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New Currencies and their Relationship with Fiat Currency

General Ideas

Complementary Currencies aim to work alongside the pound or the dollar. Classically they seek to broker exchanges of underused resources with unfulfilled need, and facilitate activity in niches neglected by the mainstream economy. They do much good work and are worthy of support.

Intentional Currency designs on the other hand will generally be grounded in a critical assessment of the way fiat currencies operate, and recognise and seek to remedy or mitigate their dysfunction. In this way they are competitive with fiat. Consequently if fiat currency plays a role in the start-up or continued operation of a new currency, it is appropriate to manage these interactions carefully and to understand the impact that fiat-dependence can have on the currency’s development.

This article outlines management issues associated with some of the potential interactions with fiat. It has been produced as a Working Paper as part of the Feasta Currency Group’s development of a Charter for Intentional Currencies.

Creating and maintaining a currency without any interaction with fiat is clearly a challenge. It’s like asking fish to reinvent water while they are swimming around in it. But if we consider the main forms of interaction with fiat, some clues as to the management of the difficulties may emerge.

Three important fiat-interactions are:

i) access to fiat capital for a start-up phase or for a step-change in the development of the currency
ii) the issuance of currency units in exchange for fiat (fiat-backing)
iii) general exchangeability with fiat

Capital Investment

Most projects need start-up capital, but fiat-friendly projects have the option of repaying investors or contributors in fiat once they are successful. A fiat-cautious project might think twice about this. To some extent this challenge has been successfully navigated by a number of ‘Open’ projects, at least to the extent that contributors defer any claim on project success until revenue streams flow or until ‘satellite’ fiat-earning activities are identified.

One attempt at formalising this sort of arrangement is Sensorica’s Open Value Accounting (OVA) proposal. ‘To distribute value in proportion to everyone’s contribution.’ [1] The way that value is progressively created and financial rewards ultimately proportionately allocated is peer-controlled via an evolving algorithm. Presented as a P2P-grounded initiative, preserving value-added for contributors and keeping out the evil monetising corporations, it has some immediate gut-attraction.

But it is a little scary. In a thoughtful critique of OVA Lars Zimmermann [2] makes the point that ‘Money and especially small sums of it are very good in destroying intrinsic motivation.’. This observation will be familiar to timebank advocates. Monetising a relationship can be a way of de-personalising or de-socialising. In the words of Mark Boyle [3], money… ‘creates a kind of disconnection between us and our actions’. So by reducing all relationships within an OVA project to calculations of input-worth and money-output it runs the risk of disabling any lingering intrinsic motivations. Zimmermann’s view is that ‘ intrinsic motivation is a huge driver in the whole open source world! The beauty you can find everywhere in Open Source Hardware is a result of massive amounts of intrinsic motivation.’

Sensorica see OVA as doing away with the power relationships and hierarchies that permeate the corporate world. An opposite view might be that rather than doing away with them, they are being programmed into an automated system. If we believe in the wisdom of crowds, then this may indeed become a superior economic form, but if it can be gamed or if the crowd begins to bully the individual contributor then OVA may become a new systematised and impersonal form of wage slavery.

So the devil will be in the detail. In particular the reputation systems that are designed to mitigate gaming attempts, and the emerging governance regime will be key. Decision making – for example about exactly when to crystallize value and distribute reward – is a tricky P2P area.

In a new currency context, we might anticipate different motivation-mixes (extrinsic / intrinsic) to different contributor-types, or at different stages of a project. A purist Intentional Currency approach might be to restrict any extrinsic motivation to rewards in the new currency itself i.e. to exclude fiat reward entirely.

Once established, an exchange currency can incorporate a transaction fee thereby progressively seting aside currency for subsequent capital investment. Culturally though, this old-fashioned approach of saving to invest later will be challenging to adhere to for a generation conditioned to the normality of debt and averse to deferred gratification.

