Virtual currency used as alternative currency

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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 ?

James P.

Posted 2012-08-23T23:07:02.437

Reputation: 197

1Are you talking about Bitcoin (or an alternate chain) or just virtual currencies in general? – David Perry – 2012-08-23T23:13:10.967

Bitcoin in particular. If it isn't suitable then ideas on what would be. – James P. – 2012-08-23T23:27:17.677

Perhaps this would be relevant to you? https://bitcointalk.org/index.php?topic=101197 We're considering implementing a POC of this.

– ripper234 – 2012-08-24T14:31:12.413

@ripper234 Will have a good read through. Have you had a look at the idea of minimum income being discussed in Germany and Switzerland ? http://en.wikipedia.org/wiki/Guaranteed_minimum_income

– James P. – 2012-08-26T01:48:45.970

No, not sure of the relevancy. – ripper234 – 2012-08-26T07:17:15.990

It is not relevant in this immediate context. However, this is one of the directions being considered by reformists. In the meantime, alternative currencies might not only a means to limit exchange to a locality. They could also serve as a means of survival in the event of a sharp economic downturn. In this respect, virtual currencies would definitely hold some advantages. – James P. – 2012-08-26T16:58:15.203

This link might also offer a few leads on what alternative currencies can offer offer conventional ones. http://en.wikipedia.org/wiki/Monetary_reform

– James P. – 2012-08-26T17:54:51.527

Answers

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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.

David Perry

Posted 2012-08-23T23:07:02.437

Reputation: 14 120

Thanks for the input David. Could you go further into explaining why a central issuer would be necessary ? I do understand that alternative currencies such as Berkshares are localized. Also, am I correct in thinking that Bitcoin requires purchase with, say USD, for issuance ? – James P. – 2012-08-23T23:31:52.067

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Bitcoin does not require purchase with any fiat currency for issuance. Issuance happens via an activity commonly called "mining" - miners perform huge amounts of complex math that help secure the transaction history against fraud and in exchange, they are rewarded with a set amount of Bitcoin. It may be worth reading the "How Bitcoin Works" page on the wiki for an overview.

– David Perry – 2012-08-23T23:51:47.877

1@JamesPoulson: I don't think there's any way to hold a currency to a standard without either a central issuer or good samaritans willing to take huge losses. Without a central issuer to regulate supply, too much currency can be in circulation and the currency's value can fall, separating the currency from the standard it's supposed to stay pegged to. The standard could only be held by a good Samaritan who buys up the currency at a loss until the standard is reached again. Who would do that? – David Schwartz – 2012-08-24T12:36:45.970

@DavidSchwartz I'm not sure I get all of that but how about substituting regulation with some "gameplay" or internal rules ? That's probably the intention behind the way Bitcoin is designed. As for inflation, there could be two possible solutions. Have a sort of "tax" or have units that expire after a given time or condition. What do you think ? – James P. – 2012-08-24T14:03:08.430

@JamesPoulson: See if you can come up with a way to make such a system work. I don't think you can. Who wants a monetary system with taxes or expiring units? What's the benefit of such things? – David Schwartz – 2012-08-24T16:38:43.037

@DavidSchwartz I won't hide that these ideas are coming from the monetary reform perspective. Here's where the idea of using a tax (might not be the appropriate word...) to tackle inflation comes from.

http://www.youtube.com/watch?v=DthcVZsFKmo

– James P. – 2012-08-24T16:49:56.803

@DavidSchwartz There is a topic on expiring currencies on this link, the reasoning being that it would encourage monetary flow: https://bitcointalk.org/index.php?topic=2462.0 . However, this article from mises.org suggests it could be a red herring and such a measure might not be appropriate, especially for people who aren't happy about state interventions. http://mises.org/daily/324 . This is where the idea of or gameplay or a ruleset comes in the idea being to protect the average consumer while leaving the market free within given confines or safety rails.

– James P. – 2012-08-24T16:54:27.857

@DavidSchwartz Here is a further link relevant to idea of expiring currency: http://en.wikipedia.org/wiki/Freigeld

– James P. – 2012-09-05T13:27:10.700

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.

Stephen Gornick

Posted 2012-08-23T23:07:02.437

Reputation: 26 454

Now some enterprising individual could probably build a mobile wallet app that monitors the blockchain & tries to spend "tainted" coins (where the taint means how much of the payment's pedigree is from other merchants in the community). Payments using these tainted coins would be awarded a discount from the merchant who in turn receives the same discount by re-spending the coins within the community. That way you end up with no issuer, and no overhead costs for managing this. The main problem is this would give up identity (e.g., merchants would need to register or claim receiving addresses.) – Stephen Gornick – 2012-08-24T02:34:43.987