Global Currency Union
Briefing Note, August 2013
Exchange Rates Innovated
The GCU offers:
- an innovative way to calculate exchange rates, based on a multi-currency approach, which provides increased exchange rate equilibrium, and a system enabling use of such rates in international transactions through a multi-currency settlement function;
- a new way of denominating transactions enabling a fair split of any exchange rate deviation between trading partners.
This document is an update to earlier Briefing Note versions, the last of July 2012, which introduced the Global Currency Union, a Danish association, and its innovative multi-currency exchange rate and settlement mechanism. Since then, GCU has documented the stabilizing effect on exchange rates this multi-currency mechanism can have, and has recently made publicly available the first official GCU exchange rate, which can be observed online. Trading partners may now opt to denominate their payments rights and obligations in GCU units for settlement. This document describes how this stability in exchange rates is achieved by implementing an index of currencies between the two currencies in a given currency pair, expressed as the unique “Index-Key”. The exchange rate of the GCU units compared to other alternative intermediary settlement options fluctuates substantially less. Further, the GCU has developed a complementary function enabling a fair split of exchange rate deviation between contracting parties. By reducing the risk of currency fluctuations, the GCU offers the possibility for trading partners to minimize costs related to such risk and thereby to concentrate on their core businesses. Use of the GCU will lower one of the barriers to trade and investment, namely unpredictable and excessive fluctuations in exchange rates, and in turn will motivate job-creation and growth.
This document also repeats earlier efforts by the GCU to inform sovereign authorities about itself and its plans, and to interest them in playing a quasi-supervisory role over the GCU and its operations. It provides detailed illustrations of how the value of the GCU exchange rates is derived. The valuation of the GCU in the context of a transaction between business partners using the British Pound and the Norwegian Kroner is described in detail. This GCU exchange rate, GBPGCUNOK, is also now available online.
Finally, this document highlights aspects of the GCU’s plans to finance and launch its services, and describes how the GCU will be integrated into existing markets, how accounts receivable and payment obligations expressed in GCUs can be valued for accounting purposes and how the GCU will function as an organization.
The Global Currency Union (GCU) was established as a Danish association in November of 2008 through an independent initiative with the objective of establishing a better method of managing currency exchange risks, which the GCU has shown will lead to increased exchange rate stability. This will, in turn provide trade facilitation and so encourage an increase in trade between different currency zones, a contribution to the common good.
The GCU will accomplish these aims by offering trading partners the ability to carry out their transactions using GCU exchange rates and units for settlement. To build confidence in the system, the GCU will act as an apolitical body, focused on providing technical solutions to the problems arising from excess volatility and disorderly movements in exchange rates. This will in turn contribute to greater predictability and stability in global trade, which will favor lasting growth and job creation.
The challenges in the market posed by significant exchange rate volatility just in the period of time since the GCU’s founding, especially with regard to currencies of systemic importance, highlight the critical need to create a better way of addressing exchange rate risk, a risk which is both out of the control of businesses and investors and dangerously unpredictable. Excess volatility and disorderly movements in exchange rates, together with disharmonious currency liquidity, represent one barrier to trade and investment for which there has yet to be an international response.
The innovative technical solutions which the GCU will bring to the market have been developed over several years, and designed in such a way that they will serve as an optional enhancing utility operating in parallel to the structures within which market-determined exchange rates function today. Further, the new GCU exchange rates and settlement system will not interfere with existing exchange policies and processes of the International Monetary System. By providing the option of increased equilibrium exchange rates in parallel to the currency trading market as it is today, we believe the GCU thereby has universal relevance and fundamentally strengthens the structure of the free market by enabling greater price stability and more open economies. The focus of the GCU is on transactions, not on monetary affairs.
Over the last three years the GCU has sought to keep official monetary authorities informed about the initiative and has welcomed advice and comments from them. A substantial number of such authorities have provided positive and helpful feedback, often focusing on the desirability of increased exchange rate stability. After the first official GCU meeting held in January of this year, the first state confirmed that it would participate in and contribute to the process of establishing an inter-state framework to provide states an opportunity to play a quasi-supervisory role with respect to the GCU and its operations.