Issuance in Exchange for Fiat

It is common for complementary currency to be issued in exchange for fiat. Thus a Brixton Pound comes into being in return for the deposit of one pound Sterling. The Sterling thus received is held on deposit, and effectively ‘backs’ the currency as it can be exchanged (minus a fee) for sterling at any time. This approach clearly limits the risk of the Brixton Pound user but it also limits the additional impact of the new currency.

Advocates of this approach often claim that while the issuance of currency in this way has no effect on the aggregate quantity of money in circulation, the new currency changes hands more frequently, and that increased ‘velocity’ increases the effective ‘local GDP’ of the currency area. Unfortunately it is impossible to prove this – any observed velocity effect can be due to moving local transactions (that would have taken place otherwise in sterling) into the new currency, leaving the overall local GDP (sterling + new currency) unchanged.

This is not to deny the positive impact of such currencies as local identity vehicles, nor the value of their signposting of local supply sources.

One alternative to being issued in exchange for fiat is for the new currency to be given or spent into circulation. Exchange currencies do not necessarily need backing but they need users to trust that they can be exchanged for goods and services of value. Such trust is difficult to build. Richard Douthwaite’s view was that an ‘anchor’ good or service was needed at the start-up of an exchange currency to reassure new users of a ‘redemption of last resort’. In Feasta’s Liquidity Network models this was usually the local authority accepting payment in the new currency for rates, parking and so on. The LA gives the currency into circulation via community groups and charities and/or spends it into circulation via its procurement of goods and services. Over time, as the currency is more widely used and accepted, Douthwaite suggested that this ‘guarantee’ could be withdrawn, just as the training wheels on a bicycle can be discarded once sufficient velocity is achieved [4]. Again, this model does not necessarily add liquidity. It depends on the recipient channels – their inclination to re-spend and their geolocation relative to the currency catchment area.

The problem with taking a fiat-backed route is that while it eases the start-up, it is difficult, perhaps impossible, to unwind the dependency. The most likely mechanism for an unwind would seem to be a progressive increase of the redemption-penalty – essentially decreasing the exchange rate. But such an apparent ‘devaluation’ would likely be interpreted as a negative signal, and if detected as a direction of travel could cause a counter-productive acceleration in conversion back to fiat.

Exchangeability in general

If currency units are easily exchangeable with fiat, but not pegged to fiat (via a 1-for-1-ish guaranteed exchange rate), there is always the possibility of a run on the currency driven by speculation or occasional bad publicity. As a currency matures it may in any case be impossible to prevent the creation of exchanges. Exchanges balance supply and demand via the exchange rate, so the overall currency supply is unaffected but an inconvenient level of inflation may occur.

In an analogous situation, the national economies of developing countries have been somewhat disadvantaged by floating exchange rates and ‘free trade’. But most of the developed countries achieved their esteemed status with the judicious use of trade barriers and capital controls, so we should not automatically discard these approaches as regressive. Effective capital controls though – introducing some degree of friction in the exchange with fiat – are difficult to imagine, short of a ‘Passport to Pimlico’ scenario [5].

If exchangeability with fiat cannot be prevented, perhaps it can be featured. Cryptocurrencies, notably Bitcoin, use the fiat value of a Bitcoin as an incentive to the creators and maintainers of the currency. At this relatively early stage of development this speculative value is perhaps reducing the potential velocity of circulation but as incentives switch from mining reward to transaction fee this may sort itself out. The clever incentive structure of Bitcoin is a good example of the ‘bootstrapping’ strategy needed for any emerging currency to scale.


The approach of an Intentional Currency to its relationship with fiat should be explicitly described in the currency’s design statements. The way in which the relationship with fiat relates to the currency’s overall intentions (values, outcomes, behaviours) is an important element of the currency, as is the way that relationship might develop over time. Currencies could usefully self-classify as fiat-friendly, fiat-cautious or fiat-averse and document their fiat-relationship-strategies in the relevant amount of detail.

