A community currency is a currency which facilitates commercial transactions within a physical, commercial or ideological community. Unlike conventional fiat currencies, which are circulated and backed by a central bank or monetary authority on behalf of a government, community currencies are circulated and backed by interest groups, foundations or private companies.
While community currencies may develop organically, they are most commonly issued by a central party. The central party may guarantee redemption of currency units for government-backed fiat currency in order to engender trust in the currency (backed community currencies). It is also common for community currencies to only be redeemable for goods and services at participating merchants, unless a counterparty can be found which is willing to purchase the currency in cash (unbacked community currencies).
The majority of community currencies are denominated by government-backed fiat currencies and their values are pegged to the currency which denominates them. In this way, units of community currencies serve as vouchers or promissory notes which can be redeemed against goods or services at participating merchants. Central parties may sell units of community for government-backed currency at a discount on their face value in order to encourage adoption.
A community currency may, under some circumstances, become more valuable than its underlying government-backed currency. This may be the case, for example, when a government-backed currency fails but trust in a community currency remains strong.
The most common use of community currencies is as a means of encouraging trade within a community. Community currencies also prevent outflows of wealth from a community because units of community currency can only be exchanged for goods or services at merchants which accept the currency.
Community currencies also play a vital role in complimenting government-backed currencies by extending the flow of cash-equivalents in economies during cash shortages. By increasing the amount of cash in circulation, they allow community members to engage in commercial transactions which would not otherwise be possible. The resulting increase in commerce stimulates economic growth in the community.
Another function of community currencies is providing community members with access to affordable loans at times when the cost of conventional loans is high. Community members are able to provide low-cost loans in a community currency because they are guaranteed that the currency will be redeemed for goods and services within the community, which will benefit them in turn.
While some governments have banned or heavily regulated community currencies, Switzerland has long encouraged the development and use of these currencies as a means of diversification. The use of community currencies domestically relieves demand for the Swiss franc, balancing the strong external demand for Swiss francs by foreign investors. Examples of commercial community currencies used in Switzerland include the WIR franc (CHW) which is backed by the WIR Bank and the REKA check which is backed by the Swiss Travel Fund. Swiss community currencies backed by interest groups include the Farinet in the Canton of Valais and the Netzbon in Basel.
Community currencies exist in many countries around the world, but have been particularly successful in the United States, Germany, the United Kingdom, Kenya and Brazil. The Chiemgauer in Germany and the Sarafu-Credit in Kenya are two examples of established community currencies.
In recent years, a number of community currency experiments based on cryptocurrency have been attempted. These include the Mazacoin, which was promoted as a community currency for autonomous native American reservations, and the Kolion, which was adopted as a community currency in the Russian town of Kolionovo.
More on this topic:
Alternative currencies explained
