade exchange and member of the International Reciprocal Trade Association (IRTA). (retrieved, March 2006).
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The problem of deficit spending can therefore be viewed as wide-spread and may possibly be seen as one of the largest contributors of exchange network failures. The constant lobbying of industry associations by various reciprocal trade networks has had little impact, with IRTA issuing a May 2012 advisory memo simply which may be summarised accordingly: a. Deficit spending is acceptable to IRTA b. Deficit spending should be less than, or equal to, 3 months barter trade volume of the network Imagine therefore, depositing your money with a bank who turned around and told you that they were going to keep the next three months of your income, spend it, and you’d have no recourse to claim it back if the bank collapsed as a result of this behaviour. Unfortunately this is essentially what may take place under such a rule. In direct contrast to this, the general public has been calling for the cash-based financial services sector to tighten up, not loosen, deficit spending rules34. Supporting the argument that many reciprocal exchange networks are not well managed are studies published in the Journal of Applied Economics. These series of reports analysed data released by IRTA on barter volume in North America between 1974 and 1999, which were then correlated to macroeconomic data for the same time period (supplied by the US Bureau of Economic Analysis (BEA)) and go on to state: "While commercial barter follows the economic cycle, corporate barter presents a counter-cyclical feature". The author goes on to state that “data (is) not comprehensive of total barter occurring in the USA, as they concern only the activity of barter organizations affiliated to IRTA,” and that the data provided is “not of a high quality.” 35 Regulation Successes Some forms of reciprocal trade are already regulated. A prime example of this is the area of countertrade (encompassing offsets, switch trades, buy-backs and direct barter). Countertrade has been effectively managed through a combination of standards and/or regulated by the United Nations36, UNCTAD, the European Defense Agency 37 , OECD 38 , many OIC member countries 39 , and the US Department of Commerce (offsets) 40 and many other national agencies. It should be noted that
34 Miguel Fernandez Ordonez, The restructuring of the Spanish banking sector and the Royal Decree-Law for the reinforcement of the financial system, Banco De Espana, 21 February, (2011).; ESA95 manual on government deficit and debt, Office of Official publications of the European Communities, (2002).; Dodd-Frank Act Federal Consumer Regulatory Compliance Items, Titles III, VI, X and XIV, July, (2011).; Matthew Denes, Gauti B. Eggertsson, Sophia Gilbukh, Federal Reserve Bank of New York, Staff Report No. 551, Feb (2012).; Daniel L. Thornton, Monetizing the Debt, Federal Reserve Bank of St. Louis, Economic Synopses Number 14., (2010); Finansinspektionen’s comments regarding EU’s plan to strengthen the capitalisation of large European banks, 27 October, (2011). 35 Barbara Cresti, US Domestic Barter: an empirical investigation. Journal of Applied Economics, 37, 1953–1966. (2005). 36 International countertrade: Yearbook of the United Nations Commission on International Trade Law, Vol. XIX, (1988). 37 The Code of Conduct on Offsets, European Defence Agency, Brussels, 24 October, (2008). There is some debate whether or not this code is legally binding. 38 Non regulatory guidelines and handbook only. See Organisation for Economic Co-operation and Development, Countertrade: Developing Country Practices (Paris: 1985) [Washington DC: OECD Publications and Information Centre, distributor], p.80 39 M. Fahim Khan, Countertrade: Policies and Practices in OIC Member Countries. Islamic Development Bank, (2002). 40 Offsets in Defense Trade, Fourteenth Study, Conducted Pursuant to Section 309 of the Defense Production Act of 1950, as Amended. U.S. Department of Commerce Bureau of Industry and Security, December, (2009).

