The Economic Viability of Complementary Currencies: Bound to Fail?

Abstract

Bitcoin and similar cryptocurrencies are the latest embodiments of a longer history of attempts to establish something that is frequently labeled as „complementary currency“. In this paper, a typology of possible meanings of complementarity is proposed as a first step, illustrated with historical examples:

-Complementarity with respect to specific contracts (e.g. goods and services or transactions more or less exclusively available with certain currencies): Examples include currencies issued by computer game producers which give access to virtual goods in online games, and private cryptocurrencies which make possible illegal transactions and tax evasion unavailable in official currency -Complementarity with respect to specific currency denominations: Examples include small denomination coins privately issued by shops and bars to overcome shortage of small change in times when the availability of official coins was impaired due to war, crisis or specific policies. -Complementarity with respect to economic regions: Examples include scrip issued by companies in remote locations (industrial company towns, timber production etc.) to overcome logistical hurdles to the availability official money, or regional authority issued scrip in deflationary times, when people lost access to their bank deposits after banks limited withdrawals in the wake of bank runs.

In a second step, conditions for the acceptance of complementary currencies by users are discussed, drawing on economic theory. The main determinants are expectations about behaviour of the issuer and of other users. Much depends on whether competing alternatives are available. Being privately issued, complementary currencies can rarely claim exclusivity in their respective domain. In a context of currency competition, network effects will favour currencies with greater established user base, unless their economic performance is significantly inferior to competitors.

Keywords: Complementary currencies; bitcoin; regional money; monetary theory;

JEL Classification: E42, E50