From Community Currency to Crypto City Tokens: Potentials, Shortfalls, and Future Outlooks of New Ol

From Community Currency to Crypto City Tokens:

Potentials, Shortfalls, and Future Outlooks of New Old Ideas

Helena Rong

David Dam

From Community Currency to Crypto City Tokens:

Potentials, Shortfalls, and Future Outlooks of New Old Ideas

Helena Rong

David Dam

About the Authors

Helena Rong is an interdisciplinary designer, technologist, and urbanist. She is a Ph.D. candidate in Urban Planning at Columbia University and a Technology and Public Purpose Fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs, whose research focuses on the use of emerging technologies such as AI and blockchain for the design and governance of the built environment. She received her Master of Science in Architecture and Urbanism from MIT and her Bachelor of Architecture from Cornell University. Rong is the founder of CIVIS Design and Advisory, a design and research practice based in Boston and Shanghai that engages in multi-scalar and interdisciplinary architectural and urban projects. Her work has been exhibited internationally at the Shenzhen Bi-city Biennale of Urbanism and Architecture, World Real Estate Forum, Future of Architecture Platform, among others.

David Dam is a first-year Master in Public Policy student at the Harvard Kennedy School. Previously, he worked at the Federal Reserve Bank of New York’s Research and Statistics Group, focusing on macroeconomic and monetary policy research. David comes to HKS to combine his quantitative research background with the more practical aspects of policy making. His wide-ranging policy interests include technology policy, climate action, the intersection of business and government, and equitable development policy. Upon graduation, he hopes to utilize his skills to contribute to data-informed policy design and decision-making.

About the Technology and Public Purpose Project (TAPP)

The arc of innovative progress has reached an inflection point. It is our responsibility to ensure it bends towards public good.

Technological change has brought immeasurable benefits to billions through improved health, productivity, and convenience. Yet as recent events have shown, unless we actively manage their risks to society, new technologies may also bring unforeseen destructive consequences.

Making technological change positive for all is the critical challenge of our time. We ourselves - not only the logic of discovery and market forces - must manage it. To create a future where technology serves humanity as a whole and where public purpose drives innovation, we need a new approach.

Founded by former U.S. Secretary of Defense Ash Carter, the TAPP Project works to ensure that emerging technologies are developed and managed in ways that serve the overall public good.

TAPP Project Principles:

• Technology’s advance is inevitable, and it often brings with it much progress for some. Yet, progress for all is not guaranteed. We have an obligation to foresee the dilemmas presented by emerging technology and to generate solutions to them.

• There is no silver bullet; effective solutions to technology-induced public dilemmas require a mix of government regulation and tech-sector self-governance. The right mix can only result from strong and trusted linkages between the tech sector and government.

• Ensuring a future where public purpose drives innovation requires the next generation of tech leaders to act; we must train and inspire them to implement sustainable solutions and carry the torch.

For more information, visit: www.belfercenter.org/TAPP

1. Introduction

Tailored to specific geographic areas, local community currencies are alternative monetary systems designed to empower local businesses and foster engagement while promoting a greater sense of unity of a place. Although these community currencies have never become mainstream practice throughout history, they have repeatedly risen in popularity during times of economic crisis or instability. In the wake of the pandemic, a resurgent interest in community currencies—now powered by blockchain and Web3 technologies—is reshaping the way cities approach local financing and engagement of their constituents. Over the last two years, mayors from major U.S. cities such as New York City, Jackson, Tampa Bay, Miami, and Austin made headlines by openly endorsing cryptocurrencies and embracing the idea of city-branded tokens in hopes of unlocking alternative ways of fundraising and boosting local economic growth during the crypto market’s heyday. With a rich history rooted in times of economic turmoil, community currencies offer both inspiring success stories and cautionary tales of the challenges that lie ahead as cities navigate the evolving financial landscape. As we consider the possibilities of community currencies powered by crypto, we ask: Are they just a temporary fad that poses potential risks and little value, or do they hold the potential to truly offer a synergistic solution to the problems facing cities today? Could they digitally revolutionize the age-old practice of local community currency and elevate public purpose value and social impact?

In this paper, we will survey the recent landscape of community currencies powered by cryptocurrency and Web3 technologies. Our investigation and evaluation will delve into cases that represent both top-down and community-oriented approaches, uncovering the potential benefits and pitfalls of combining Web3 technologies with the time-honored custom of community currency as place-based solutions to address urban challenges concerning public financing, local economic stimulation, and community engagement. Indeed, while some of these “crypto-native” projects that lack intrinsic value and use could reiterate or even exacerbate the same systemic inequities cities are trying to address, other more nascent and less well-known attempts that adopt a community-centered approach suggest alternative paths forward that could more thoughtfully tackle urban challenges through technology.

