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Published on: Sep 5, 2024
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A complementary currency is a medium of exchange that is an alternative to and complements a national currency. Why is a complementary currency important?
➔ A complementary currency is set up by concerned individuals and groups in consultation with public regulatory bodies for specific conditions or within a local area.
➔ A complementary currency has a specific economic, social, environmental, or political goal.
➔ There are several types of complementary currencies.
The history of money is ancient. What first began as a barter system during the early phase of civilisation has evolved into the modern fiat currency system.
But during the journey of money, there are several currency systems that emerged to address concerns of different communities through time. Some of such currency systems exist even today and tend to complement the dominant national fiat currencies. Such a currency is referred to as a complementary currency. This blog discusses what a complementary currency is and its different types and applications.
A complementary currency is a currency or a medium of exchange that is an alternative to and complements a national currency. Though not widely used, it is accepted for locally specific conditions in a nation.
Unlike a national fiat currency, a complementary currency is not recognised as a legal tender in any country. Instead, it is set up by concerned individuals and groups in consultation with public regulatory bodies for executing transactions under some specific conditions or within a local area in the nation.
A complementary currency aims to achieve a specific economic, social, environmental, or political goal. This is why it is very limited in its scope of usage and doesn’t threaten the presence of the fiat currency that is dominant in a nation’s economy.
Complementary currencies are created by communities for various purposes like fair exchanges or sustainable life choices. Primarily, there are five types of complementary currency:
Mutual credit currencies are the first among complementary currencies created within a community at a local level without reserve. Mutual credit currencies are used to settle transactions between companies or individuals locally.
These currencies create a pool of credit and liquidity for a local community seeking to launch their ventures. As more individuals become members of such a community, the credit and liquidity limits rise. Mutual credit currencies are used among communities that lack access to large-scale, institutional centres of money.
• Non-commercial Mutual Credit Currencies
Several mutual credit currencies are used at an informal, non-commercial level where people get connected outside the purview of economic markets. Typically, the unit of a non-commercial mutual credit currency is a working hour. A member has zero hours in the beginning and then earns units of working hours as they work in the setting. As they have twenty hours' worth of currency, he can purchase goods and services worth twenty hours of work.
It's a labour-intensive currency system in which the number of hours you put in earns you the capacity to acquire goods and services worth that much effort. A popular example of non-commercial mutual credit currency is a local exchange trading system or LETS. It records transactions of members exchanging goods and services by using locally created currency. It lets members negotiate the value of their own work hours or services and keeps the wealth in the local community.
• Commercial Mutual Credit Currencies
Commercial mutual credit currencies refer to the national currency as the unit of account. Each purchase contributes to the internal credit of the system. Each participant is accorded a purchase limit based on simple criteria, such as their workforce's strength.
The purchase of goods and services results in a minus (mostly interest-free) for the buyer and a plus for the seller. This process can be described as an act of decentralised money creation insofar as the positive balance can be used to make further purchases from other participants. Once the network reaches a critical mass, the possibilities for reusing the credit currency multiply and the system becomes more efficient.
The ongoing exchange gives the internal unit the character of money. The process of credit creation and currency circulation comes to an end when all participants spend their positive account balances matching exactly the negative balances of the other participants.
Some examples of commercial mutual credit currencies are Sardex and Bartercard. The Sardinian Exchange Network, or Sardex, is a complementary currency operating at the regional level through a B2B mutual credit system. The Bartercard is used in Australia and New Zealand in which a business can earn points for selling goods and use them to buy other goods.
Reserve-backed complementary currencies have the national currency or some goods as a reserve.
• Regional Currencies
Regional currencies are used by a community in a local region with a specific economic or social purpose in mind. Individuals can purchase the regional currency with the national currency at a 1:1 ratio. Further, they can use regional currency to make purchases at local businesses that accept the regional currency.
These businesses can then exchange the regional currency for the national currency by paying a fee of 0%-10%. Often, the fee is used to support causes at a local community level. Regional currencies put their reserve national currency in banks so that they can be loaned to businesses.
A regional currency that is getting popular is the Sarubobo Coin in Japan. Developed jointly by Hidashin Association and iRidge Inc., the Sarubobo Coin is a regional currency that can be used only in Takayama City, Hida City, and Shirakawa Village, Gifu Prefecture.
• Emergency Currencies
Some complementary currencies have goods such as food grains or other raw materials as reserves. Some even use energy as a reserve. Typically associated with periods of economic crises, goods-backed complementary currencies are not so widespread. Its adoption remains difficult because of its limited scope.
