Disadvantages of local complementary currencies

The purported advantage of converting one’s money to a complimentary (local) currency is that it can have the effect of stimulating local economies.

The obvious disadvantage of such a currency is precisely that it can only be used locally.

In addition because it is usually brought into circulation only once participants opt to purchase units of it at 1:1 with local fiat currency this creates two systematic problems.

Firstly, this 1:1 ratio has the effect of forcing participants to make the essentially non rational economic decision of limiting their fiat money’s utility, in exchange for the altruistic aim of “keeping money local.”

Secondly a 1:1 buy in and cash out requirement restricts adoption of the currency because the necessity of maintaining confidence in it can only be provided by promising a definitive fiat exit to all participants.

This promise of a definitive fiat exit to the currency creates the need for a “central promiser” and bank account containing funds. This central bank account, reflecting circulating supply, may have the effect of turning the currency into eMoney and a space where regulation is inevitable.

The success of complementary currencies such as the Lewes pound and the Chiemgauer have proven that increased velocity of currency does occur within their specified geographic boundaries and yet if they maintain a central authority in some shape or other, this is sub-optimal and in opposition to the way the world is moving.

For many reasons, the central authorities involved in administrating complementary currencies would be wise to decentralise the promises they make to their participants. With the advent of blockchain technology this is possible for the first time.

That stated, a move to decentralisation would require implementation of entirely different business models for most complementary currencies, including the two mentioned above. Given the vast chasm of changes that would be required to make such a transition, the most successful examples of complementary currency are likely to remain physical note based currencies for some time. In addition the ongoing requirement of utilising breakage to fund centralised operations as well as their direct 1:1 ties to fiat, they seem bound to their local fiat systems and current business models with inescapable chains.

In conclusion, despite the demand from businesses, consumers and experimenters - no definitively successful complementary currency exists which maintains a fixed value and yet does not rely on:

1) A fiat inflow and outflow tied 1:1 with money held in a bank account

2) A central trusted party administering it, and its exchange with fiat

Last updated