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Blockchain is local currency’s missing link

SMBs, hailed as the backbone of the American economy, have become a magnet for fintech financing solutions and innovations. From lightening fast online loans to supply chain financing, incumbents and startups are eager to reap the benefits of small business loans, while companies like Intuit and Xero are greatly simplifying SMB accounting.

However, financing and accounting solutions, no matter how intuitive or beneficial they are to the small business owner, fail to address the fact that SMBs are enmeshed in an intricate network of community businesses. As such, addressing the specific needs of a single business might not be enough to help that business grow and thrive, let alone survive.

In fact, the American Independent Business Alliance, which helps independent businesses launch and implement the now ubiquitous “buy local” campaigns, found that the most successful campaigns engage businesses of every sector, demographic group and location in the community.

Local currencies face significant challenges

The finance industry’s nod towards the interdependent community web that links SMBs together was local currencies, a type of money that’s usually complementary to a national currency and which can only be used in a specific locale. For example, the UK’s first citywide local currency, the Bristol Pound, has been around since 2012 and enables consumers to use Bristol pound notes or text to pay options, as well as online banking.

Local currencies have been shown to do great things for communities, such as increase SMB revenue and encourage economic regeneration of marginalized populations. In spite of these benefits, adoption rates aren’t phenomenal. In Bristol, a city with over 400,000 inhabitants and thousands of small businesses, the Bristol Pound only has approximately 1400 individual members and 800 businesses accepting the Bristol Pound.

Launching a local currency like the Bristol Pound can get costly, too: there are special bills to be printed, regulated, and distributed, and there all also conversion fees to cover. It’s no wonder, then, that so many local currency facilitators are non-profits – up until this point, local currency providers and the municipalities they work with have had to shoulder the costs.

Blockchain could change all that

Blockchain technology could drastically simplify and minimize the cost of local currencies. Colu, an Israeli startup developing blockchain-based local currency solutions, is convinced that blockchain can take on the barriers that have prevented local currencies from really catching on.

“Blockchain allows for direct peer to peer transfers of value,” says David Sherman, head of marketing at Colu. As such, blockchain removes the need for any type of intermediary as far as local currencies are concerned – you don’t need banks, you don’t need to print money, and you don’t need to find ways to distribute it.

Is fear of blockchain a marketing concern?

One of these days, they’re going to invent a word to describe the emotional and psychological process individuals without background in finance undergo the first time they encounter the concept of blockchain. Even without this much-needed addition to the English language, you can imagine that blockchain might not be the sexiest marketing hook for merchants or consumers.

However, the blockchain in Colu’s local currency platform is invisible to the end user. “It’s not about blockchain,” says Sherman. “But when we go to a merchant, we’re not selling blockchain. We’re selling community business and increased traffic.”

Another major selling point is that transaction fees can be much lower than credit cards’.

So far, merchants in Tel Aviv’s Jaffa community have responded favorably to Colu’s offering, with nearly 50 merchants accepting Jaffa’s Colu-based local currency, the Pishpesh Shekel. The fact that different types of merchants – restaurants, pubs, homeopaths, pilates and yoga studios, an electronics store, a pet boutique – have adopted Colu’s payment solution will no doubt increase the reach and appeal of the Pishpesh Shekel to other merchants in the neighborhood.

Making money valuable

The potential impact of blockchain on local currencies is profound: with blockchain, local currencies could become just another hyper-accessible type of mobile payment. With Colu, for instance, merchants and consumers just need to download the app, and they can start using p2p community payments. Eventually the app will have a discovery feature through which users can discover and locate other merchants that accept local currencies.

Colu currently has two local currencies running in Tel Aviv, and Sherman notes that people in those neighborhoods are really eager for the project, more than the general public might expect. “Money with purpose and money with meaning rather than money for the sake of buying things has really resonated with people,” explains Sherman. “They care about their community. They’d rather do good than not.”

Blockchained local currencies could do more than simplify payments, though this simplicity will make it supremely easy to go from passive shopper to community activist in a matter of minutes. In theory, local currencies based on blockchain could engender a radical paradigm shift: “Money has always been about competition and scarcity, and now we’re making it about cooperation and community,” explains Sherman. “It’s actually been quite a powerful message.”

Making local global

Local currencies based on blockchain technology could also be transferable across different locales. For Colu, this feature is still in development and is at least a year out, but the idea is that you could use the app to exchange your local currency for a different local currency according to an exchange rate.

“You can then be a local in that community,” says Sherman. “The app will help you discover the local area faster, plug into the local coffeeshop…you can be local everywhere you go.”