although no U.S. law specifically regulates countertrade by name, four different U.S. laws regulate imports. The four primary trade laws are the anti-dumping law 41 , countervailing duty law 42 , Section 201 Escape Clause 43 and Section 406 market disruption statute44. Counter-trade statistics are managed by the World Bank who estimates that45: - In 1972 only 15 Countries were engaged in countertrade - In 1983, 88 Countries were engaged in countertrade - In 1996 over 100 Countries were engaged in countertrade Arguably, the well-documented standards and regulations introduced by the World Trade Organisation46, UN and UNCTAD between 1972 and 1983 have had a major impact on the acceptance of countertrade by Governments 47 . More recently the European Commission has issued directive 2009/81/EC48 which creates a common framework for EU defence procurement markets and regulates the use of offsets across the entire European Union. Another example of success through regulation is that of the WirtschaftsringGenossenschaft (WIR), founded in Switzerland in 1934 by Werner Zimmermann and Paul Enz49. In 1997 the WIR introduced an interest-bearing cash account as the first classical bank product available through WIR, completing the organization’s transition to true bank status. In 1998, it went further, changing its name from the “WIR Economic Circle Cooperative” to the “WIR Bank”, immediately marking institutions acceptance within the structure of existing Swiss banking laws. The WIR surpassed ten million francs in 1952 and 50 million Swiss francs in 195850 to 1.627 billion in 2010 - representing circa 0.3% of Swiss GDPs51. Other countries go so far as self-regulating their own international barter trade obligations, by enshrining them in legislation52 . Examples of this can be found in Kuwait53, Philippines54, Pakistan and Indonesia. Government regulation of the commercial and non-profit reciprocal exchange industries does actually exist55, however such regulation is solely focused on clients
19 U.S.C.A. 1671-1677h, (West 1982 & 1985 Supp). 19 U.S.C.A. 1671-1677h, (West 1982 & 1985 Supp). 19 U.S.C.A. 2251, (1985 Supp.) 44 19 U.S.C.A. 2436 (1982) 45 Charles W. Neale, David D. Shipley, J. Colin Dodds, The Countertrading Experience of British and Canadian Firms, Management International Review, vol 31, pp. 19-35, (1991). 46 The 1994 Government Procurement Agreement, signed by over 40 countries, the World Trade Organisation (WTO) states in Article XVI: Offsets in government procurement are measures used to encourage local development or improve the balance-ofpayments accounts by means of domestic content, licensing of technology, investment requirements, counter-trade or similar requirements. 47 Countertrade, Background note by the UNCTAD secretariat, Trade and Development Board, Committee on Economic Cooperation among Developing Countries, TD/B/C.7/82, 28 August , (1986). 48 The European Commission states in a specific Guidance Note on Offset that Member States’ use of Article 346 is too broad. As a result, its interpretation needs to be confronted to the European Court of Justice (ECJ) before it becomes fully applicable. 49 Tobias Studer, WIR and the Swiss National Economy, Published by the WIR Bank, Basel, (1998). 50 Vittorio Lavarino, International Trade Flows Facing the Global Credit Crunch. University of Turin, Faculty of Economics, (2012). 51 Capacity Trade and Credit: Emerging Architectures for Commerce and Money. Z/Yen Group Limited. City of London Economic Development, (2012). 52 Sam C. Okoroafo, A Managerial Approach to Predicting Countertrade Demands by Developing Countries, The Haworth Press, Journal of Global Marketing, Vol. 6(1/2), (1992). 53 Counter-Trade Offset Program, Decision No. 694. Council of Ministers of the State of Kuwait, 26 July, (1992). 54 Phillipine Government, Executive Order 120 s. 1993 55 Scott J.Lochner, Guide to Countertrade and International Barter. 19 Int'l L. 725 (1985)
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who use the platforms, rather than the operators themselves56. Such rules are therefore centred on the recording, and subsequent taxation, of barter transactions: with countries such as Australia 57 , Canada 58 , New Zealand 59 , South Africa 60 , United Kingdom61 and the United States62 taking the lead in developing robust and taxation and accounting rules for participants in reciprocal exchange transactions. Conversely, no specific guidelines or rules exist for exchange network operators themselves. Self-Regulation Vs Government Regulation Modern society suffers from a broad range of problems that have self-regulation as a common feature. Social problems that revolve around the inability of some individuals to control themselves result in corporate crime, Wall Street excesses, phone hacking and trickle down through to teen pregnancy, alcoholism, drug addiction, venereal disease, gambling and domestic violence Self-regulation is a complex, multifaceted process, and so it can break down in several different ways. After 60 years of self-regulation, little (if anything) has been done to stem the tide of failures on the barter exchange industry. Unfortunately regulation is not a popular topic, with many in the industry certain that any form of lobbying for regulation, or even open discussions on the topic, will result in the total destruction of the reciprocal trade exchange industry. “Because some leaders of your organization ... seek to do harm in the barter industry63.” Another example of the fear of regulation can be seen in the public admonishment of a poster to a public internet forum who attempted to open a discussion relating to general barter exchange policies and matters of deficit spending. “IRTA does not feel this is an appropriate forum for discussion of these issues and therefore recommends the concerned parties contact IRTA's Executive Director, Ron Whitney.64” Currently neither IRTA or NATE offer public libraries of resources on the exchange industry and the only other freely accessible library focusing on alternative currency and reciprocal trade exchange is that of the Complimentary Currency Resource Centre (CCRC)65. Despite its grandiose title, the CCRC is primarily funded and maintained part time by a single individual and consists of ad-hoc selections of (mostly) academic materials with a particularly narrow focus on non-profit community currencies. For
56 Some European legislation uses the term "multilateral contact" to refer to countertrade or barter deals in which both parties obtain respective benefits from a reciprocal exchange. See L. Díez-Picazo & A. Gullón: lnstituciones de Derecho civil, Vol. T/2, Madrid, Tecnos, 2nded., 1998, p. 28. This kind of contracts is expressly included in the Italian Civil Code of 1942, as it is in other codes influenced by this, such as the Portuguese Civil Code of 1966 and the Peruvian Civil Code of 1984. 57 http://www.ato.gov.au/print.asp?doc=/Content/63086.htm 58 http://www.cra-arc.gc.ca/E/pub/tp/it490/it490-e.html 59 http://www.ird.govt.nz/resources/file/eba3c44b28fd0fd/ir899.pdf 60 http://www.sars.gov.za/Tools/Documents/DocumentDownload.asp?FileID=56808 61 http://www.hmrc.gov.uk/vat/managing/special-situations/samples.htm 62 http://www.irs.gov/taxtopics/tc420.html 63 Mr Dariusz Brzozowiecz, Letter to the Author, IRTA Director & CEO of Barter System Poland, 30th November, (2011). 64 Excerpt of statement made by Annette Riggs, IRTA Director, Think Barter Group, Retrieved 1 Dec, (2011). 65 See http://www.complementarycurrency.org

