Alternative Currencies: The Pros and Cons Explained

Almost all means of exchange in use today began as alternative currencies. In the past, towns, provinces, countries and empires created community currencies, bartering systems and time-sharing schemes to supplement the physical commodities used for inter-regional trade.

Until the Swiss franc was issued as a nationwide currency in 1850, most trade in Switzerland was transacted using regional currencies or bartering. Since then, many people have come to accept the dominance of fiat currency, central banks and international monetary authorities over almost every aspect of trade without question.

But recent attempts to reestablish the concept of trade as a direct exchange between individuals have met with more success than they have in previous decades. The concept of taking responsibility for the affect our transactions have on the world around us has become more widespread. Recent technologies have facilitated the use of alternative currencies.

Types of alternative currencies

It is important to differentiate between various kinds of alternative currencies because while they all offer an alternative to fiat currency, there are major differences between various types of currencies.

1. Cryptocurrency

We will start with cryptocurrency because this is the alternative currency type which has been the most hyped up in recent years. A cryptocurrency is a currency which is entirely digital and uses encryption for added security. The most popular forms of cryptocurrency are those based on blockchain technology, such as bitcoin and Ethereum. Today, thousands of cryptocurrencies exist - with new ones being created on a regular basis. Most of these are circulated within an online community and many of them are based on political or social aspirations. Some examples are explained in the moneyland.ch guide to popular cryptocurrencies.

Pros: The biggest advantage of cryptocurrencies is that they allow for electronic transactions outside of conventional banking systems. Because many of these currencies are backed by online communities made up of users in many different countries, they allow for some measure of international exchange and conversion into fiat currencies.

Cons: As with community currencies, the value of cryptocurrencies is only as strong as the demand from the community which accepts them. Cryptocurrencies can only be used to purchase goods and services from the community which accepts them, so their use as currencies is limited. Because these currencies only exist in electronic and not in cash form, they are potentially vulnerable to data harvesting, online theft and fraud. The value of cryptocurrencies is determined entirely by supply and demand, which has led to their being used primarily as a speculative instrument rather than a means of exchange.

2. Community currency

Community currencies are created by physical communities. The goal of these currencies is typically to promote trade between members of their issuing community and to prevent the outflow of wealth from the community. They may also provide greater stability because they are typically free from the speculation and macro-economic factors which plague national and international currencies. As long as the community which issues and accepts the community currency is economically strong, the currency will normally hold its value. Read the moneyland.ch guide to Swiss community currencies for more on this topic.

Pros: Community currencies are normally backed by fiat currency and can be exchanged for fiat currency at a fixed rate. If they reach a high level of adoption, community currencies stimulate regional economies and prevent the rapid outflow of capital. Community currencies may also benefit the environment by reducing the international manufacture and shipping of consumer goods. Most community currencies are issued as cash, allowing for direct transactions without the involvement of third-party service providers.

Cons: Because community currencies can only be used for the purchase of goods and services from the community which backs them, they must normally be converted to fiat currency when you make transactions outside of the community. Whether or not you can sell community currency for fiat currency depends on how strong demand for the community currency is. If a community currency does not reach wide adoption, it may more closely resemble a voucher system than a bona fide currency.

3. Time exchange

The adage “time is money” takes on a literal meaning in the time exchange system. In this system, individuals or businesses exchange services directly without converting time into money. The time exchange system is among the earliest forms of trade known to man. While maintaining accurate ledgers required a great deal of effort in the past, trading time has become a great deal easier thanks to technology. Time exchange systems now let you easily bank time and trade it with other participants in complex ways. You can find more information in the moneyland.ch guide to time banking in Switzerland.

Pros: Time exchange is among the fairest means of exchange because profits are limited by time, preventing participants from taking more than they give. Exchanging time eliminates the need for any form of money. Because time exchange requires direct interaction between individuals, it can help to build community.

Cons: Not everybody is willing to exchange their time for yours, so you may not find trading opportunities on demand. Time exchanges in Switzerland operate regionally, so the pool of trade partners is limited. The services you can offer individually may not be in strong demand. If you have more money than time, you may find it easier to pay for a service with money than to exchange your time for it. Legal tie-ups like tax and social security obligations can make time exchanges complicated and therefore less desirable.

4. Bartering

Bartering, or the direct exchange of goods and services at an agreed price, is among the oldest means of trade. This system – which is based on supply and demand – has made a comeback in recent years thanks in part to an increase in environmental awareness and a backlash against consumerism. Neighborhood exchanges, classified pages and local bulletins are just some of the mediums used. Initiatives like walk-in closet, which holds clothes bartering events in Swiss cities, offer another opportunity for traders. Online bartering platforms and mobile apps now match traders within a much larger pool than was previously possible and bring some interesting ideas to the table. On some Swiss platforms, such as Exsila, goods can be traded for points which can be banked and used to purchase the goods you want at a later date. Points systems act as community currencies to facilitate bartering.

Pros: No dependence on any financial service provider whatsoever because goods are traded directly and are never converted into money. Goods are used to a greater capacity because they are passed on to another entity when you no longer need them. This results in less manufacturing, shipping, and consumption of resources, and subsequently less damage to the environment.

Cons: You may not always find the items you need. You may not always find trade partners who are interested in what you are offering. Bartering portals and initiatives do not yet have widespread support, so their efficiency is limited. The majority of consumers are still accustomed to buying newly manufactured goods, even for one-time use. A shift in consumer behavior would be required for bartering to become an actual alternative to the conventional financial system

5. Precious metals

Rare metals have been the international currency of choice for thousands of years, and some precious metals (gold in particular) are still universally accepted in exchange for goods and services thanks to the ease with which they can be converted to fiat currency. In Switzerland, gold bullion is not subject to VAT. Gold bars as small as 1 gram are minted – making gold an ideal alternative currency. However, the majority of precious metal owners hold their assets as a means of wealth preservation or speculation rather than circulating them as currency.

Pros: Global acceptance. Inflation-resistant. No third-party service provider required for transactions. Direct transactions do not leave digital footprints. Quickly and easily converted to almost any fiat currency. Rare metals have physical value as commodities – as opposed to cryptocurrencies and community currencies.

Cons: Requires safe storage and physical transportation. Some jurisdictions forbid or limit the ownership and transfer of precious metals. Not everyone accepts precious metals as payment, so they may have to be sold for fiat currency in order to trade.

Verdict:

While technology has changed the way in which we make financial transactions, trading is still dominated by established financial systems and new technologies are rapidly being appropriated by those systems. However, social initiatives and technology have brought new life to alternative trading systems which make direct trading between individuals viable, efficient and (in some cases) free from third-party interference.

More on this topic:
Trading: Online broker comparison
Guide to buying gold in Switzerland