Intentions are worth a close look in their own right. What are legitimate aspirations for an IC’s intentions? Is ‘local’ GDP a legitimate metric? Is increased liquidity of itself a ‘good thing’? Where is quality and wellbeing in all this? And can Intentional Currencies hope to bootstrap themselves into existence with mininmal dependence on fiat? In a later article I hope to come back to these questions and to expand on the basic ideas of the Preferenced and Deprecated Domains outlined in previous articles


15 Comments on "New Currencies and their Relationship with Fiat Currency"

  1. Makati1 on Fri, 31st Jul 2015 9:46 am 

    One currency for all is not going to work. You only have to look at the EU and the Euro to see why. Someone will ALWAYS con the system. In the Euro case, it is Germany.

    The current financial system is disintegrating before our eyes. The next one will likely be barter, if there are any of us left to do so.

  2. penury on Fri, 31st Jul 2015 10:07 am 

    In order to be a currency the item requires an agreed upon value between traders. In today’s climate trust is in short supply, In the U.S. currency is backed by “the full faith and credit of the government” what is the value of a “Federal Reserve Note”? Another one just like it. I think that “faith” in fiat is rapidly eroding, however at this point I do not see anything which will replace it. Which nation is debt free or has a currency which is backed by anything tangible? The time is coming when your paper will not be acceptable and other currencies either physical or electronic will not be acceptable. Guess what happens when trade dies.

  3. Plantagenet on Fri, 31st Jul 2015 11:29 am 

    The US dollar already acts as a universal currency. It is prized itself in many countries where their own currencies are unstable, and it is easily exchanged for local currencies anywhere on earth.

  4. steve on Fri, 31st Jul 2015 11:49 am 

    Nicole Foss predicted that the u.s dollar would be the last horse in the glue factory as the world sinks into deflation and so far her prediction seems to be correct. I don’t know that going further that will be true I think all countries are on the same ship and as that sinks we will see that as that ships sinks some will remain dry for just a little bit longer than others….think fractional reserve banking….

  5. Rodster on Fri, 31st Jul 2015 11:57 am 

    All you need to know is all gold backed currencies turn to fiat money and all fiat money becomes worthless. And behind the debasement of all currencies are politicians who are running up their nations debt like there’s no tomorrow. You can go back to the Romans and see what’s happening today and they all follow the same pattern.

  6. BC on Fri, 31st Jul 2015 12:21 pm 

    The growth of “trade” (Anglo-American imperial trade regime, i.e., “globalization”) is coming to an end in similar (and different) ways as happened during the sterling reserve regime in the 1920s-30s prior to the post-W II Bretton Woods regime.

    Also, the convergence of GDP PPP and equalizing of trade and capital flows between the three major trading blocs implies all major fiat currencies trending towards, and around, par with one another hereafter.

    Moreover, the rentier Power Elite are awaiting the next crisis to consolidate power and control via the Rockefeller-Rothschild int’l banking syndicate to merge the US and Canada with the UK and EZ to create the Transatlantic (and Transpacific) Federation. The reserve currency will be the IMF-reserved SDR, with the IMF as the reserve-clearing bank and the BIS as the central bank of central banks.

    “The Plan” is well along in its progress as part of the rentier Power Elite’s neo-feudal, bankster-run world gov’t.

    Resistance is futile. We will be assimilated (and later exterminated).

    It’s all good (for the top 0.001-1%).

  7. steve on Fri, 31st Jul 2015 1:06 pm 

    BC how do the .001 keep there heads in a situation like you are describing on one hand what you are talking about is a complete destruction of current system and then you are talking about BAU….
    It is like you are saying 4 people are deserted on an island and the the “Former rich dictator is among them and gets to keep his power…..and that is not how it works everyone becomes equal…that is why it is so scary to the .001 percenters….you have no further than to look at SA they will lose their heads literally if things slow down just a little. I think the same can be said all over the world…

  8. Davy on Fri, 31st Jul 2015 1:24 pm 

    Steve, I agree to a point. We really do not know how all this is going to unfold. Descent is random and unpredictable. Descent is also obvious. That which is unsustainable and non resilient will likely fail. Locations poorly located will likely perish. In that sense it is obvious. The details are where all this gets cloudy and smoky.