Based on the approach described below, the GCU, through its operational company GCU Settlements (incorporated in January of this year during the official GCU meeting), will provide trading partners an easily accessible and easy-to-use system giving them an efficient, secure and credible way to reduce and split exchange rate risks associated with cross-currency business, while at the same time respecting each individual country's circumstances.
GCU Settlement's activities will be calculating and publishing GCU exchange rates and distributing GCU units for settlement. As an initial step, GCU Settlements has already started publishing its first new exchange rate, namely GBPGCUNOK, which over the coming six months will be joined by several other exchange rates.
If implemented and operated as intended, the GCU exchange rates and settlement function will become a valuable new feature for international business that to a great extent will make good a deficiency of market-determined exchange rates by providing stabilizing functions serving the multilateral trading system and thereby the general prosperity.
Perspective and Objectives
Each day the world’s economies become increasingly integrated and interdependent. In this context, the potential for new opportunities for trade and business abound. However, persistent exchange rate volatility, whether inherent in the market or motivated by individual states, discourages the taking of risks required to realize such opportunities. Some potential trades and investments are foregone on the basis of that risk/cost related to exchange rates, as the potential profit from a given business transaction can easily be eliminated through these excessive movements.
A good way to put the magnitude of this problem into perspective is by looking at the average profit-to-turnover ratio for Fortune 500 companies, which in recent years has averaged around 7%. When in the same period fluctuations in currencies of systemic importance to the International Monetary System have exceeded 7%, often by several times, it becomes clear that such fluctuations are a major bottleneck to expanding trade and investment between monetary systems. The exchange rate risk/cost associated with expanding business internationally simply exceeds the potential profit.
As global integration evolves further, frictions between various systems upon which existing systemic currencies are based will only intensify, as we have witnessed over the last years. An exchange rate mechanism providing a greater degree of equilibrium can mitigate such undesirable consequences and support increased financial stability, and through that lasting growth, increased employment and prosperity, which is in the interest of the overwhelming majority of nations and their populations.
The Global Currency Union believes that each time a trade takes place, based on free price-formation and market forces, a bit of wealth is either created or protected by both sides. Each trade thus represents the realization of the best-possible value by each party, better than the alternatives at a given time.
Each transaction is the ”birth of” or the ”protection of” wealth. By enabling an increased number of transactions through providing a key parameter - stability - we hope that, with its global reach, the Union will further prosperity on a global level. This is our ambition.
To make this ambition a reality, the Union has been created as a neutral organ whose sole functions are to develop and maintain these universally relevant mechanisms, making GCU exchange rates electronically available to private and public-sector entities engaged in cross-border trade and investment. The GCU is intended to be just a means for exchange for businesses which fully respects each state’s independence and monetary sovereignty.
Perspectives on exchange rate innovation
As systems develop, they begin with basic functions and controls. Then, as required by increasing demand for capacity and efficiency, improvements and innovations are implemented to meet these requirements, so that the full latent potential of these systems can be unleashed.
Example: Over the past 100 years telephone systems and their integration have steadily developed. First, an operator received a caller’s instructions as to where to direct a call (manually). Then dialing a number with a few digits was introduced. This led to the addition of more digits to the telephone numbers. Later, dialing international numbers without going through an operator was introduced. The latest development is that a caller can automatically reach any number from any country from a mobile device by adding a ”+” in front of the national code. Each of these successive stages of development have added to the system's functioning and integration, either by making it easier to use or by expanding the number of users who can potentially be connected through a more efficient integration of the various systems.
Activities in and between various monetary systems have developed in a similar way. Barter gave way to the use of local currencies and monies made of precious metal (ideal for trade with foreigners). National currencies developed from these more local innovations. The electronic exchange of money between countries represented a further step. It is by developing the system, the method of exchange connecting the various monetary systems, that we can facilitate further integration between these.
Developing the system by which we direct transactions between currencies, exchange rates, is a key factor for enabling an increase in these activities.
