Alternative currencies

Business boosters or flashes in the pan? Kieran Corcoran explains four different ways to trade

We've all seen - and felt - what it's like for people to lose faith in finance on a large scale. Along with financial institutions and products, even national currencies are falling prey to alternatives. Economic hard times, as well as advances in technology, have produced a spate of new mediums of exchange, which let people exchange value and do business in ways they find more attractive. Here are four of the most interesting alternatives.

Local currency: the Bristol pound

In September 2012, a local currency was launched in Bristol to boost local businesses by helping the area retain its wealth. The Bristol pound (£B), backed and administrated by the Bristol Credit Union (BCU) bank, is a "complementary currency", which means it's designed to circulate alongside the national currency.

The Bristol pound's value is fixed to sterling in a 1:1 ratio, and a pound sterling is held in reserve for every Bristol variant in circulation. The two currencies can be freely exchanged, less a 3 per cent transaction fee for turning Bristol pounds back into their nationwide counterpart.

The aim of local currencies is to ensure that wealth created in the area stays there. Local people buy Bristol pounds, which they can only spend in Bristol shops. In turn the shops can only use them to buy from local suppliers, who can spend their pounds in those same shops - this is known as the "multiplier effect". This structure minimises the wealth leaking away to, for instance, multinational or foreign-based companies, who would typically take money out of an area. Although BCU initially incentivised the currency by selling £B105 for £100, and it is hoped that deals will be offered to shoppers using the currency, the primary incentive is the emotional attraction of supporting the local economy.

BCU aims to have over £B500,000 in circulation within a year, and hundreds of businesses have reportedly pledged their support, backed by Bristol council, which will allow council tax and business rates to be paid in Bristol pounds.

Local currency initiatives have already been launched elsewhere both in the UK and abroad. Brixton, London and Lewes, East Sussex both sport their own local "pounds", while the Chiemgauer currency in Bavaria, Germany, and the BerkShare in Berkshire, Massachusetts, are longer-standing examples, with the latter boasting over $2.7 million (£1.7 million) in circulation.

Digital currency: the bitcoin

This digital currency, favoured by internet enthusiasts, anarchists and drug dealers, is untraceable and impossible to forge; each bitcoin is the solution to a long and difficult cryptographic puzzle. Bitcoins can be passed from user to user over the internet, and all transactions are recorded on a public ledger, making it impossible for the same coin to be in circulation twice.

There is no central issuing body, and new bitcoins are issued at a steady rate to people who dedicate large amounts of computing power to generating new coins, a process known as "mining". The rate of release is fixed by the algorithm governing the coin supply, which increases the difficulty of the equations required as more are solved. The easily-transferable units can be traded on active stock exchanges for regular currency, and are redeemable in a variety of online stores selling anything from computers to cupcakes.

All trades are recorded in a public log, and trades are instant, irreversible and free, which makes them attractive to online businesses, who traditionally lose a proportion of their takings to companies such as PayPal and Visa. For these same reasons, bitcoins are also a useful means of exchange for countries where consumers have little or no access to traditional payment systems like PayPal, as highlighted by blog-hosting website WordPress, which recently began accepting the currency to make their services more widely available.

However, there is a dark side to this unregulated currency. When combined with encrypted browser settings, transactions are completely anonymous. Bitcoins are the currency of choice on the Silk Road online marketplace, which offers illegal drugs and weapons, making it far less risky for criminals to profit from the illegal trading that takes place on the site.

Social currency: the ven

This alternative, digital currency is based on the exchange of knowledge between professionals. The ven is the official medium of exchange for invite-only social network Hub Culture, and has been floated on open markets for around a year since Thomson Reuters began providing pricing data on the currency.

Hub Culture founder Stan Stalnaker says: "Originally the ven really was about exchanging value and knowledge between members; then it grew into online stores. And more recently it's grown into financial assets and trading: things that go beyond knowledge and a coffee."

Like the Bristol pound, the ven is also fully backed by other assets, which comprise a mixture of foreign currencies and other assets including carbon credits, which makes it more stable than traditional currency.

"The ven is the first currency to be backed by a basket of assets," says Stan, "which means that the exchange price of ven is an amalgamation of a bunch of other things. One of those elements is carbon, so as ven grows we would expect to buy more carbon, save more forests, save more trees. We've got about 25,000 acres of Amazon rainforest so far that has been put under protection using the ven."

Financial uncertainty worldwide has led to difficulties with traditional currencies, and Stan can see the ven as a potential way out of the current system: "I do think alternative currencies offer new ways for us to value activity... increasingly I think people are looking for democratic ways of running exchange between each other, really peer to peer as opposed to centralised hierarchies, and I think ven is part of that answer."

While the currency is still in its infancy, recent ven trades conducted by multinational companies such as Nike, as well as banks and hedge funds holding the currency in reserve, may mark out ven as the first serious digital currency entrant into the financial markets.

Community currency: the time bank

It's traditional, capitalist wisdom that "time is money", and this form of banking takes the adage to its logical conclusion. "Time banks" exist in communities all over the world and allow people to exchange work of any kind on an equal footing.

Members of the bank complete tasks for other members, and so gain or spend an appropriate amount of hours, in what is essentially a codified way to do people favours. An accountant could spend two hours doing someone's taxes, who then walks a plumber's dog for two hours, who could then spend two hours fixing the accountant's boiler, completing the exchange. There is, of course, potential for much more convoluted movements than this.

Time banks tend to have limited interaction with traditional businesses, as they have little to gain but much to lose from the assumption that all work is equally valuable, but a strength is that they appeal to people who are usually outside of regular employment, and provide a medium of exchange which is easy to participate in on a small scale. Timebanking is often used to exchange childcare, and gives people such as prisoners, the elderly, full-time parents and the unemployed an opportunity to take part in economic activity.

Using a time bank is also efficient, as the exchange of labour is not subject to taxation and also doesn't impact on benefit claims made by workers. Even more so than with the use of local currencies, the system, often centred on a small geographical area, retains any value put into it.

The most advanced timebanking system is based in Ithaca, New York. The Ithaca Hour has developed beyond being a medium of labour exchange - the currency can now be traded with US dollars, and also allows people to bill high-value work at more than one Ithaca Hour per actual hour worked, incentivising professionals such as accountants and dentists to join the exchange.