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How The Blockchain Can Aid The Effectiveness And Use Of Complementary Currencies

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The blockchain provides the foundation to design complementary currencies that embellish community relationships, drive regional economic growth and encourage self-sustainability. The local multiplier effect is the underlying benefit of using complementary currencies. The local multiplier effect occurs when one form of economic activity affects another.

Businesses using local tender tend to invest in their community, and a positive cyclical effect begins. Using complementary currencies has been shown to diversify economic development and increase the magnitude of the multiplier effect in areas participating in these alternative markets.

Complementary currencies existed in the United States long before the creation of Federal Reserve Notes. State-sponsored banks issued short-term redeemable bank notes in exchange for commercial goods before to the Civil War. Each region maintained their own banking system to meet the needs of their community.

More than 1,400 state banks began circulating notes, creating distrust in the liquidity of regional banks. The Civil War ushered the beginning of the national banking system. Congress began distribution of fiat currencies (greenbacks) to pay for debts during the war, and created the first national banks with the purpose of selling bonds.

After the first few years of operation, use of state-sponsored banks began a steep decline as national banks outnumbered regional banks 3-to-1. After the Federal Reserve Act passed in 1914, the incentive to continue local currencies was curbed by the incentive to create an elastic national currency.

Only a few decades later, during America’s Great Depression, local governments were under pressure for receiving low tax revenues, and scrips were issued as a form of payment.

Complementary currencies are not a phenomenon of the last century. The lack of an elastic national currency drove 2.5 million citizens in Argentina to adopt the crédito during their modern-day depression, from 1998 to 2002. During those five years, Argentina communities participated in the “Red Global de Trueque” (RGT).

The RGT was a weekly community market designed to encourage a self-sustainable alternative to the unstable national currency. Other alternative currencies emerged during this time of economic hardship, but none ever reached the same level of usage. Efforts to adopt complementary currencies were all but extinguished after government policies expanded unemployment programs and counterfeiting problems surfaced.

Research at Bucknell University shows a majority of complementary currencies are created during times of high unemployment, economic instability or if no adequate banking service is available. The nature of these currencies is to act alongside fiat currency in a cooperative system.

The WIR Bank in Switzerland uses an electronic form of currency, the WIR Franc, in combination with the national currency to create dual currency transactions. In 1934, currency shortages sparked a solution from Paul Enz and Werner Zimmermann to create a network of businesses looking to maintain a competitive advantage.

The result of their efforts lead the WIR Bank to being adopted by 20 percent of businesses in Switzerland. The alternative liquidity that the WIR Bank provides has proven beneficial during economic hardships.

Bitcoin provides a digital solution for systems that rely on multiple consumer needs. To act as an exchange between a national currency and an alternative currency, all that is required is that the acting exchange accepts both currencies. It can be a large institution or a small network of businesses.

A trustless digital ledger does not require a large reserve of funds to back value in one currency or the other, because of the nuances of the blockchain. When an account requests to exchange funds from one currency to the other, a Bitcoin transaction is recorded on the blockchain and funds are moved without an intermediary. This transaction acts as a proof-of-exchange and provides a method to give additional liquidity.

The ability for the WIR Bank to provide additional liquidity is what maintains the WIR Franc as a powerful complementary currency. By also providing additional lending capabilities during economic hardships, the WIR Bank has helped stabilize the Swiss economy.

Offering additional means of acquiring assets is a large step toward increasing economic development in struggling regions. By granting microloans to women in Bangladesh, the Grameen Bank (and the spin-off Grameen Foundation) is reducing poverty with great success. Impact investments are an important tool for decreasing poverty in regions where unbanked individuals struggle to acquire assets.

Low-risk loans have been financed to individuals at interest rates as low as 0 percent in Ithaca, NY, using their version of a complementary currency. Ithaca Hours was created in 1991, and is currently the longest running complementary currency in the United States.

Since its establishment, millions of Ithaca Hours have been spent, and more than $100,000 worth of hours is in circulation today. A part of the success of Ithaca Hours can be attributed to the clarity of the program. One Ithaca Hour is equivalent to $10, which was the average wage in Ithaca in 1991. For a small fee, enterprises are given $20 worth of Ithaca Hours and listed in a directory of businesses accepting the local currency.

This creates a way for businesses to advertise their support for the community, and the program has a low entry fee, incentivizing even low-income individuals. However, administrative issues curb these efforts and have hampered the scalability of these programs.

Costs to maintain a steady flow of currency, pay salaries and raise capital have proven problematic. Complementary currencies are struggling to compete with the rise of digital payments. These currencies are created by private institutions, and normally run in conjunction with community banks.

To grow into the digital payment market, a complementary currency in the UK, the Brixton Pound, has adopted a Pay by Text method. This method is not self-sustainable. Digital platforms require constant updates to deploy adequate security measures.

Man-in-the-middle attacks and other security risks are an issue for all payment platforms. Complementary currencies will not effectively scale into digital platforms without large amounts of funding.

Using the blockchain, complementary currencies can be exchanged in a secure environment that does not require constant upkeep. Bitcoin provides communities with the foundation to build programs that suit the needs of their communities.

Some communities can benefit by financing microloans with Bitcoin-backed assets. Other communities can exchange into and out of their currency networks without the need of a third-party. The uses of Bitcoin grows with each new application. Systems developed on the blockchain are a better alternative to ineffective methods that are employed today.

Featured Image: Bryce Durbin