When speaking about money and currencies, a number of overlapping and often interchangeable terms are in use. In this post, we organize the diverse ecosystem of complementary currencies. We focus on why and how complementary currencies are built and how value can be created.
What is currency?
Currency, in the most specific sense, is money in any form when in use or circulation as a medium of exchange, especially circulating notes and coins.
Currency is actually only a small piece of the monetary economy and just one consideration when looking at the total money supply. Most money today exists as credit money or as electronic records stored in databases in banks or financial institutions.
Currency has also taken a number of different forms throughout history. In many early societies, certain commodities became a standard method of payment. More recently, technology has enabled an entirely different form of payment: electronic or digital currency.
Currency is a form of money.
Normally we see currencies as legal tender in certain political jurisdictions: a system of money (monetary units) in common use, especially for people in a nation or monetary region (e.g. Eurozone). Under this definition, U.S. dollars (US$), euros (€), and Japanese yen (¥), are examples of currencies.
These currencies are recognized as stores of value and are traded in foreign exchange markets, which determine the relative value of each currency. National or official currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.
180 : the number of official currencies recognized by the United Nations. Source: WorldAtlas
A complementary currency is a medium of exchange that is thought of as supplementing or complementing national or official currencies. Complementary currencies are usually not legal tender. Their use is based on an agreement or consensus between the parties exchanging the currency.
Sometimes they are also called alternative currencies, in particular when they intend to create an alternative and different system. In that case, they are more ambitious politically, competing and directly opposing the national monetary system.
In recent years, the number of complementary currencies has risen sharply worldwide and created a diverse and complex ecosystem. We will now organize them based on some common grounds and certain characteristics that differentiate them.
There are already tens of thousands of complementary currencies in circulation.
Agenda of complementary currencies
National currencies respond to national agendas and monetary policies. Complementary currencies are created to advance the particular goals or agendas of the institutions that issue the currency. Let's look at some common currency agendas or motivations.
A branded currency (or incentive or loyalty currencies) is a store of value and a medium of exchange issued by companies for goods and services from a specific brand to which it is tied. This includes any physical or digital form of payment such as coupons, loyalty points, gift cards, or a specific amount of store credit.
In this context, social currencies refer to those mediums of exchange created and issued by civil society (groups, organizations, etc.) to connect and help their target group and facilitate economic transactions and social activities. Their ultimate objective is not profit, but inclusion and to serve the participants of the network.
Local and regional currencies
A local currency is a complementary currency that can be spent only in a particular geographical locality, at participating organizations and businesses. They aim to facilitate and promote local commerce. A regional currency is a form of local currency encompassing a larger geographical area.
Community currency aims to encourage spending within a certain community. It might be a kind of local currency (geographic) or even be used for exchange within a specific online or virtual community (gamers, etc.).
Ecocurrencies are a sort of incentive currency. They aim to both value and reward ecological action. They are earned by the participants through sustainable actions and or can be exchanged for ecological assets.
Complementary currencies have a proper agenda and aim to reward certain behaviour or actions. It is special-purpose money.
National currencies are fiat money. They are not backed by any physical commodity and do not have significant intrinsic value or use-value. They obtain their value simply because the government legislates and regulates the use of it. Complementary currencies can be issued with or without real backing. Some common backing types are:
Mutual credit implies that creditors and debtors are the same people lending to each other. Normally the internal loans are granted by the administration, however, all participants are responsible for the liabilities of others. Loans are paid off by selling goods and services to other members. Examples are time banks, LETS, multilateral barter, etc.
Some complementary currencies are backed by goods, and/or services of a business or a group of businesses. They represent something of real value supporting the face value, though they have no value of their own (intrinsic value). They inject liquidity to the issuer as they save cash expenses and promote extra sales. A common example is branded or loyalty currencies.
In this case, the complementary currency is totally backed by official or national currencies. They aim to optimize or multiply the circulation of the official currency in a specific network by retaining it and substituting it with a currency with a more specific use. Because of their backing and convertibility, these currencies are likely to be seen or accepted as legal tender.
Local financial institutions can issue loans to customers or target groups with a complementary currency. The currency will be used for and circulate only within a network of businesses and participants. Debtors need to pay back the loan to the financial institution, with complementary or national currency.
Public authorities can issue currencies for certain programs or target welfare transfers. These currencies are usually widely accepted since, by definition, they have the advantage of being used as a means of paying taxes.
Peer-to-Peer-Currencies are the youngest type of complementary currencies. They are a form of fiat currency and derive their value from the participants' trust. Without real backing, they need to be managed carefully to avoid fraud, inflation, and profit trading (speculation), in particular when there is nothing legally guaranteed that holders can claim.
Sufficient spending options, approppiate backing mechanisms and great governance are key for long term sustainability.
Technologies for currencies
Modern technology has facilitated the creation, circulation, and administration of complementary currencies. Some popular technologies today are:
Many social and loyalty currencies still use traditional physical vouchers or notes. Let us look at some interesting new technologies and terminologies:
Digital currency (or electronic currency), is a broad spectrum of currencies. Technically it is any value that is a balance or a record stored in a distributed database on the Internet, in an electronic computer database, within digital files, or within a stored-value card.
A mobile currency can be any digital currency that can be received, stored, spent, and sent using a mobile phone. Low-end technologies include SMS or USSD payments, while high-end mobile wallets run mostly on smartphone apps or software.
Virtual currency is a type of unregulated digital currency, that is only available in electronic form. It is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community.
Cryptocurrencies are part of the virtual currency group. They use cryptography technology to secure transaction records, control the creation of coins, and verify the transfer of coin ownership. When implemented with decentralized control they work with distributed ledger technology, typically a blockchain, that serves as a public transaction database.
Nowadays there are already more than 10 thousand cryptocurrencies registered.
Complementary currencies for the future
The phenomenon of complementary currencies and special-purpose money is not new, nor just a fashion. It is an evolution and trend, a consequence of failures of the centralization of our monetary system and the emergence of digital technologies in recent years.
We truly believe in the power of an ecosystem of sustainable digital currencies and mobile payment solutions to connect people, foment commerce, facilitate transactions, create employment, and hence promote more economic and social welfare.
However, issuing and running a complementary currency is not easy. Currencies, as a form of money, are issued and created on an agreement and trust with participants. To build a trusty complementary currency, it requires:
values and principles
leadership and governance
knowledge and expertise
resources and technology
With our vast experience as digital currency architects combined with Cyclos, the award-winning payment software, we help organizations design, build and grow digital and mobile payment solutions that are unique, secure, affordable, and easy to implement.