The new GCU exchange rate structure is based upon the GCU as a multi-currency index as the intermediary:
GBP GCU NOK
While all systems and structures surrounding us in daily business, as well as in daily life, have changed fundamentally over the past forty years, the very core of the system, which we still blindly expect to support and facilitate economic growth, the system by which exchange rates are determined, has not been fundamentally improved for an even longer period than the same forty years. This perspective makes it easier to realize the need for a new approach to exchange rates, one which better supports efforts for economic growth and development in the reality of today and in the years to come. The GCU multi-currency system is this new approach.
How the GCU multi-currency system works
For the GCU system to function, we need both the sending and receiving side to have available the same exchange rate trading opportunities. So, if we want to execute a transaction between GBP and NOK, the respective GCU Index-Key can only be made up of the underlying currencies which we can also settle from those two countries. For example, if we employ an Index-Key based on the USD, SEK, EUR, CAD, GBP and NOK, and the British sender of money buys a GCU unit for settlement GBPGCUNOK (backed by each of these currencies), we also must be able to sell each of these at the receiving side, otherwise the system will not be able to complete the monetary settlement correctly. Therefore, we must always have available the same currency exchange rates and trade opportunities on the buying and selling sides.
As the number of tradable exchange rates between different currencies varies from a few trading opportunities to many, the GCU system cannot successfully rely on only one Index-Key. Alongside designing a technical system enabling the issuance of units for settlement based on a plurality of underlying assets, we have solved this ”index problem” by making it dynamic (nine-letter exchange rate codes instead of six - the three new letters = “through”). In our system the characteristics of both sender and receiver are used when the correct Index-Key is chosen through an Index-Key matrix system as the key for the transaction between the two parties. There will be a unique GCU Index-Key relating to each of the base/settlement currency-pairs we decide to service.
This approach means that we ultimately will be able to direct and complete transactions through the GCU between all currencies. The GCU will have a competitive advantage over any alternative intermediary currency by spreading the risk of fluctuation from one exchange rate to several related exchange rates, thereby creating a high degree of equilibrium. In some cases the risk will be split over a lower number of exchange rates and in other cases over a high number of exchange rates - but in all cases it will offer a competitive advantage for the users.
The structure of our system will also give us the future opportunity to implement new exchange rate trading opportunities on an ongoing basis, so that the Index-Key used in relation to any two currencies can be improved further.
Having this ability to use the correct Index-Key, based on characteristics of the sender and receiver (base and settlement currencies), also enables us to start operating our service based on current market circumstances.
The Split Rate Function
Following development of the multi-currency exchange rate and settlement system, the GCU has further developed a supplementary system which we refer to as the “Split Rate” system. This system provides trading partners the possibility, when entering into a business/transaction, to agree on sharing the exchange rate deviation (from time of agreement until settlement) between them equally or proportionally as they wish.
This function can serve all types of transactions, both direct trades where no intermediary unit for settlement is used, as well as such transactions where an intermediary unit for settlement is used, whether this is the GCU or any of the alternatives.
The above-described systems and methods are covered by relevant patent documents:
PCT/EP2011/068017 (Multi-Currency Settlement System), and
US Provisional Patent Application No. 61/843120 (Currency Risk Mitigation - “Split Rate”).
Method for setting the GCU exchange rate
The GCU approach to exchange rate price formation is fundamentally different from the current method. Today the price of a currency is derived from a simple calculation, using a fixed number of Units (most often calculated based on 100 or 1) which then via the exchange rate provides the price per unit. This way of determining the price of the currency leaves the user with full exposure to that single exchange rate. In contrast, the approach by GCU to calculate the multi-currency exchange rate starts from the users’ perspective, and from that defines how much of the Value the user should expose to a given currency/exchange rate. This is done by using the GCU Index-Key for the given currency pair, which combined with the exchange rates of the individual currencies used in the Index-Key then compiles the GCU unit for settlement between the two currencies at that time.
By ‘releasing’ the current constant, the number of Units, in the simple equation for pricing a currency, as is the procedure today, and replacing this simple price-formation with a more advance equation having the GCU Index-Key as the ”fixed point” along with two variables, namely the exchange rates and compilation of the Unit, increased exchange rate/price stability is achieved.