Hurdles to overcome

As with any blockchain endeavor, the proliferation of blockchain-based currencies will be largely dependent on the future of blockchain regulations; at this point, Colu is working with lawyers and regulators to figure out what the ramifications of such regulations might be. Colu also hasn’t revealed its economic model yet – this will be a critical turning point for the local currency blockchain market.

For now, however, Colu’s vision of a global network of local currencies has resonated with investors, who have invested $12 million in the concept. Unless you’re opposed to doing good for your community with the push of a virtual button, blockchain local currencies should be an interesting space to watch in the next few years.

Photo credit: Ted Van Pelt via Visual hunt / CC BY

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WTF are local currencies?

You’re vacationing in Bristol when you suddenly get a hankering for some cheesy comestibles. You head over to The Bristol Cheesemonger, order a hunk of Cheddar, and move to the register to pay. As you’re fishing around for your Pound notes (which, you think to yourself, have probably dipped even lower in value over the past five minutes, thanks Brexit), the cashier asks whether you’ll be paying in Pounds or in Bristol Pounds.

You pause, thinking maybe you misheard. Then, as the cashier looks at you expectantly, you say – as they do in the UK – “Pardon? What are Bristol Pounds?”

WTF are local currencies

The Bristol Pound is a type of local currency, which is a form of money that can only be used in a specific locale or community. Local currencies are usually complementary to the country’s national currency – it’s not that Bristol has decided to secede from Britain and has accordingly launched its own currency; rather, the Bristol Pound is backed pound for pound by sterling deposits, making it just as safe (or as risky) as paying with the national pound.

Nevertheless, there are some types of local currencies that aren’t backed by a government and that can’t be considered legal tender, such as rewards systems (like frequent flyer miles, Reddit Gold, or Starbucks Points) and mutual credit systems (like local exchange trading systems and timebanks).

How many local currencies actually exist? Is this really a thing?

It’s a thing. As of July 2016, there are thousands of local currencies active worldwide. And while it would make sense for local currencies to mushroom in Africa, which for the most part doesn’t have an established banking infrastructure (leading African countries are to adopt some seriously cool fintech banking solutions), the phenomenon is actually far more prevalent in developed countries.

Reward systems and mutual credit systems aside, the US has over 100 local currencies, Canada has at least a dozen, Europe has over 60, and the UK has at least 9.

Who benefits from local currencies?

A number of independent studies have shown that local currencies can in fact have a positive impact on a community’s microeconomy: local currencies tend to generate more revenue for SMBs, which in turn allows them to invest in better technology or equipment to grow their business, and local currencies have also been found to encourage economic regeneration in poor areas with otherwise prosperous economies.

“My view is that local currencies offer an opportunity for resilience at the local level,” says Dr. Mark Perry, a senior academic at Brunel University’s department of computer science. Perry, who researches Bristol Pound users together with colleague Dr. Jennifer Ferreira, has found that local currencies “build interactions in communities, cement relationships in places, and provide a nucleus for building consensus around the kinds of cultural and economic futures that their users envision.”

To what extent are local currencies impacted by digital?

Fintech can’t take credit for the creation of local currencies – they’ve been around since the early 1900s. This Swiss WIR Franc, for example, which has an annual turnover of 1.2 billion Swiss Francs and which serves 62,000 SMBs, was launched in 1934.

Nevertheless, digital innovations have made it much easier to create and spend local currency. With the Bristol Pound, for example, consumers and businesses can sign up online via Bristol Credit Union, and consumers can TXT2PAY within seconds on any mobile phone.

Socially-minded fintech startups have set their sights on the globalization of local currencies with the help of fintech’s current sweetheart, blockchain technology (“How you doin’?”). Colu, an Israeli company that started out as a colored coin app but pivoted to blockchain-based local currency provision, believes that blockchain is the key to making local currencies widespread. 

As with many blockchain predictions, time will tell with this particular technology will be able to help local currencies make the leap from marginalized to mainstream.

Are local currencies disruptive?

Should incumbents have local currencies on their radar? Short-term, says Perry, the answer is no: “Where [do local currencies] sit in the larger economy and finance industry? At the moment, its effects are probably microscopic.”

Nevertheless, Perry believes that the long-term potential of local currencies is disruptive, especially in the context of the digitization that makes them cheap and easy to access.

“Digital local and alternative currencies are not constrained by the technical and regulatory constraints, and legacy concerns of traditional fiat currencies,” he explained. “This is a huge opportunity in challenging the financial status quo. It’s a form of homebrewed fintech that grows bottom-up from people’s real interests and concerns, and which could meet needs that are unmet in the industry elsewhere.”

Photo credit: Gerry Dincher via Visualhunt / CC BY-SA