consumers, accessing information critical to the decision making process, is a key element in eliminating trust-based failures and bolstering the transparency of any financial services industry66. According to reports by Professor James Stodder of Rensselaer at Hartford University, “IRTA activities are less public and less centralized, and therefore, far less subject to the scrutiny of other customers”. Stodder goes on to reveal that “IRTA data, too, is not of the highest quality”. Accordingly, IRTA performs no empirical studies of its members trade volumes, does not openly reveal the annual trade volume for its "Universal Currency" (a mechanism of reciprocal exchange between IRTA member organisations), nor does it publish its annual accounts to non-members (and therefore to consumers of reciprocal trade services). Fortunately, regulation has meant that high quality data does exist in the USA, where all commercial barter credits count as regular income and must be filed on Form 1099-B of the US Internal Revenue Service67. As an example of misapplication of such regulation this statistical data is not available to the public. With IRTA 68 and NATE 69 reporting that more than 500 reciprocal trade exchange networks exist within North America, adding to the 2,000 operating globally, one must question why IRTA membership has fluctuated throughout the years from as low as 21 through to 63 (as of 2012)70 members. Claiming to be representative of the entire industry – while having a membership of only 3.15% - may be seen as somewhat self-serving. Even if not a single IRTA member collapsed in the history of the Association, it is easy to see that “self-regulation” has not been a success by any statistical measure. Adding to the problem of industry self-regulation is that both IRTA and NATE excludes various types of members and is, therefore, unable to provide a basis for supporting the “entire” reciprocal exchange industry. Community currencies, time banks, countertrade organisations, offset trade specialists and commercial banks are all excluded from membership71. Corporate barter exchanges are also notably absent from the IRTA/NATE roster, with only 7 listed (out of an estimated 600 worldwide); a percentage of 1% of the target market. Large industry players have also, time and again, refused to participate in IRTA because of internal politics – with most of the European players such as RES (Belgium, 70,000 card-holders), Nordic Barter (Iceland), Anatolia Barter, Avrasya Barter, Bartermen, EminBarter (Turkey) and others across Continental Europe adamantly refusing to become involved. Software Providers And Regulation