It is this opposite conceptual approach, that of segregating the exposure to fluctuation from the Unit, swapping priority and relation between those, which is the basis for creating the increased stability that the GCU units for settlement provide.
A British buyer enters an agreement with a Norwegian supplier to be settled in USD. This amount of USD is 'units', which represent, when multiplied by their value/exchange rate for these units, respectively the cost for the UK buyer and the sales value for the Norwegian seller. Each of the parties to the deal has 100% exposure to any change of value of the chosen unit, the USD, from the point of entering into the agreement to monetary settlement. To reduce the overall risk of fluctuation in the value of the unit used for settlement, the parties can agree to use the GBPGCUNOK. The GCU system, from the perspective of the Value-to-end-user (in contrast to a fixed number of units), distributes the exposure to value fluctuation to a plurality of units by aggregating the unique unit for settlement, generated by using the value-to-end-user at the date of agreement (day 1), based on the value/exchange rates. It compiles the number of units for each of the currencies used to make up the GCU unit of settlement.
The result is a calculation taking place (at day 1) from the value of the user's currency to each of the currencies used in the Index-Key. When dividing the user currency by the weighing of the Index-Key assigned to the exchange rates, the number of units making up the GCU unit for settlement appears.
The denominator in the GCU system, the reference number of Units, is dynamic and appears by dividing the unique Index-Key with the exchange from each side to the transaction. (Purchases of GCU units for settlement always have a reference date/time log.)
The unique Index-Key, distributing the risk of deviation in the value-to-end-user to a plurality of currencies at the time of agreement, results in the calculation of the dynamic denominator which then is the basis for setting the GCU exchange rate.
Technically, it is relatively easy to handle a dynamic denominator using modern computer technology. Consequently, such a unit for settlement can only exist electronically and not physically.
The GCU system moves the center of economic gravity in international transactions
from the unit to the value.
GCU Index-Keys: Composition of Underlying Currencies
The core idea of the GCU units for settlement structure is to provide to businesses and investors using currencies based on market-determined exchange rates a parallel function of increased price stability in international trade. Such a function of stability serves the common good, since excess volatility and disorderly movements in exchange rates can have adverse implications for the users of such currencies.
Developing a multi-currency exchange rate and settlement system able to choose the correct Index-Key for a given transaction was the first step to this solution. The obvious next step was to identify a method whereby the correct currencies for a given index and the weighing between these could be determined. Over the last years we have reached a point where we are confident that, with the relevant related currencies available, we can always develop an Index-Key providing increased stability compared to alternative intermediary settlement options. From this process we have arrived at four fundamental conclusions, which today are the basis for our continuous work to refine this process;
Our first conclusion is that currencies which have the best stabilizing function for a given currency-pair will tend to be those of traditional trading partners. As an example, implementing the Australian or New Zealand dollar in an index where the Danish crown is the settlement currency would not provide much added stability. Rather, the Danish economy's trading partners are mainly the surrounding countries, that is, Sweden, Norway, the UK and the Eurozone.
When we look at a given currency-pair and set about developing an Index-Key for the relation between them, we initially make a list of the most important trading partners for these countries/currencies. Based on these two lists, we identify the common elements. Based on these elements' importance to the two currencies, we prioritize them on the list of tradable non-pegged currencies to be used in the Index-Key. According to these currencies' underlying fundamentals, we set a band within which we estimate this currency should be weighed in the index. Initially this band is set wide, but then we go through a series of iterations in which we narrow that band, based on our system's calculation of what would have been an optimal scenario in a high number of previous periods of various lengths. Based on those calculations, that band can be displaced a bit upward or downwards while at the same time made a bit more narrow. Eventually we end up being able to fix the Index-Key for the given currency-pair.
The second finding we have made is that there is a notable fall-off in the reductive effect on the accumulated deviation as more currencies are added to the index. Generally, additional currencies numbering up to five have notable effects, while the sixth's effect proportionally will be somewhat more limited. Whether the seventh currency can be constructively added is not certain in all situations, while additional currencies after that either have almost zero or even a counterproductive effect. This is consistent with our observation that the vast majority of import and export activity for a given economy usually involves a relatively low number of currency zones.