Drawing from a combination of gray literature review, archival analysis, semi-structured interviews with founding teams of some selected projects, and digital ethnography of online activities, we have mapped a landscape of current projects in this field. While the surveyed projects do not encompass a comprehensive overview of the entire landscape, they represent a diverse array of examples with different scales and approaches, illuminating what has been successful and what has fallen short on delivering their intended impacts. In the remainder of the paper, we will first delve into a brief history of community currency, followed by an overview and analysis of a selection of recent case studies that employ Web3 tools. Finally, we will conclude by highlighting key takeaways from these experiences that cities, communities, and anyone interested in this topic can learn from. (Disclaimer: The authors of this paper are academic researchers who have no financial interest or stake in the cases presented in this work. The content of this post is for informational purposes only and does not constitute legal or financial advice.)

Key Takeaways

• Decentralized technologies can potentially address challenges faced by traditional community currencies, but they require careful design with appropriate social and governance goals.

• Digital community currencies should avoid volatile cryptocurrencies and explore fiat-backed or asset-backed stablecoins.

• Digital community currencies should emphasize community-first adoption over endorsements from city figureheads.

• Permissionless participation in digital community currency can lead to speculation; incorporating an identification layer is preferred and recommended.

• Community digital currencies should prioritize local residents over crypto-native users.

• Current token-based on-chain voting leads to plutocracy. Alternative forms of voting that integrate locality and equity should be prioritized.

• A city-branded stablecoin can help create a sense of community and identity, thereby encouraging local spending and local value capture.

• Regulatory risks like stablecoin bans create challenges for innovations, requiring cautious evaluation from policymakers.

2. History of Local Community Currencies

The concept of community currencies (also referred to as local currencies or complementary currencies) can be traced back to ancient civilizations, such as the Egyptian grain banks or the barter systems of early agrarian societies. This system allows a specific geographical locality to circulate and spend their own currency on goods and services primarily provided by locally owned businesses. In more recent history, the economic crises of the 1920s and 1930s saw the emergence of functional community currencies in response to the bank runs that resulted in the collapse of banks and traditional finance systems. To address shortages in currency, numerous cities and towns across the US and Europe created their own local currencies to stimulate economic activity and alleviate financial hardships. These local currencies function as complementary currencies to the national currency, but with the added benefits of promoting local spending and capturing value within the community.

One of the best-known applications of local currency during this time was in Wörgl, Austria. The small village of Wörgl drew inspiration from the success of the Wära experiments in Germany, which had a community currency backed by extracted coal in the small town of Schwanenkirchen (the value of coal was less volatile than the German currency at that time).1 Sensing the grave economic conditions that his town faced, the mayor of Wörgl realized there were numerous public works projects that required completion and reduced unemployment, but the town had limited funds to pay workers. To address this issue, the mayor deposited the town’s 40,000 Austrian schillings in a local savings bank as a guarantee for issuing the equivalent of the town’s own stamp scrip.

1 Lietaer, B., & Dunne, J. (2013). Rethinking money: How new currencies turn scarcity into prosperity. Berrett-Koehler Publishers.

The town’s own local currency to paid employees for projects such as repaving the streets, rebuilding the water system and other public infrastructure projects.2 Workers who received payment in this form were compelled to spend it quickly due to demurrage, an anti-hoarding concept that features a negative interest rate, which increased the velocity of money, allowed for more jobs to be created, and ensured that value remained within the locality. This ultimately generated high levels of economic activity and attracted interest from neighboring communities, but was eventually shut down by the Austrian Central Bank due to its perceived threat to the Central Bank’s monetary authority and control over the nation’s currency.3

However, the Wörgl experiment proved contagious for other communities around the world. Famed economist Irving Fisher devoted his book Stamp Scrip (1933)4 to discuss the application of local currencies as a potential temporary cure for the Great Depression. Around 30 communities in Iowa adopted a form of local currency that provided temporary, emergency relief in small towns, but their benefits tapered off due to lukewarm support and poor implementation.5