John Carson, Self-Regulation in Securities Markets, The World Bank Financial Sector Policy Group, August, (2010). James Stodder, Reciprocal Exchange Networks: Implications for Macroeconomic Stability, paper presented at the International Electronic and Electrical Engineering (IEEE) Engineering Management Society (EMS) Conference, Albuquerque, New Mexico, August (2000). 68 See International Reciprocal Trade Association (IRTA) Reciprocal Trade by Geographic Region (per year), 2009/2010 Estimates, http://www.irta.com/component/content/article/39.html, retrieved 16 June (2012). 69 See National Association of Trade Exchanges (NATE) press release dated 23 September (2004). http://www.nate.org/articlesdetail.asp?id=827pageno=1 70 http://www.irta.com 71 This may not be by design. IRTA’s Executive Director, Ron Whitney, has stated that he has been unable to convince these types of organisations to join IRTA and, with regards to Countertrade, associations “may” already exist for those involved in this particular field of reciprocal exchange.
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When it comes to regulation, software providers may have a vested interest in maintaining the status-quo . Average start-up costs for online barter software range from $US10072 to $US50073, with ongoing monthly fees from $50 to $US250 per exchange. Fees are also typically capped regardless of the trade volume of the barter exchange organisation using the software. With such low levels of per-unit income it is easy to see that, even at $US250 per client / month, the software developers require a significant number of reciprocal trade exchanges in operation in order to break even. These same software companies can be seen regularly touting for business in the forms of e-books (which cite how easy it is to start a barter exchange 74 ), through to maintaining a vast array of beautifully developed websites which prompt people to start their own barter exchange systems75. Regulation may cause a potential drop in the prospective number of clients, thereby resulting in a drop in revenues for these service providers. Countering this argument would be the transition from a “capped” income model to a revenue sharing one, where the software provider has a higher cap and/or no cap at all. This, however, may be difficult to implement given the current landscape of service providers and the minimal variation in pricing between them. It’s a Matter of Trust Over the past decade or so, an increasing number of experts have come to recognize, and explicitly identify, trust as an essential component of a properly functioning economy and society. Of particular importance are three books on the subject: in chronological order, Francis Fukuyama, Trust76, Robert D. Putnam, Bowling Alone77, and, Tamar Frankel, Trust and Honesty7879. Each of these books forcefully propounds the thesis that the economy and the world as we know it simply could not function without a certain degree of trust. At its simplest level, trust can be defined (as per Tamar Frankel) as "believing that others tell the truth and will keep their promises.80" More detailed is the definition proposed by Margaret Blair and Lynn Stout: "a willingness to make oneself vulnerable to another, based on the belief that the trusted person will choose not to exploit one's vulnerability”. Thanks to an outpouring of research on trust over the last couple of decades, we now know quite a bit about how trust is developed, nurtured, maintained, destroyed, and rebuilt81.
72 73

http://barter21.com/pages/pricing Retrieved 12 June (2012). http://www.nextrade360.com/pricing.pdf Retrieved 12 June (2012). 74 See http://www.bclsoft.com 75 See http://www.gets.cc, http://www.virtualbarter.com 76 Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (1995). 77 Robert D. Putnam, Bowling Alone: The Collapse and Revival of the American Community (2000). 78 Tamar Frankel, Trust and Honesty (2006). 79 See generally id.; see also Margaret M. Blair & Lynn A. Stout, Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law, 149 U. PA. L. REV. 1735 (2001); Frank B. Cross, Law and Trust, 93 GEO. L.J. 1457 (2005); Lawrence E. Mitchell, Trust and Team Production in Post-Capitalist Society, 24 J. CORP. L. 869 (1999). Other important works address trust within the larger context of social capital. See, e.g., FUKUYAMA; PUTNAM. 80 Tamar Frankel, Trust and Honesty (2006). 81 Ronald J Colombo, Trust and the Reform of Securities Regulation, Delaware Journal of Corporate Law, Vol 35