Our third observation is that the longer the estimated settlement period (i.e. the time between signing of the contract and payment), the more currencies may be relevant to use in the index. This can be likened to dropping a pebble in the water and observing the waves that result: the longer the effect is observed, the more the circle of waves expands. What is more, the first wave is the largest – so the currencies which are
the first and closest trading partners have the most impact, while the effects drop off from there. This observation has led us to consider that in time, it could be relevant to develop different Index-Keys between two currencies depending on the settlement period.
A fourth important conclusion we have made regarding implementation is that the fundamental effect of increased exchange rate equilibrium by spreading the risk is achieved by simply going ahead with the process even on the basis of incomplete data. For instance, knowing the exact optimal weighing of any given currency in an Index-Key, whether 9% or 10% for example, is not crucial for achieving a significant reduction in volatility.
After analyzing various periods, we have also observed that it is usually the same index, or very close to the same one, which has the most stabilizing effect on the exchange rate in up-trend periods, down-trend periods, and periods of relative stability. That means that the currencies that contribute the most stability to a given currency-pair, and their weightings, are almost identical no matter the movement between the currencies.
Maintaining the GCU Index-Keys will be an ongoing process. The frequency with which such recalculation and optimization shall take place is yet to be determined. Technically there is no barrier to doing so at a high frequency, but based on current knowledge we believe maintenance every four to six months will be sufficient.
Frequency of calculation of GCU exchange rates
The frequency with which exchange rates between the currencies used for a given Index-Key are updated varies, as some change second-by-second and others with a much lower frequency. The GCU exchange rate between two currencies will initially be set twice daily at a minimum, which corresponds to our aim at providing an AM and a PM settlement process.
As we expect the Index-Key eventually to contain free-trading currencies which, due to relatively low availability in free markets, can only be provided directly from alternative currency suppliers, we will employ a ”rolling” settlement mechanism so that two transactions are made with each currency supplier daily to adjust holdings of already-existing currency reserves to the amount of outstanding GCU units for settlement.
We will aim at expanding on an on-going basis the number of currencies underlying the GCU, and thereby continuously seek to increase the exchange rate stability provided for the various currency pairs. Our launch case will be based on currencies which we can buy and sell in the free market, so that implementation does not become dependent on any external corporation. However, we hope that market participants - ideally central banks, or else other money providers - will see the relevance of our activities to the creation of growth and jobs for their own market/economy as we expand them, and so will decide to integrate with our settlement system and become part of this monetary transaction flow.
Functions of the GCU Units for Settlement
Over the past years the concept of the GCU has been calibrated into the solution we will offer, namely a new way of calculating exchange rates and a multi-currency settlement system enabling transactions using these exchange rates. Following the conceptual development, we have been able to document the value of increased exchange stability which our solution can provide.
Now a basic question arises: What functions shall we give these new units for settlement?
- Shall there be restrictions of any kind as to whether the user can hold these units for settlement in an account?
- Shall we offer paid interest on such accounts?
- Shall it be possible to issue bonds denominated in a GCU units for settlement? If so, who shall be the issuer?
- Shall users be given access to deposits in such accounts through debit cards? Etc.
The Union wishes to clarify that the GCU system's objective is to establish functions which mitigate the risk associated with exchange rate volatility when engaging in international business. Nothing less and nothing more. The issuance of these units for settlement does not represent an attempt to develop a new global currency nor to affect the relative values of currencies or their rates of exchange. The purpose of the GCU is to provide a new exchange rate mechanism through which all currencies can relate in a more stable manner.
It is the intention of the GCU that the use of these units for settlement will in no way infringe on the sovereignty which States or groups of States have over national or regionally-issued currencies. The GCU will be of great benefit to States and to growth in their economies, as it will represent a new and effective means to establish a greater degree of equilibrium for exchange rates and thereby expand the cross-currency exchange of products and services, and thus the creation of growth and jobs, spurred by increased monetary stability.
