Private Branded Currencies: Currency Types and Meeting the Standard of “Good Money”

Feb 24, 2017

By Newman Banks

In the last article, we outlined the characteristics of how we define Good Money. The most important properties are:

  • Good Money should derive its value from real goods and services.
  • Good Money must allow for the rapid exchange of goods and services with close to zero transaction costs to the buyer or seller.
  • Good Money should be reasonably stable.
  • Good Money should be flexible.
  • Good Money should clearly reflect and represent the value of goods and services.
  • Good Money exchanged in a transaction should be transparent and represent relatively equal values of goods and services.
  • Good Money should represent a certain “standard of value”.

Meeting each standard for all of the properties listed above is difficult to meet for any concept of money.  In fact, today’s government issued (fiat) money cannot comply with even the first property!  Fiat currencies currently derive their value from the confidence  people have in that money.  Fiat currency value can fluctuate, not necessarily based on the actual value of goods and services, which retains relative stability over time, but based on confidence that people have in their central bank, retail banks and governments.  Different approaches and alternatives to fiat money have been tried throughout history, from barter systems to today’s evolving cryptocurrencies. In this article we offer some thoughts on these alternatives and discuss how they meet or fail the properties presented above. Let us consider a barter economy, cryptocurrencies, local currencies, time-based currencies and customer loyalty programs.

Barter Economy:

In today’s economies, one function of money is to set a price for all goods in units of money. In a Barter Economy, two parties have to agree on the interchange rate between each pair of goods, for each transaction. This is an inconvenience only surpassed by the impracticality, especially in the case of physically having to exchange goods. Not only must each transaction value be bartered, the method and means of exchange, including time and location must also be negotiated.  Consider the challenge of large or heavy objects being exchanged or if the exchange rate demands fractions of the goods to be exchanged.

In the case of a transaction in a Barter Economy, the value of goods exchanged establishes a real goods-based equivalent to monetary value, and that value is derived directly from goods, or services, exchanged. This is a highly desirable property, because it ties the economy directly to the real economy without, generally speaking, the space for political influence. However, this type of economy is highly impractical because it does not allow for rapid and efficient exchange of goods and services.

Cryptocurrencies:

On January 3, 2009, a new currency innovation was introduced to the public: the first digital currency which does not have a physical form (such as coins or notes). This innovation, the first true cryptocurrency, is called Bitcoin.  However, what has proven to be even more impressive than the currency itself is the new technology upon which it was based – “Blockchain”.  The concept of the Blockchain uses distributed ledgers to enable peer-to-peer transactions.  While Bitcoin remains largely the same as it was when introduced over eight years ago, Blockchain and Distributed Ledger Technology (DLT) has grown and evolved.  Using Blockchain or some version of DLT there are now about 700 different digital currencies, with Bitcoin still being the best-known.

Bitcoin has some interesting properties, in particular the fact that there is no central authority (bank or government) having the power to manipulate the currency. In addition, Bitcoin enables very low transaction costs, (in spite of growing energy cost increases to keep the network up and running – which, if it continues to be neglected, may ultimately have a negative impact on transaction costs), and Bitcoin-based transactions can be divisible into interminably small fractions. However, the two main disadvantages of Bitcoin are its volatility (gaining and losing value over short periods of time) and that a real goods-basis of value does not exist for Bitcoin.  Bitcoin’s value is largely based on speculation and its own intrinsic trade value. This positions Bitcoin outside the real economy and most companies who accept Bitcoin recognize the associated risk and volatility and therefore trade them into local fiat currency soon after receiving the Bitcoin payment. The consequence is that Bitcoin offers a very short lifecycle and cannot fill the requirements of a reliable currency that is well suited for storing values.

Local Currencies and “Scrips”:

Examples of local commerce being supported via the issuance of unique local currencies, or scrips, are plentiful.  Over the years the military, especially at oversea bases, and famously, coal mining companies, have used scrips both as payment of wages, and for exchange of goods and services within certain restricted zones.  Broader interpretation of local currencies and scrips can be understood in the context of bus tokens, festival ride tickets, cruise line vouchers, etc., all of which carry with it significant restrictions in terms of valid places for redemption.