Sociologist L.G. Zucker has identified three paths to the development of trust: characteristic-based, process-based, and institution-based. Characteristic-based trust "rests on social similarity and assumes cultural congruence." Thus it arises from shared values and is not something which is subject to artificial creation. Process-based trusts is built upon over time, incrementally, by repeated (positive) exchanges. This, unlike characteristic-based trust, it is something which can be intentionally and strategically developed. Institution-based trust "is tied to formal social structures" which "protect the interests of all parties to the exchange”. Given the complexity of modern society, where shared backgrounds and beliefs are in short supply, institutional based trust is critically important82. This is an important argument for regulation. In an evolving environment, where new, nonbank players continue to enter the alternative finance and payments space, the risk attributes are changing and not well understood. Consumers are faced with many choices and may be unsure about benefits and risks, so consumer education and collaboration among stakeholders is needed to ensure a safe environment and convey a message of trust to participants. The lack of reading material on standards of operations of “good” 83 networks, combined with the level of secrecy which such material is “guarded” by existing associations84 means that, short of their own trial and error, consumers have no set of guidelines by which an exchanges activities can be measured. IRTA and NATE’s miniscule membership is clearly not representative of the reciprocal trade exchange industry as a whole. Furthermore, the development of highly secretive but ultimately ineffective frameworks surrounding deficit spending, ethics and conflict-of-interest rules has rarely resulted in public sanctions or convictions of those accused of violating the rules. As a result, ethics rules offer little or no deterrent to those who might violate the public trust. The appearance of impropriety exacerbates public distrust in the reciprocal exchange industry, ultimately causing a decline in participation. It also demoralizes honest exchange owners and operators who do exhibit self control by not using the networks exchange credits as a lucrative form of self-remuneration which then contributes to an overall exchange deficit. From the EnronWorldCom-Global Crossing failures of approximately a decade ago to modern-day Bernie Madoff, Marc Dreier and Allen Stanford (among, sadly, many others), fraud (as is usually the case with fraud in general) was made possible by trust and its breach. Adding to these woes are statistics that show securities fraud (and Ponzi schemes in particular) appears to be en vogue once again85. There should be no
82 Christel Lane, Introduction: Theories and Issues in the Study of Trust, in TRUST WITHIN AND BETWEEN ORGANIZATIONS 1, 11 (Christel Lane & Reinhard Bachmann eds., 1998) (citing Lynne G.. Zucker, Production of Trust: Institutional Sources of Economic Structure, 1840-1920, 8 RES. ORG. BEHAV. 53, 60 (1986)). 83 Well run / functionally sufficient / financially stable / well-structured 84 * International Reciprocal Trade Association (IRTA) / National Association of Trade Exchanges (NATE) 85 See, e.g., Tina Brown, Did We All Go Mad?, DAILY BEAST, http://www.thedailybeast.com/blogs

and stories/2008

12 15/did



we all go mad/ (Dec. 15, 2008, 7:30 EST); Frank

reason that these breaches of trust are limited solely to the “cash” banking sector. Indeed, the “spend and not repay” mentality of certain reciprocal exchange network owners can be seen as being akin to a giant ponzi scheme of the worst kind – one against which the authorities are truly powerless to act. The reciprocal exchange industry has an unprecedented opportunity for transformative thinking. The involvement of the City of London Corporation, BIS and the UK Treasury allow the tabling of a broader discussion about the failures of the barter exchange industry and those involved in it can use the opportunity to set standards of self-control and restore public trust. It is important to note that this paper’s recommendations are not designed to reduce the amount of participants involved in the reciprocal trade exchange industry, nor do they suggest that the existing “industry bodies” are completely “without hope”. Yet there is clearly a need to develop some form of minimal regulatory framework aimed at ensuring operators have the basic fundamental knowledge and tools at their (and the end-users) disposal to turn potential failures into successes. Doing so will go a long way to restoring integrity and trust in the reciprocal trade exchange industry. Conclusion Recent years have seen a massive collapse of trust within the reciprocal trade exchange industry and this has led industry leaders to recognise the need to shore up their resources and build a “defensive perimeter” against newcomers. As in similar times of crisis, some have suggested that the industry turn to law and regulation for answers to the problems of trust. The imposition of regulation, some advocate, can help to increase trust in markets. Unfortunately trust is complicated as it exists in a variety of forms. Some forms are predicated primarily upon reasoned calculation and respond well to law and regulation. Other forms are predicated primarily upon relationships and emotion and respond poorly to law and regulation. In fact, these latter forms of trust can be seriously harmed by legal intervention. This paper argues that there are at least seven important reasons why regulation is important for the reciprocal exchange industry. 1. In traditional finance, the failure of one financial institution can lead, in a domino effect, to other institutional failures 86 . This does not necessarily occur in the reciprocal exchange industry in the way that it would with banks as debt obligations between trade exchanges are often small in size. What it does do, however, is lead people to doubt the safety of all reciprocal exchange providers in general; particularly when a collapse is well publicised. In traditional finance the argument goes, it is prohibitively costly (or nearly so) for individuals to monitor financial service providers. So too, the public has no
Pasquale, A Total Breakdown in Trust, CONCURRING OPINIONS, http://www.concurringopinions.com (Dec. 13, 2008, 15:40 EST). 86 Robert T. Clair, Gerald P. O’Driscoll, Jr., and Kevin J. Yeats, Is Banking Different? A Reexamination of the Case for Regulation, Cato Journal, Vol. 13, No. 3, Winter (1994).

