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Of self-made coins and cashless economies!

Recently I was talking to an old friend of mine who happened to mention something very interesting. In a small town in India the local shop owners have invented their own form of currency. This town was facing an acute shortage of small change forcing shop keepers to hand out candies to customers in place of change. Customers were unhappy with this and were demanding to be paid in currency.

What did the shop keepers do? They manufactured their own currency.

Small fiber-based coins of denominations ranging from  1 to  5. They are now giving these to customers who in turn collect and use them to purchase goods the next time they are in the shop. A simple and effective solution to a long standing problem. But how long will this solution last? Well, until the central court takes notice and decides to shut it down.

There are two sides to this story. The good part is, instead of sitting around and waiting for the bank and the government to give them a solution, they found a workable solution to their immediate problem. But on the flip side, if everyone comes up with their own currency it will de-value the country's official currency and can adversely affect the economy.

If you have been following recent events you would have read about the situation in Greece. Would alternate currency aid the country in its time of need? With the current economic crisis looming large over it, an alternate currency for local transactions might keep domestic trade from coming to an absolute stand still. But if used extensively it can destabilize the economy though as a short term solution, it could benefit local trade. Similar situations have given rise to several alternate currencies in the history of money over the years, but the most popular albeit controversial parallel currency of recent times was invented by Bernard von NotHaus. The Liberty Dollar was of course labeled illegal and NotHaus, a domestic terrorist.  Another interesting example is the Q coin in China. It was invented by Tencent Holdings Limited which developed Tencent QQ, the popular online chat platform in China. This currency was initially introduced for users to buy virtual things related to their chat and blogs, but slowly it leaked into the real world and people started accepting and paying for 'real' things with Q coins. Of course the glory days for Q coins as real currency were numbered. The most successful by far I think are Linden Dollars, the very famous currency of the virtual world, Second Life. In fact this currency became so popular that it received its own currency code - SLB!

All of this gets me thinking about the value that cash or currency still has in our lives. While we talk about virtual currency, the mobile wallet and digital payments, the truth is we still have a long way to go before a cashless society becomes probable. But even when it does, will it really edge out physical money? I would not put my money on that.


Comments: (3)

A Finextra member
A Finextra member 20 July, 2012, 09:25Be the first to give this comment the thumbs up 0 likes

Good examples that illustrate well why fiat money can come not just from the governments. Dave Birch is a proponent of "new money" or, rather "new institutions" - one of his blog posts covered that subject well. In fact, US retailers are doing something similar, only they are looking to create not a new "money" (closed-loop cards existed for years, after all), but new "rails".

NFC solves the issue of "change", btw - and can be applied to "closed loop" ecosystem. It's just not that ubiquitious yet.

A Finextra member
A Finextra member 20 July, 2012, 15:18Be the first to give this comment the thumbs up 0 likes

All alternate currency, stored value or loyalty points system have to 'cash-out' at some point - creating exchange rates.  If this village keep manufacturing more and more 'currency' (like Quantativie Easing) then the currency become less valued and the exchange rates suffer.  Another problem is faked currency (counterfeit) which brings me to the point which is that in a way, 'digital' currency can be more secure, better tracked and harder or impossible to fake (except by those that have the keys to the printing press).  All digital money could be signed with a seal of authenticity and thereby tracked forever.

Maybe then we would see where all this recent virtual money really went. (i.e all the real money went out of the banking system to those that could take it, leaving a bubble of nothingness that we, the public, will be filling for years to come)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 24 July, 2012, 20:12Be the first to give this comment the thumbs up 0 likes

As long as the fiber coins are used to buy things from the same shop that issued them in the first place, there's perhaps nothing illegal about them. Therefore, the risk of any court issuing a "cease-and-desist" order are minimal. Besides, businesses like canteens have been issuing paper chits as substitutes for change for a long time in India. Furthermore, with commission on "change transactions" - 100 x 1 coins in return for 1 x 100 banknote - reportedly touching 18% (according to a parking lot attendant I happened to speak with recently), the change problem is only going to get more acute going forward. I doubt if Indian courts, who are struggling with a huge backlog of lawsuits, will be too bothered with such a typically-Indian solution to such a typically-Indian problem. Personally, I circumvent this problem by using credit cards as far as possible. Ever since I started doing this, I've been pleasantly surprised to note that, even for most categories of products of everyday purchase (e.g. fuel, groceries, cigarettes, etc.), there are several stores who do accept credit cards nowadays.