The Union has closely followed the debate about the future of the International Monetary System and the potential which Special Drawing Rights (SDRs) might have as a unit of currency, which some believe could be used more widely to denominate transactions. While such discussion may produce adjustments to the SDR system over time, the current and persistent volatility of the foreign exchange markets requires a faster, innovative, more advanced and holistic response.
The system for creating and managing the GCU will be fundamentally different from the purpose, objectives and framework under which the SDR system is operated. This will facilitate a quicker and more flexible approach in several respects:
- The GCU will be available for use to all parties engaging in international business, private as well as public;
- The GCU will serve only as an electronic unit for settlement, and will be created and settled based on demand;
- The value of the GCU will be derived by factoring in the values of available relevant currencies and so will not be limited to referencing a restricted number of specific currencies as does the SDR;
- The GCU will be issued by a new, apolitical organization which will provide a permanent platform for a public-private partnership on exchange rate issues; and
- That organization will have as its only focus the GCU's successful implementation and operation.
The amount of outstanding GCUs will be dynamic. It will be directly related to the scale of demand from the market at any given time. No State or other third party, besides those involved in the transaction, will be required to allocate capital or carry any risk in connection with the operation of the GCU system.
While the GCU may initially attract political attention, the Union believes that part of its success will be linked to its ability to undertake its activities in a non-political manner. The market must come to consider the GCU as managed with neutrality, free from the risks inherent in decision-making linked to national political interests.
To ensure that the market perceives the GCU with trust and accepts the Union as a neutral organization, the GCU has arranged for a dialogue to begin for the establishment of the permanent Official Stakeholder Consultative Group (OSGC), from which we hope to receive input and guidance relating to our activities. All States are invited to participate in this process.
Accounts and transaction process
Transactions in the GCU system will be initiated either via distributors/banks or by the end-user.
The GCU system will function as the issuer of these units for settlement. Our system will at any time on the one side maintain the amount of outstanding units for settlement, the corresponding paid-in monetary amount in a given currency from the original purchaser together with the holdings of underlying assets/currencies and, on the other side, maintain the register identifying who the holder is of these units for settlements.
GCU units for settlement can be settled by the holder either by selling the units to the GCU system - by which transaction the seller receives the corresponding monetary amount in his local currency in return for the units for settlement while the GCU systems dissolves the purchased amount of units for settlement by selling the various underlying currencies - or by making a transfer of the units to a recipient, i.e. either a bank or direct user of the GCU system, in exchange for an agreed monetary amount in either of the two currencies (base or settlement) involved.
The intention of the GCU is to service non-speculative cross-currency business, whose underlying nature is based on purchases and actual delivered products, services or resources between business partners. The system shall offer the user as few functions as possible, and only those related to engaging in cross-currency business.
As the GCU exchange settlement mechanism is intended as a stabilizing technical utility when engaging in cross-currency trade and investments, the functioning of the accounts shall also reflect this.
In the GCU system, the direct user has at least two accounts. The first account, A, will be operated in the user’s designated local currency (settlement currency). The second, account B, will be operated in xxxGCUs.
Account A will have a corresponding account at the user’s bank. All transactions between the user’s bank and the GCU system will be between these two corresponding accounts and will operate in the same currency.
By using this method of corresponding accounts, the GCU system will to a great extent be able to approve new users by relying on the users’ existing relations with their banks, thereby making the customer-acquisition process very efficient and potentially fully electronic.
All transactions between a sender and receiver will be based on the exchange of GCU units for settlement. Our system is not intended to service transactions apart from those based upon these units for settlement.
When calculating the GCU equivalent of any given monetary amount, this will on the one hand be based on the buyer's payment in an existing currency, which on the other hand will be balanced by the issuance of the GCU Unit for settlement, based on the Index-Key, in the various underlying currencies. This takes place when the correct amount of various currencies in the Index-Key have been purchased and are held in the GCU Treasury, which then constitute the underlying value for the issuance. Note therefore that there is no transaction risk involved for the user – the GCU unit for settlement is by no means meant as any sort of speculative instrument but rather as a settlement mechanism.
The amount of outstanding GCUs will be dynamic. It will at any given time be directly related to the demand from users of the GCU system engaged in cross-currency business.