An example of an emergency complementary currency is Notgeld. It was produced during the war years in early 20th century in Germany and Austria as national economies got disrupted during the period. Notgeld was mainly issued in the form of banknotes, coins, leather, silk, linen, wood, postage stamps, aluminium foil, or coal.
Just like a national fiat currency, even a community issues a fiat currency at a local level. Such a currency is called a fiat complementary currency. It can even be used to pay taxes. A rather old concept, it is not widely known to be used currently.
However, we find an example of a fiat complementary currency in Kenya, where Sarafu is used by five different communities located in informal settlements or slums, including small businesses and schools. Sarafu complements the shilling, Kenya’s national currency.
Digital peer-to-Peer (P2P) complementary currencies are used for executing transactions among individuals outside the control and regulation of a centralised authority such as a central bank. The most common type of digital P2P currency is cryptocurrency.
While fiat currency is minted, cryptocurrency is mined via a distributed ledger technology on a blockchain network. While the former is issued and controlled by a centralised monetary authority, the latter is completely controlled by the crypto community. The current market capitalisation of the global crypto market is $2 trillion, per CoinGecko.
The most popular example of a digital P2P complementary currency is Bitcoin (BTC), also popularly referred to as digital gold.
Sectoral currencies are created to address specific issues such as environmental concerns, women empowerment or financial aid for the poor. Sectoral currencies operate in a social network in which the community members come together to create an economic system focused towards a particular cause.
For instance, you can work on an ecologically sensitive project and earn rewards which can be redeemed to acquire eco-friendly goods. The reward system incentivises individuals to contribute to a cause dear to them and in turn, a community is formed that has its own currency system.
Another example of a sectoral currency is the Banco Palmas in the Conjunto Palmeiras community located in Fortaleza, Ceará in Brazil. It has a low-interest micro-credit system that is aimed towards eradicating urban and rural poverty.
Image: Complementary Currency, Mariana Consoni Rubio (The Encyclopedia of Tourism Management and Marketing)
We already discussed above that Bitcoin, as a digital P2P currency, is a type of complementary currency. Let's explore the subject in detail. Bitcoin is the first decentralised cryptocurrency that was launched in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It is used both as a store of value and a mode of payment.
Image: A sculpture of Satoshi Nakamoto, by Fortune
The central argument underpinning Bitcoin is its desire to create a financial order lying outside the control of any central intermediaries. The Bitcoin payment system is not controlled by a centralised leadership and lies outside the regulation of any centralised government authority such as a central bank.
The current value of one unit of Bitcoin is around $60K and its market cap stands at $1.12 trillion. Bitcoin is today so popular that it has become almost synonymous with cryptocurrency.
Now, how can we say that Bitcoin is a complementary currency? For a currency to be qualified as a complementary currency, it should address the specific social or economic goals of a community. Bitcoin has been used to provide aid in war-torn regions. It also provides financial services to the underbanked or unbanked communities.
Not only that, but several establishments also accept Bitcoin as a mode of payment today. So, Bitcoin can indeed be counted as a type of complementary currency.
Recommended Read: FBI on Satoshi Files: Can “Neither Confirm Nor Deny” Its Existence
The main advantages of complementary currency are:
It advances an economic or social cause at a local level such as providing financial services to unbanked communities.
It creates an informal, alternative economy in which all the business enterprises in a region can become participants in a local economy.
It offers financial stability to those who cannot avail themselves of financial services via official, institutional channels.
It offers networking opportunities to local businesses so that they can receive credit lines and open themselves to regional markets.
During periods of economic crises, it creates an alternative financial system that facilitates the flow of goods and services in a region where the national economy has collapsed.
Image: Understanding the Concept of Complementary Currency, by FasterCapital
There are a few disadvantages of complementary currency:
Since it has a specific purpose, it cannot find wide adoption outside its local community.
Due to its focus on local issues, it can never create a nationwide or global network. Cryptocurrency, however, is an exception.
A robust national economy is necessary for a society to run smoothly. A complementary currency can only offer temporary economic support.
A complementary currency is a currency that acts as an alternative to the national fiat currency. It aims to serve a specific social or economic purpose at a local community level.
There are five types of complementary currency:
• Mutual credit currency
• Reserve-backed complementary currency
• Fiat complementary currency
• Digital P2P currency
• Sectoral currency
Yes, Bitcoin is a digital P2P complementary currency.
The advantages of complementary currency are:
• Advancement of a local cause
• Creation of an informal, alternative economy
• Financial stability
• Networking opportunities for local businesses
• Community support during economic crises
A complementary currency has these disadvantages:
• Lack of adoption
• Lack of nationwide or global network
• Temporary economic support
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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