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Alternative Currencies POSTNOTE Number 475 August 2014 Alternative Currencies Overview Alternative currencies include global currencies like Bitcoin and local community currencies such as the Bristol Pound. They are meant to complement, not replace, national currency. Local community alternative currencies are designed to regenerate local areas, address social exclusion and value unpaid work and Alternative currencies are types of money or activities. exchange that can be used instead of and Global alternative currencies are designed to alongside national currency. A number of bypass intermediaries like banks. alternative currencies are used in the UK Alternative currencies are largely today. This POSTnote outlines the different unregulated in the UK. types and aims of these currencies. It also Consumers may not be protected against sets out how alternative currencies are being loss of global alternative currency. used and highlights regulatory and policy The use of some local community currencies challenges regarding consumer protection, may affect eligibility for benefits. financial crime and taxation and benefits. Background Local community currencies There is no commonly accepted view on what counts as There are three main types of local community currency in money or currency,1 but currencies typically fulfil three use in the UK, each with distinct aims. These are Transition functions: providing a unit for measuring the value of an Town Pounds, Time Banks and Local Exchange Trading item; acting as a store of value for future use; and being Systems (LETS). used as a ‘medium of exchange,’ which allows goods and services to be purchased using commonly accepted units Transition Town Pounds and tokens (e.g. a five pound note). In the UK, people are The Transition Town movement was launched in Totnes in free to accept any currency that they wish and alternative 2006 as part of an effort to re-organise local economies in currencies can be used alongside pounds sterling. response to a changing climate and perceived over- Alternative currencies have developed historically in dependence on oil. The Totnes Pound was the first response to concerns relating to financial crises2,3,4 and Transition Town Pound in 2007. The Lewes (2008), Stroud ecological, economic and social sustainability. (2008), Brixton (2009) and Bristol (2012) Pounds followed. Transition Town Pounds are paper notes with a legal status Types of alternative currency equivalent to a retail voucher. In contrast to vouchers, they are subject to tax in the same way as cash and are used to Alternative currencies are objects of monetary value, which keep money flowing within a particular town or city. Each can range from loyalty schemes like Amazon Coins or Transition Town Pound is backed one-to-one by sterling by Starbucks Stars to advanced technologies like Bitcoin. Most the managing Community Interest Company or membership alternative currencies fall into two types: local community organisation. Their use is geographically restricted (e.g. the currencies or global currencies. A third type, corporate Brixton Pound can only be used in Brixton). The largest of currencies, is explained in Box 1. This POSTnote does not the five Transition Town Pounds, Brixton and Bristol, involve consider those alternative currencies that do not form a 300 and 660 businesses respectively. Around 2,000 wider financial ecosystem, such as vouchers or loyalty residents in Brixton have accounts that allow them to pay schemes. with Brixton Pounds via text.5 There are 1,600 Bristol Pound account holders at the Bristol Credit Union. More than The Parliamentary Office of Science and Technology, 7 Millbank, London SW1P 3JA T 020 7219 2840 E [email protected] www.parliament.uk/post POSTnote 475 August 2014 Alternative Currencies Page 2 £600,000 Bristol Pounds have been issued since 2012, Cryptocurrencies although some may have been removed from circulation Cryptocurrencies are payment systems with their own and held as souvenirs.6 Both Bristol and Lambeth councils internal currency. They are designed to allow payments to accept business rates in local pounds and in Bristol, the be processed without any financial intermediaries like council's elected mayor George Ferguson draws his salary banks, and to generate units of currency without any single in Bristol Pounds.7 issuing authority like a central bank. The original and most widely used cryptocurrency is Bitcoin (Box 2). The designers Time Banks of the Bitcoin system set a cap of the number of new coins The currency of a Time Bank is time. A member can that can be generated. New coins will be issued gradually volunteer to work for an hour for another person, and in until 2140 up to a limit of 21m. This limit is meant to prevent exchange be credited with one hour. This can be redeemed bitcoins from losing value through inflation. The value of for a one hour contribution from any other member of the cryptocurrencies like Bitcoin fluctuates considerably, making