knowledge of the difference between "sound" barter networks and the "not sosound" barter networks and no easily identifiable yard-stick by which to measure either. The failure of a few bad operators has the potential to leave the industry in disrepair. So why is trust in the industry so critical? There are many reasons, but of these two appear particularly important. Firstly, mutual credit and reciprocal exchange involves a relationship based solely upon trust. In the face of a bad transaction or an exchange underpinned by ongoing deficit spending and/or other forms of fraud, a participant has only the membership terms and conditions to fall back on. Secondly, under the current scenario there is no "higher authority" to seek justice from if something goes wrong with the exchange operators themselves. Reciprocal exchange networks are created through private membership agreements where the exchange owner can manage to somehow eliminate any form of personal responsibility to the members. Highlighting this issue is the fact that there have been no known cases of an exchange owner being held criminally liable for the collapse of a reciprocal trade exchange network - even when such collapses left behind tens of millions of dollars of unfilled barter obligations to those holding credit balances. 2. Using their own statistics, the two “industry” bodies – IRTA and NATE – together represent less than 4% of the entire “reciprocal trade exchange” industry in the B2B sector; and possibly less than 1% of the entire non-cash trade industry. Given the many years in which both associations have been trading there can be no reason to assume that uptake will increase to a point of reaching a critical mass. 3. The current industry associations operate with secrecy. IRTA and NATE do not publish their financial accounts online, do not have openly accessible libraries for public research, undertake no statistical data collection and do not perform any research into the industry. The limited number of “advisory notices” that are published (such as the recent IRTA May 2012 advisory relating to Deficit Spending) are kept restricted only for member use. It could be pointed out that this is contrary to the charter of a non-profit, public body whose stated mission is to “educate the public” however such complaints have historically fallen on deaf ears. 4. Regulation may provide support for early development of documented standards that include effective risk management and credit controls that are lacking in the market today. 5. Better data is needed from surveys, regulatory reporting, and other means to help the industry understand risk trends, benchmark risk levels, and identify mitigation efforts. To date the industry has proven that it is unable to collate empirical data by itself.

6. Regulation will hopefully result in the development of a “barometer” by which customers can easily measure the health of various exchange networks. (Similar to credit ratings of banks or health ratings for food preparation businesses). 7. A regulator would be an independent body for the storage of information and best practices and, as a public authority, would make such documents available to everyone. The industry currently revolves around the theory of “buyer beware”. If someone joins a “bad” exchange network it’s often seen as though the customer is to blame for choosing poorly. This sort of argument is typically espoused by those who like the concept of mutual credit through reciprocal trade exchange networks but do not wish to adhere to any set of standards or reporting. Being accountable means exchange operators may become more careful. The ease at which a reciprocal exchange network can be started means that many are established as experiments, with little or no commitment from the exchange operator if something goes wrong. By having a higher power to appeal to, participants in exchange networks can gain back some of the trust lost through previous industry failures. By implementing regulation the industry is balancing reputational risk against regulatory risk. Reputational risk is a current feature of the industry – where negative information about exchange failures can spread very quickly. Regulatory risk, on the other hand, may result in greater oversight and unintended consequences may result. After describing the various types of conflicts of interest and pointing out the weaknesses in the existing framework (or lack thereof), this paper falls short of proposing a specific set of policy reforms. What it does propose is to develop a set of and remedies seek to enhance transparency, increase vigilance, and establish mechanisms to reduce impropriety (whether perceived or actual) by opening the discussion for establishing appropriate rules and boundaries for the successful operation of reciprocal trade exchange networks. In order to implement any form of regulation the following would need to be considered: 1. Creating a “trust coalition” to research and bring together reciprocal exchange operators, consumer groups, educators, regulators, financial institutions and legislators to explore how to restore trust between consumers and reciprocal trade exchange institutions; 2. Defining the problem - Require all proposals for regulation to include clear analysis of the problem to be addressed. Analysis should cover the scale and significance of the problem and consider options other than regulation for addressing it; 3. Facilitating discussions among appropriate government agencies— together with reciprocal trade exchanges (commercial and non-commercial), application providers, marketers, and financial services firms—to develop a set of best practices for the industry;