  9. Rodster on Fri, 31st Jul 2015 2:01 pm 

    “Resistance is futile. We will be assimilated (and later exterminated).

    It’s all good (for the top 0.001-1%)”

    And the planets biosphere is getting closer to life support so in the end I wouldn’t bet on the 0.01% making it in the long run despite their wealth. When the global economy and society collapses their p received wealth will be a fraction of what it once was.

  10. Makati1 on Fri, 31st Jul 2015 10:00 pm 

    The French took care of the problem. All of the 1% lost their heads. I suspect a similar ending for them this time. The population numbers point in that direction. For instance: In the Us there can not be more than 300,000 that are billionaires or in some power office. That makes it 1,000 to 1 when the day comes.

    If anything, the world may go back to a gold standard in some form, but it will be the East that initiates it, not the West. A few more years will see the East holding most of the world’s gold, if they do not already. History and a 5,000+ year old ingrained “gold gene” says that gold will always have value.

  11. steve on Fri, 31st Jul 2015 10:55 pm 

    I have to disagree with both Mak and Davy here.. First of all people in the United States feel like they are insulated from all the world problems….Which is why they don’t understand or have little empathy for the rest of the world.
    On the subject of Gold how could you switch to Gold when less than 1 percent of the population owns that? I could see more a mix of precious metals but just gold no…It would be the same problem. If you were to pay someone in the Philippines with a lot of gold I think would be a big mistake as they would follow you home and slit your throat.

  12. Boat on Sat, 1st Aug 2015 12:16 am 

    Japan, China, Korea for example had excellent systems. Except they continually robbed each others gold caravans. The key for the war lords was the ability to pay their Samurai. When the crash comes, how many Samurai can you afford.

  13. Makati1 on Sat, 1st Aug 2015 4:13 am 

    Steve, the money will be gold based, not the metal itself. Perhaps like the original gold backed dollar. The gold backed dollar didn’t allow the bankster mafia to make exorbitant profits so it was traded for a debt based currency where the bankster leeches could get a cut every time you bought something on credit. It also allowed the US to pay for their wars of plunder (Vietnam, et all) with fiat money worth less and less as time passed.

  14. steve on Sat, 1st Aug 2015 10:08 am 

    I see what you are saying Mak but you still are talking about a “trust” based system when the panic of collapse sets in that is lost. Will anyone believe that the U.S has what it says it has in gold? You are correct in that people will be looking for something tangible a bottom if you will…
    I find that when I visit my American counterparts they believe that yes things are screwed up but there wealth and isolation will protect them and things will be just fine, pensions will keep rolling in and their house will still be worth a million dollars 401k will keep them fat etc…and when I play the scenario in my head I just don’t see that….Another crash for the U.S will be deep and devastating…..the FED will panic and have to flush cash into the market thereby bastardizing the dollar etc…Right now the U.S is enjoying being a safe haven country…there are 3 possible scenarios
    1. War/fast collapse
    2. Slow devastating collapse
    3. A new invention creating tons of free energy

  15. deadlykillerbeaz on Sun, 2nd Aug 2015 6:15 am 

    A good medium of exchange in a collapsed world would be bars of soap.

    Hoard soap, not gold. You’ll have lots of friends. A ready supply of towels will come in handy.

    Clean and dry will have plenty of value.

    Also, be sure to have a textbook of clinical parasitology, you’ll need one.

    Live near resources, places where coal and oil can be extracted. If at all possible, be sure there is a power plant nearby too.

    Coal, oil and electricity will be good to have after everything has gone to hell.

    The banks will be closed but the doors will be open, the vault door will be open and you can have anything in there.

    The warehouse in the industrial district will have four billion bars of soap and the river has plenty of water. Fill the water towers with water so there can be enough to fight a fire if one occurs.

    Form an army to protect it all.

    Good land for farming in the vicinity can insure a food supply, build a grocery store for the distribution of the food products grown for consumption.

    It all can be done if you have soap. Don’t have to live like pigs, cleanliness is next to godliness.

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