Of the community currencies launched during the Depression era, the WIR franc (Wirtschaftsring-Genossenschaft) in Switzerland remains the largest alternative currency still in operation today, with an annual turnover of $7 billion.6 Founded in 1934, users of this currency—primarily small and medium-sized enterprises (SMEs) referred to as “members”—obtain WIR by selling goods or services to other businesses in the closed network or by obtaining WIR credit from a coordinating center.7 The primary goal of the WIR Franc is to stimulate local economic activity by encouraging businesses within the network to trade with each other and providing an affordable alternative to business loans denominated by Swiss francs, thereby promoting local supply chains, increasing liquidity, and supporting SMEs. The WIR Franc is asset-backed with its value pegged to the Swiss franc. It circulates in a closed-loop system and its usage is limited to the

2 Lietaer, B. (2013). The future of money. Random House. Available at: https://library.uniteddiversity.coop/Money_and_ Economics/The_Future_of_Money-Bernard_Lietaer.pdf

3 Adriano, Andreas. (2021). New Old Idea: Technological innovation is fueling the resurgence of community currencies. International Monetary Fund.

4 Fisher, I., & Cohrssen, H. R. (1933). Stamp Scrip. New York: Adelphi.

5 Warner, J. (2012). Iowa stamp scrip: Economic experimentation in Iowa communities during the Great Depression. The Annals of Iowa, 71(1).

6 Adriano, Andreas. (2021). New Old Idea: Technological innovation is fueling the resurgence of community currencies. International Monetary Fund.

7 Lietaer, B. (2013). The future of money. Random House.

businesses within the WIR network, helping to retain the currency’s stable value within the local economy.

During the late 20th century, local currency systems such as LETS (Local Exchange Trading Systems) and Time Banks emerged as alternative models for exchanging goods and services within communities. In the US, the most prominent example of community currencies is BerkShares, which is circulated in Berkshire, Massachusetts. Established in 2006 in Berkshire, Massachusetts, BerkShares was designed to support local businesses. Residents can acquire BerkShares from four participating local banks at a rate of 95 cents USD per BerkShare and spend them at more than 400 participating locally-owned businesses. As of 2020, over 10 million BerkShares have been issued, reflecting the success of the currency.

More community currencies fail than those that succeed due to reasons such as limited circulation, lack of acceptance, inadequate technological infrastructure, insufficient marketing, inability to scale, and absence of long-term vision and support. However, those that remain relevant and contribute to regional economic growth share several common features. These successful community currencies generate a high level of trust, which in turn fosters buy-in from both consumers and businesses. They are dedicated to serving the community, amplifying the multiplier effect of the community currency without competing with the national currency, which can still be used for non-local purchases.8 Importantly, while these currencies possess real-world value (or currency-equivalent value), they may not necessarily appreciate like an asset, and converting them to real-world values could incur a small cost.9

The number of locality-based complementary currencies has ballooned over the last several years with estimates reaching over several thousand systems in existence today.10 The advent of digital technology has further facilitated the development of digital local currencies, many of which are powered by blockchain technology, offering faster settlement and cheaper transactions. In spring 2022,

8 Demeulenaere, S. (2000). A Pictorial History of Community Currency Systems. Available at: base. socioeco. org/docs/ pictorial_history_of_ccs. pdf; accessed 7th February 2015.

9 BerkShares, for example, can be converted from dollars freely, yet charges a 1.5% fee to convert to dollars. There is no incentive to hold on to BerkShares since there is no profit to be made relative to the dollar.

10 Deighton, Ben. 2017. Alternative currencies in rapid growth phase – researchers. Horizon: The European Research and Innovation Magazine. European Commission. Available at: https://ec.europa.eu/research-and-innovation/en/horizonmagazine/alternative-currencies-rapid-growth-phase-researchers

the aforementioned BerkShares transitioned from paper currency to Digital BerkShares. This change was made possible through a collaboration between New York-based social enterprise Humanity Cash and Berkshire’s Schumacher Center for a New Economics, leveraging Celo Foundation’s carbon-negative blockchain platform to power the currency.

Increasingly, more cities and social entrepreneurs are exploring the adoption of blockchain as the foundational infrastructure for their digital community currencies, such as the LVGA stablecoin of Lugano, Switzerland, and Bristol Pound in the UK. Many projects have also started to explore new modes of governance and innovative concepts, like quadratic funding and backing assets with natural resources, to achieve sustainable urban economic development goals. Consequently, several questions emerge: Can technological tools like blockchain help integrate digital community currencies into the mainstream financial system? How can these new sociotechnical systems do more than merely facilitate transactions, but also assist cities in achieving environmental and social sustainability objectives? In the following section, we discuss case studies of projects that have not only created new digital community currencies, but are also experimenting with governance and other intriguing forms of Web3-related innovations.

