How Digitization Can Unlock the Potential of Local Currencies

In cities and regions across the world, the coronavirus pandemic has fostered and exacerbated challenges to economic vitality and social wellbeing. Policymakers are seeking solutions to a wide range of problems, including declining dynamism, rising inequality, and climate change.

Local currencies—a form of money that can be exchanged locally on favorable terms to retain wealth and promote prosocial behavior within a particular area—are a promising tool for meeting those challenges. Many places have used local currencies to strengthen regional economies, provide needed services, increase equality and inclusion, and address environmental degradation.

Despite these successes, local currencies remain an experimental and niche mechanism because they are costly to create and maintain and difficult to repurpose in response to shifting needs. However, advances in digital technology can lessen or eliminate these drawbacks and unlock the potential of local currencies as a potent instrument of social and economic progress.

Creating Incentives

Local currencies work much the way airline and coffee shop rewards programs do: they incentivize people to behave in particular ways and exchange goods, services, and money with specific partners.

Several local currencies have been created to encourage businesses and consumers to buy and sell in a specific region—to keep more money circulating locally and foster job creation, increased tax revenues, and a virtuous circle of economic activity and growth.

Local governments and businesses typically work together to ensure these currencies can be exchanged for the standard national currency, so they retain value while offering an additional benefit. For instance, people could receive a 10% discount―funded by the local government―when they use a local currency in local stores.

In the Berkshire region of Massachusetts, locals can purchase a currency called Berkshares―they pay 95 cents to receive $1 in value―at area partner banks. Berkshares have been issued since 2006 to retain wealth in the region and support local businesses. Roughly 130,000 Berkshares are in circulation at any given time.

Many Currencies, Many Uses

Other uses for local currencies include:

• Promoting and democratizing social services: In the Buurt region of the Netherlands, a local currency called the Makkie was introduced in 2012 to encourage and empower citizens to take active roles in their communities and increase residents' wellbeing. People earn Makkies by doing service or community work—anything from fixing someone's computer to volunteering at a film festival—and these physical notes can be redeemed for products, services, leisure activities, or discounts at local shops.
• Countering inequality and social exclusion: The Bangla-Pesa, a local currency in an impoverished district of Mombasa, Kenya, allows community members to trade goods and services with each other regardless of the local conventional money supply. Introduced by a local non-governmental organization (NGO) that focuses on economic relief and stabilization, the Bangla-Pesa has been useful in addressing gender and economic inequality in an area where women own 75% of participating businesses and the typical user of the currency is a 35-year-old mother who is the main provider for 2 to 3 children.
• Addressing environmental impacts: The Eco Iris, a government-sponsored currency in Brussels, is awarded to people who make their own compost, buy organic produce, and behave in other eco-friendly ways.

Lacking Longevity

Over the last century, more than 4,000 local currencies have been introduced worldwide―but few have stood the test of time.

Some fail because they are a poor fit for local situations. Others prove effective during times of regional stagnation and crisis—when the mainstream currency is scarce and limiting economic vitality—but lose traction and relevance when fortunes improve.

In some cases, local currencies become a threat to mainstream currencies and are shut down by central banks. During the Great Depression, for example, the Austrian city of Worgl created a local currency called the Freigeld that helped reduce unemployment and allowed local government to complete projects including construction of a reservoir and a bridge. The experiment drew interest from the French government, but Austria's central bank terminated the currency after it had been in circulation for only a year.

Other factors working against the longevity of local currencies include:

• Difficulty managing a new and complex ecosystem./li>
• Most local currencies are created by NGOs, community organizations, and local governments—entities that typically lack expertise and resources to sustain a currency over time and through rough economic patches.
• Failure to distinguish themselves from the mainstream currency.
• Operating costs―including manual processes for issuing, tracking, and gaining public acceptance of local currencies―that often exceed the benefits provided.
• A lack of flexibility. Local currencies designed to address specific issues are not easily refocused on new challenges.

Digital Difference

Technology has the potential to overcome some of these hurdles—and, in turn, breathe new life into local currencies.

Emerging firms are creating the technology needed to support digitized local currencies. Digitization and decentralization can significantly reduce the cost of introducing, operating, and monitoring local currencies. For example, geo-fencing and the use of smart contracts and digital wallets can simplify processes that traditionally have created heavy administrative burdens such as defining active regions and participating merchants.

Similarly, the programmability of digital currency can make it more flexible than paper money, allowing policymakers to quickly refocus on new areas of socioeconomic impact—either by shifting the value a local currency creates or the problem it solves. For example, digitization makes it relatively easy to expand or contract a local currency's operating region and to reorient it away from revitalizing local businesses and toward addressing environmental challenges.

Emerging firms are creating the technology needed to support digitized local currencies. One Israel-based cryptocurrency company, has created a "City Coin" platform that helps cities reward residents for behavior that boosts local economic activity and promotes municipal goals. After enjoying some success in Tel Aviv—where participating business owners reported 30% of their economic activity came from users—the company is now focusing on the United States and working with the cities of Akron, Ohio and Rancho Cordova, California.

In Barcelona, a pilot program uses blockchain technology that allows local transactions between individuals, businesses, and institutions to help small businesses facing decline because of large stores, supermarkets, and e-commerce. The REC is a private stablecoin used with a mobile app and it can be exchanged for Euros at any time, which helps build trust in and encourage use of the currency.

Window of Opportunity

Increasingly, leaders and thinkers from across the political and economic spectrum are calling for capitalism to be re-imagined to address pressing issues including socioeconomic inequality and climate change. Local currencies, as drivers of behavior, could play an important role in this shift.

Despite their rich history, these currencies have remained niche tools―but technological advances are opening a window of opportunity for broader and more effective use. Large commercial banks generally have not participated in local currency efforts, but they possess the expertise and resources to be key players in emerging ecosystems. If and when local currencies become mainstream, every city in the world will have a new tool to address economic vitality and other regional challenges.