While Ada Colau was running for office as mayor of Barcelona, which she won in June 2015, she popularized the idea of a local Barcelona currency which would be valid as payment in participating stores in the city. Further, the concept promoted that local government employees should receive part of their salaries in this local currency, with the essential idea of directing some of the purchasing power of the locals back to the local economy.

Similar concepts of local currencies which are valid only in some geographic regions have been seen for some time and are currently discussed in the Pavel Bains article “Why Cities Will Soon Choose Digital Currency Over Fiat Money”. In general, local currencies have no backing from any level of government, gaining its value only from the promise to be exchanged into goods in the geographical region. Therefore, these local currencies have fundamentally the same properties of fiat money but with an added deficit due to local or other restrictions.

Time-based Currencies:

The concept of time-based currencies has social roots and is an exchange system similar to a barter system.  However, instead of an equitable exchange of goods or services, the value is based on a person’s contribution of time.  In a particular time-based currency system, that contribution of time is given a standard unit of value, for instance a “person-hour”. This unit of value is the foundation for transactions or exchanges. In exchange for a good or service, a person would pay a certain number of time-based units which would ultimately be redeemed though that person’s time (or that of another person if the original person making the transaction could find another person to fulfill his time obligation).

This system of using time-based currency was conceived in the 19th century, and has been implemented with varying degrees of longevity (and success) since then.  A more recent illustration of this system might be seen in experimental communal or cooperative communities of the second half of the 20th century. In these communities, each of its members is expected to contribute time for the benefit of the community. The more time an individual contributes, the more “currency” is earned, and the more buying power that person gains.

Despite the fact that time-based currencies have a defined and understandable baseline for each unit of value, a “person-hour”, it is actually not well-suited to scale beyond a small well-defined community with a widely accepted value for a unit of value.  There would be too many variances between communities and regions and, in fact, market segments.  In fact, for large scale applications, it would be virtually impossible to determine the exact value of person’s hour, which depends on that person’s skill set, speed at which the work is accomplished, and the intended task to be completed. As a result, values for time cannot be uniform and therefore prices (costs in terms of time units) are not transparent.  In addition, time and energy must be spent searching to find a competent person to perform the intended task.  This system therefore quickly devolves into bartering based on skill sets and availability.  In this scenario, time truly is money!

Customer Loyalty Programs:

Though not strictly legal tender, loyalty programs, especially those that use points, illustrate an offer of a type of currency to customers of that company. Such programs can be understood as a company offering a portion of its products for free.  In a loyalty points program, when a good or a service is purchased, that customer can be rewarded with a certain number of points and, with those points, is given a future right to acquire a portion of another of that company‘s product, in whole or in part, based on the number of points required and redeemed. But this right may not be eligible for exercise until certain other conditions are also met, including a minimum purchase amount requirement.  In addition, points may have time factors applied to them. The value of the points may decline over time, even dropping to zero upon reaching a full expiration date. Additionally, the rights assigned to a customer via a points program cannot be traded in the marketplace with other customers. Customer loyalty programs are increasingly personalized to the individual customer and customers are restricted from combining points with other customers. However, from the standpoint of Good Money, points programs have two very desirable properties: they are based on real products and the value of these currencies is transparent.

Leondrino Exchange:

At Leondrino Exchange we are developing a cryptocurrency which unifies all the properties of Good Money into one type of currency. Leondrino Exchange’s offering also unifies the strengths of the concepts of Good Money listed above and mitigates their weaknesses.

This article is the continuation of an occasional series in which we discuss money, its history, its forms and its future. Naturally, this is only a subjective point of view, but we would be very interested in your opinions as well. We invite you to contribute more ideas and perspectives on the properties that Good Money should have. Also if you have an opinion about any of the statements we have made, let us know. Sharing and discussing ideas will always improve the original thought. In the next part of this series, the Leondrino Exchange concept of Good Money will be explained in detail.

Until then!

Author:

Newman Banks

Economist at Leondrino Exchange

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