3. A Survey of Crypto-Based Community Currencies

In this section, we will dive into four recent community currency case studies that employ Web3 technologies: CityCoins, City3, Ibiza Token, and Kolektivo. These cases were chosen due to their diverse strategies, encompassing a range from crypto-native-first to community-centric approaches, as well as differences in volatility (Figure 1).

3.1 Crypto Native-First Experiments

CityCoins: Top-Down Approach to City-Branded Tokens

Undoubtedly, the most high-profile and well-funded project in the realm of city-branded cryptocurrency is CityCoins, which has raised over $40 million for Miami and New York tokens. Despite being not formally affiliated with city governments, the project has received strong endorsements from the mayors of both cities. CityCoins began as an alternative funding mechanism created by a

Figure 1: Selected case studies.

private enterprise of the same name, aiming to assist cities in generating additional revenue while also offering financial incentives for those who hold and mine the tokens. The idea is that anyone can mine CityCoins on behalf of any city. A user can acquire a CityCoin (e.g. MiamiCoin) by obtaining a native token (STX) of the Stacks blockchain, forwarding the STX to CityCoins, allowing CityCoins to mine on behalf of them, and then claiming the minted CityCoin tokens. Distribution of the CityCoins works in the following ways: 30% of the STX tokens forwarded to the CityCoins smart contract is allocated to the participating city’s multisignature wallet that is linked to its treasury to provide a new stream of revenue for the city, while the remaining 70% is distributed to holders of CityCoins who choose to “stack” their tokens (Figure 2). Stacking requires holders to lock their CityCoins for a given amount of “reward cycles” and later receive a portion of STX spent by miners as rewards.

For cities, this 30% “voluntary tax” approach appears to be an attractive means of raising funds with minimal effort, requiring only endorsement and the creation of a city-specific wallet. The first CityCoin was launched in Miami (MiamiCoin) in August 2021. A long-term crypto proponent, Miami Mayor Francis Suarez was proud to proclaim that the city earned more than $21 million in the months after Miami Coin debuted, or nearly one-fifth of its tax revenue.11 The price of CityCoin

Figure 2: How CityCoins works. (Source: CityCoins Documentation).

11 Drucker, David. January 26, 2022. “How Miami Coin works and why people should keep an eye on it.” Florida International University News. Available at: https://news.fiu.edu/2022/fiu-faculty-weigh-in-on-the-future-importanceof-miami-coin.

is determined by two factors: 1) the supply and demand of an unbacked coin which rests on speculation; and 2) how the city decides to allocate the coin. In February 2022, Mayor Surarez withdrew $5.25 million disbursement from the MiamiCoin wallet to fund a rental assistance program. However, this has sparked concerns among MiamiCoin token holders because the withdrawal has depleted the city’s wallet which ultimately reduced the value of the token by over 80%. One Discord member notes:

“How would you stop mayors spending that money on political stunts like Miami mayor did on rental assistance programs? Well you can’t. The CityCoin contract needs to be changed. Or is our plan to let them deplete the wallet on useless things like that? So we can continue to mine and lose our money?”12

The community’s dissatisfaction with the allocation of funds has prompted revisions to CityCoins’ model.

In response to increasing concerns surrounding governance, CityCoins adopted DAO (decentralized autonomous organization) governance to enable the MiamiCoin community to oversee the distribution of raised funds. CityCoins employed a token-based voting system, allowing token holders to participate and vote on city budget allocation. However, this unveils a fundamental flaw in the system’s design and raises potential equity concerns. From the get go, CityCoins’ setup did not include an identification layer, meaning that anyone could join the network pseudonymously, many of whom might not have originated from or lived in Miami. This leads to a significant disconnect between the MiamiCoin community members and the actual residents of Miami. Essentially, CityCoins’ new model suggests that investment decisions are made for cities without considering the opinions and interests of the actual residents who would be impacted by such decisions. Without a concrete use case, CityCoin relies heavily on the speculation of its tokens and has limited connection to actual value created within cities. Critics further argue that the technological hurdles associated with participating in CityCoins exclude individuals from involvement and permit non-residents to vote on city-related issues, giving rise to a novel form of wealth concentration that benefits only those who possess crypto expertise or substantial financial resources.13 12

CityCoins demonstrates a top-down approach to city-branded cryptocurrency, concentrating on obtaining support from city figureheads as its go-to-market strategy rather than engaging with adoption from local residents on the ground. While this approach has proven effective at capturing headlines and rapid fundraising, it has primarily attracted crypto-natives who hold no real stake in the city beyond the coin’s value. This uneven dynamic results in a fundamental misalignment of values, incentives, and expectations between token holders and the city, leading to poor execution and deviation from its intended goals of “empowering everyone to take ownership in their city.”