4. Developing frameworks for risk management; 5. Use an independent agency to undertake regular reviews of regulations to ensure they are achieving the original objective and check whether they are still required; 6. Put a sunset clause – with an expiry date in e.g. five years - in new regulations where appropriate. The point at which the expiry date is reached would be the optimal time to review a regulation; and 7. Promoting industry and institutional focus on cross-channel fraud management. A network of trust must be built through these types of forums. In order for these and other such efforts to work, they will need senior industry leadership involvement, a structure that creates an environment of openness and trust, and dedicated staff behind the scenes to keep momentum. More importantly, reciprocal exchange industry leaders need to demonstrate a unified form of bipartisan leadership going forward, when have not done so effectively in the past. Personal Thoughts The current economic downturn is driving individuals to develop new methods of facilitating trade. This environment creates new choices for consumers and businesses and drives efficiency improvements overall, but may also introduce new challenges and risks for which many stakeholders may be unprepared. From the authors viewpoint the following are essential to build and maintain consumer trust: 1. Deficit spending needs to be eliminated in the industry. In order to do so it must be accepted as an industry wide problem and mechanisms put in place for existing exchanges with deficits to repay them in the fastest possible amount of time. 2. Reciprocal exchange networks collectively need to take a holistic, cross-channel approach to risk issues, putting customers in control. Customers can become a trusted partner to help fight deficit spending by exchange operators, price inflation and fraud if given the right tools and information. 3. The industry has much to do to promote transparency in trade practices to consumers, such as by providing them with easily accessible information about industry standards, rules and regulations 4. Improved statistics collection, research and reporting will help non-industry players become more involved over time. 5. Improvements must be made in supporting the development of an openly accessible, non-aligned, library for the industry.
NB: An attempt needs to be made at distinguishing between regulation, underregulation and misregulation. • Underregulation entails a failure to apply specific controls

•

Misregulation involves regulation imposed in a misguided or counterproductive fashion, and so the desired result is not achieved.

About the Author Daniel Evans is the CEO of the Ormita Commerce Network, a non-cash multilateral barter trade platform with customers in 54 countries and annual transactions of $3.231 billion USD (year end March 2012). Daniel Evans holds a Bachelors degree in accounting and economics together with a Masters in Economics and he is a current and/or past member of: • The New Zealand Association of Economists • Commonwealth Association for Public Administration Management • The American Economics Association • Canadian Economics Association • The Economics Society of Australia • The Law and Economics Society of New Zealand • The Internet Society • Midwest Economics Association Prior to founding Ormita, Mr Evans was the CEO and founder and major shareholder of XO Limited, a barter software provider headquartered in New Zealand with customers world-wide. Email: daniel.evans@ormita.com About Ormita Commerce Network Focused primarily on the government and Fortune 2000 sector, Ormita is the world's largest multilateral reciprocal trading system. The Company provides an efficient platform to mitigate contractual hazards which arise in imperfect capital markets and provides import and export procurement financing and low cost collateralisation for creditors. Summary of Market Benefits Financially constrained buyers fund existing purchasing requirements from new sales – not existing cash-flows Reduces the cost of funding working capital Improves cash-flows by reducing the need for cash Provides access to captive market audiences Realisation of maximum value of under-utilised assets Increased purchasing power Ability to manage and balance fluctuations in production and overtime Eliminates risk associated with currency convertibility and regulatory investment controls Enhances corporate cash management by allowing a business to reduce its borrowing and trade finance risks Helps to alleviate balance of payment deficits resulting from imported goods. Stimulate the output of domestic industries and to help find new export markets. Fully Sharia-compliant www.ormitausa.com www.facebook.com/ormitacommerce www.ormitacorporate.com www.youtube.com/users/ormitausa