Accounting and valuation of transactions denominated in GCU
Users of the GCU system will be able to value payment obligations and accounts receivable in accordance with the same methodologies employed with respect to currencies. The GCU will facilitate valuation and meet accounting needs by offering on-going publication of GCU exchange rates quotations. Thereby any financial exposure to a GCU base transaction can be entered and updated with a true and fair book value.
Market-oriented approach focused on user's perspective
The GCU exchange rate system will have a fundamentally different approach to the marketplace and to customers as compared to other monetary mechanisms, as our system does not seek to favour one side or currency over another, but instead will function as a neutral utility enabling further economic integration between different monetary systems through a better-balanced equilibrium exchange rate framework.
Understanding exchange rates, and the units for settlement enabling transactions in these, to be a product like any other, and grasping how users view this product, its function and its value is fundamentally important from our perspective when approaching the marketplace. For any new product to succeed it must have competitive advantage on a parameter important to users. The GCU exchange rate and settlement system has been developed to have competitive advantage as a unit for settlement based on the parameter which we believe is of most importance to the participants in cross-currency business, namely stability.
The Union is confident that a successful launch and expansion of the system will be achieved through focusing on three universal key factors, defined as accessibility, usability and credibility.
Accessibility. It is obvious that customers must have access to the product to employ it. If the product is not available in the marketplace, it will not be engaged. The GCU will ensure accessibility of our new exchange rates and system for settlement by offering the current distributors of financial products and services, the banks, the possibility to distribute our exchange rates using the same business model as is commonly used in the market today (spread). Next to distribution via the existing structure in the market, the GCU will also make available its products and services directly to users via the Internet to ensure accessibility for all.
- The easier a product is to use, the faster the customer's use increases. The GCU system will be focused on simplicity, and will offer the fewest functions possible, each based on needs relating to monetary settlement of cross-currency transactions. To meet users’ technical requirements connected with operating daily businesses, the GCU system will offer interfaces to all widely distributed ERP systems so that transactions through it can be initiated and received directly in the customer systems already in use. This brings a higher degree of monetary stability through an easy-to-use system directly to where it represents the highest value – namely inside companies and organizations engaging in cross-currency activities.
The more advanced a market is technically and economically, the closer to the end-user the integration for GCU will be. In advanced markets it is more likely that end-users will integrate directly with the GCU system, whereas in developing markets GCU’s integration could likely be with the central bank or the commercial banks for those to integrate with the end-user.
Credibility will be built one transaction at a time through business excellence, providing customers the value of increased stability inherent in each delivered transaction.
Launch and market development
Our overall perspective in the market approach is to build relations with existing market participants and integrate with existing market structures, simply by providing a new competitive product to be distributed through these channels.
The services to be brought to market by GCU Settlements will be:
- Publishing the GCU exchange rates;
- Offering settlement reports; and, later
- Offering settlement service through GCU units for settlement (the time of launch depending on budget).
The first GCU exchange rate, GBP GCU NOK, was published at the end of July this year. This will be supplemented through the coming six months with a series of other exchange rates, relating inter alia to AUD, BRL, BDT, CAD, JPY, KRW and TWD.
Individual countries which desire potential users within their territories to have access to the system before implementation there is planned by the Union have the option to cover the cost related to technical-national adjustments, and in this way to make the service available sooner within their home market. The system is designed in such a way that individual countries can be connected to the system in a parallel process, while adjusting to their individual circumstances.
The GCU system
The Union plans to introduce the GCU exchange rate and settlement system as a system available over time to the global marketplace. The initial market introduction might be prioritized for Denmark, Sweden, Norway, the United Kingdom and Germany, which collectively could be seen from a technical perspective as a “test market,” before expanding further. It would be most obvious to launch services in Scandinavia, UK and Germany since each of these markets is in close proximity to our city of origin, Copenhagen, and each features open economies, diverse currency frameworks and market situations involving fluctuating exchange rates, while at the same time being well-regulated and boasting easy identification of and communication with potential users. Nonetheless, should interest in supporting the launch of the GCU system prove to be greater in another region of the world, this would of course influence our market strategy and priorities.
