Virtual currency used as alternative currency

Question

Would it be feasible for a virtual currency to be used in the same way as alternative currencies such as Berkshares and Brixton Pounds ? Furthermore, do you think it is possible to make it independent of conventional currencies such that it is held to a standard, say a basket of household goods ?

Answer 1

While there's no technical issue preventing the use of Bitcoin and its' associated engine for any number of alternate currency types, the problem you're likely to run into with your question is the addition of a central issuer. Bitcoin is explicitly designed for distributed issuance of funds according to a carefully designed algorithm that requires distributed proof-of-work. It would be non-trivial to chance the issuance mechanism.

That said, if you have a talented programmer, Bitcoin is open-source under the MIT license and you're welcome to modify it as you see fit, just know that it's probably not going to be as easy as your question seems to indicate it should be.

Answer 2

Bitcoin is a standalone alternative currency with no dependency or "backing" from any other entity. The rate it trades at is the result of supply and demand.

The alternative currencies Berkshares and Brixton Pounds are representative currencies. A Berkshare represents 95% of a dollar. For example, you can go to a bank in the region and exchange one Berkshare and get back $0.95 USD.

Participating local merchants will accept the BerkShare at a 1:1 ratio with the dollar. They aren't necessarily losing the 5% as a customer discount though because after the merchant receives that Berkshare, it can then be used to pay contractors or to make purchases from other merchants.

The funds then circulate over and over within the community.

If the merchant happens to end up taking in too many BerkShares and needs make purchases where payment is in dollars, the BerkShares can always be redeemed back to dollars at the rate of $0.95 per BerkShare.

Most of the benefit goes to the consumer who converts dollars to BerkShares because this effectively provides a 5% discount on all purchases made using Berkshares. When the merchant then goes to spend these, there is no direct benefit because a full $1 of value was exchanged for each BerkShare.

The merchant might find that offering this 5% discount is something that is more than offset with stronger business locally, or the mechant desires improved relations with its customers and benefits from building and supporting a stronger local community.

This all works because BerkShares are not issued elsewhere, and they cannot be redeemed elsewhere.

With Bitcoin, there is no containment. A merchant could offer a discount for all bitcoin payments, but because that bitcoin can be redeemed anywhere, the funds aren't necessarily retained in the local community. There's no harm to offering this other than the potentially harm to margins, but going this route misses completely the original incentive of a community currency -- a reasonable method to encourage the community to increase commerce locally.

Here's the main reason this wouldn't work when using bitcoin just yet though.

Technically the backing for the BerkShare could be a bitcoin, or an ounce of silver even if you really wanted. But the problem is that you then expose the community members (consumers and merchants) to exchange rate risk.

But let's say this community (consumers and merchants) were willing to take on the exchange rate risk. There are more problems.

BerkShares does have a cost to administer -- the bills must be printed and there must be exchange to and from dollars, etc. With BerkShares, apparently the local community together subsidizes that. But the person holding the BerkShare is at no time not ever able to get back at least the $0.95 of value that was spent to acquire it.

If there were a method to transact electronically, then there wouldn't be the cost of the bills, but that is asking the consumer and merchant to incur costs that would be seen as excessive. So it would probably need to be paper-based or a coin monetary instrument representing the amount of backing held by an issuer.

And that again is a roadblock. The dollars backing BerkShares are held in a federally insured bank and BerkShares is responsible to ensure that no BerkShares are counterfeits. This does not translate well for bitcoin, as there is no "federal bank" to store the bitcoins with. Maybe with M of N a workable method to "bank" the coins would be accepted.

There are a lot of options for something like this, but really no incentive as the goal of the community currency is to introduce friction that encourages commerce to remain local.

Bitcoin is built to bypass any artificial frictions.

Now individuals and merchants in the community are free to begin using bitcoin without it being promoted as some type of community currency. It would be something novel where the merchant might attract new customers, but doing so doesn't necessarily bring the same results along the lines of what the BerkShares' goal is intended to bring.