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