Security obviously has the highest priority on all levels, and our focus is on building the system in such a way that we implement from the very beginning best practices, tailored to individual countries' circumstances, to prevent illegal financial activities and system intruders.
A key characteristic will be system flexibility, of the kind that ensures different countries' individual circumstances can be respected by a) giving them the possibility to suggest individual routines in the process of approving new users from their jurisdictions (this process is nationally adjusted), and b) if requested, providing them with information about system activities relating to their jurisdiction, suited to their requirements.
In the case of direct users, the system is as of now designed to only allow customers to transfer local currency amounts out of the GCU system to a verified corresponding account held in the customer’s name at his preferred bank.
To be useful to users in the reality in which they operate their daily business, we will enable the system to directly integrate with ERP systems as well as providing direct online access.
Operations could be carried out through regional hubs, ensuring a homogeneous global presence to facilitate better contact and responsiveness to customers' regional needs. European users will be served by a regional center located in one European State yet to be determined, users in the Gulf States will be served through the Union’s regional center in one of the Gulf States, etc.
It is estimated that all markets can be serviced through approximately 10 regional centers.
The Union will engage with appropriate technical partners to undertake and ensure reliable settlement of transactions. This task will be provided by an already established and recognized organization.
The GCU stands open to accept cooperation and feedback from national and international monetary authorities, financial institutions and other market participants. As the system is one which primarily supports the basic functioning of market-determined exchange rates, we welcome any feedback that could help to enhance the competitiveness of those fundamental market mechanisms.
We will aim at establishing an organization that reflects our ambitions, based on resources available, which to the greatest extent shall ensure the successful operation of daily activities.
Interaction with States and international bodies will be pursued through the legal entity of the Global Currency Union. Through this organ such entities, if they chose to participate in the dialogue and consultative work, will have access to and be able to advise, influence and monitor the framework within which the GCU exchange rates and system for settlement functions.
Operational business of the GCU exchange rates and system for users and others commercial business partners will be carried out through GCU Settlements as an entity intended to operate within market conditions, offering the various products and services to the market.
The operation of the Union and offering of the various exchange rate-related products shall optimally be self-financing. Revenues shall be generated by the operational entity, GCU settlements, through the normal exchange rate business-model, taking advantage of a spread between the buy and sell price of the underlying currencies traded. The spread will be calculated based on the expected expenses and transaction volume through the GCU system. All operation of GCU settlements shall be on commercial market terms.
The GCU will seek within the coming six months to secure the financing needed to develop the technical system and establish the operational organization. Any nation, international body or third party having an interest in furthering the development of the GCU should not delay any dialogue with us on this subject.
The GCU exchange rate structure and settlement system will succeed based on its competitive advantages, namely the increased stability, reduced risks, and the option it provides to automatically split any exchange rate deviation between business partners. As the Union will have no power to force contracting parties to use the new GCU exchange rates or units of settlement, it will be its commercial value for end-users that will determine its success.
In taking this initiative, the people behind the GCU have sought to avoid politics – just as the GCU is itself designed to do – and simply deliver this new exchange rate structure and settlement system to the market as a technical utility to further global prosperity.
The GCU will be no compromise or tradeoff between different interests. It will be, even though small, a focused and highly relevant new feature reducing the adverse implications from exchange rate volatility for economies. This will to some extent help to ensure a more robust, open, well-functioning and stable financial system, and through that lasting growth and stability for the world's economies. As it is in the interest of the overwhelming majority of nations to support and promote the development of features in the international trading system which remove barriers to cross-border business, trade and investment, we trust that many nations will choose to support our activities for the common good.
The Union is confident that there will be a demand for these new exchange rate and settlement opportunities, and that this will become successfully integrated into the International Monetary System, because of the way it enhances predictability between market-determined exchange rates, facilitates increased global trade and investment, and thereby enables increased prosperity, lasting growth and the creation of jobs on a global scale.
The Union prefers initial contact in the form of written communication either by letter or e-mail.
Global Currency Union
2900 Hellerup, Denmark