Time Bank (the exchange need not be directly reciprocal). them unlikely to replace national currencies outright. This alternative time-based currency assumes the efforts of all members to be valued equally. Time Banks are usually Private Digital Currencies run by a broker supported by a social care organisation. The Private digital currencies are typically issued by a company first Time Bank in London, Rushey Green, was launched in or a social network to their customers or members. Well partnership with a GP’s surgery. known examples include Linden Dollars, which are issued within the online role-playing game Second Life. Players of Local Exchange Trading Systems (LETS) the game can earn Linden Dollars online and these can then Whereas Time Banks are usually run by a broker and be exchanged into national currencies like sterling. Debates associated with social care provision, LETS are membership are ongoing in the US and the EU about how Linden Dollars organisations in which members exchange an internal should be taxed.13,14 currency with each other for skills, goods and services. LETS currency is not denominated in time but in LETS units. Not all private currencies can be converted into national These units do not usually take the form of a token or note, currencies. The now-defunct Facebook Credits (2009-2012) but are recorded in a computerised ledger. Any member can were not convertible into national currencies nor issue the currency. LETS currency can be issued as a transferrable between users. This is because the Credits ‘credit’ in another member’s account in exchange for goods were designed to encourage users to spend more time or services received. Currency can also be issued as a consuming gaming or other services within Facebook. To ‘commitment’, or a negative account balance that shows a compete with national currencies, private digital currencies member’s willingness to provide goods or services to other must be transferrable among users and exchangeable for members in the future. A person can leave the LETS without other currencies.15 Private digital currencies designed to providing goods or services to which they have committed. increase consumption, such as Facebook Credits, differ However, it is assumed that people will not do this within from the competitive private currencies created by financial LETS because they are co-operative schemes. They may institutions that have been proposed as alternatives to also have difficulty returning to the LETS. The Bright centrally-issued national currencies like sterling.16 Exchange LETS scheme in Brighton has been running for 12 years.8 Aims of alternative currencies Alternative currencies are designed to bypass banks and Global currencies put control in the hands of members or users. Alternative Global currencies allow units of value to be transferred currencies have both social aims and financial aims. electronically between businesses or individuals and across national borders. The two main types of global currencies Box 2. Bitcoin are Cryptocurrencies and Private Digital Currencies. Bitcoin (with a capital ‘B’) is a payment system that allows units of currency (‘bitcoins’ with a small ‘b’) to be transferred between any two individuals who have a Bitcoin address. In the sterling economy, Box 1. Corporate Currencies financial intermediaries like banks ensure that the same units of Corporate currencies are based on the exchange of products and currency (e.g. a ten pound note) are not ‘double spent’ or fraudulently services from business to business (B2B), rather than business to used to pay more than one recipient. Cryptocurrencies are designed consumer. B2B currencies cannot be exchanged against legal tender to remove these intermediaries and as an alternative, they use a and are not subject to financial conduct regulations. Examples of B2B ledger called the ‘blockchain,’ which records the entire transaction schemes in the UK include Recipco and Gets Global.9,10 B2Bs are history of the Bitcoin network. A copy of this ledger is kept on the used all around the world in networks of businesses, typically small computer of every person running the Bitcoin software. Each Bitcoin and medium sized enterprises (SMEs), giving their users cheaper address is secured by a private key which is used to sign transactions lines of credit and low transaction and credit costs compared to and provide proof that they came from the owner. It is also prevents conventional currency. Some well-known international examples are in anyone from altering the transaction once it has been issued.17 Before Switzerland and Latin America. B2Bs are particularly appealing to a new transaction can be confirmed, it is checked by all computers on industries with low marginal costs,11 and can support profitability.12 the Bitcoin network to make sure that the bitcoins have not been used before or sent to more than one person at the same time. The first computer to confirm this is rewarded with a new batch of bitcoins.
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