3.2 Alternative Community-Centric Solutions

While CityCoins serves as an example of how crypto-based city currencies can pose potential threats to cities instead of promoting their sustainability, other emerging efforts adopt an alternative community-driven approach to address challenges related to local economic prosperity and community engagement in cities. We will next explore a few intriguing examples. Many of these projects are in the early stages of development; but their approaches are well-considered and merit the attention of those interested in this area.

City3’s $OAK: Community-First Local Currency to Create Driving Cities

In stark contrast to CityCoins’ approach to creating a crypto community currency is the nonprofit project City3. City3’s pilot project, $OAK, is a digital community currency in the form of a stablecoin pegged 1:1 to the USD, aiming to empower communities in Oakland, California by developing and governing a pool of shared community assets. $OAK envisions three main components for its community currency: 1) a city-wide community currency, drawing inspiration from Lugano’s LVGA; 2) a nominal 0.5% transaction fee that goes into a city-wide treasury, promoting recirculation of the currency; and 3) a community endowment that can be managed and governed by local community members through a participatory budgeting process, leveraging crypto-native tools in partnership with the Ethereum Foundation, Gitcoin, and the Oakland Fund for Public Innovation. Through offering a merchant payments network, community governance system, and community ownership, the project aims to generate new pathways for community

self-sufficiency. City3 seeks to harness the capabilities of distributed ledger technology to establish decentralized trust at scale, leading to more affordable and expedited transaction solutions, as well as a foundation for trustworthy governance mechanisms. By removing financial intermediaries, City3 intends to provide communities with an alternative, decentralized payment rail with a much cheaper transaction fee.

Instead of diving straight into developing the blockchain technology stack, City3 prioritizes on researching and learning from existing solutions, educating local communities about cryptocurrencies, digital wallets, and stablecoins, and gradually enlisting merchants into its network in partnership with Oakland’s tourism department, Visit Oakland. Over the course of 2022, City3 successfully onboarded more than 1,100 Oakland residents to use digital wallets for crypto payments using off-the-shelf stablecoins like USDC. With over a decade of experience as a community organizer and activist, City3’s co-founder and CEO, Darrell Jones III dedicates significant time to engaging with communities on the ground, particularly in neighborhoods of color, to introduce local residents to Web3 tools such as wallets and stablecoin payments. As part of the initial pilot, City3 partnered with Web3 crowdfunding platform Gitcoin to experiment with quadratic funding14 as an alternative to existing participatory budgeting models. In 2023, City3 plans to assemble a team to develop a white-label, purpose-built app that facilitates basic stablecoin transactions and design a city-wide stablecoin $OAK deployed on Coinbase’s Base protocol, in collaboration with local residents by 2024.

Unlike CityCoins, City3 intentionally refrains from involving city figureheads during its initial launch stages and instead focuses on securing local community buy-in. By learning from successful community currency projects such as BerkShares, which prioritize community outreach and local support, City3 aims to build resistance against regime changes and shifts in political winds. This approach tackles the obstacles encountered by many community engagement projects such as Colu, which faced the problem of short-lived pilot projects as a result of emphasizing support from local government actors exclusively. Although City3’s process is much slower than that of CityCoins, it ensures the growth of a robust base of local consumers and merchants, ultimately laying the foundation for the acceptance, sustainability, and longevity of the community currency.

14 Quadratic funding is a mechanism for allocating funds to projects in a fair and efficient way, taking into account the preferences of a community or group of contributors by weighting matching allocations by the number of donors rather than by the amount donated.

Despite its potential, City3 faces several obstacles, particularly in the wake of the numerous fallouts experienced by the crypto industry in 2022. One significant challenge is overcoming negative public perceptions and devoting time to educate people about the technology’s potential benefits. Additionally, City3 must navigate the complexities of regulatory changes, such as California’s possible prohibition of algorithmic stablecoins, which could affect asset-backed stablecoins like the one proposed by City3.

Kolektivo Curaçao: Backing Ecological Tokens With Nature in the Global South

While City3 plans to back its $OAK stablecoin with traditional fiat currency, numerous projects in the Global South are exploring the concept of nature-backed tokens to address regional liquidity issues. Kolektivo Curaçao is one such example that proposes to back its community tokens using natural assets such as food forests and coral reefs. Headquartered on the island of Curaçao in the Southern Caribbean Sea, Kolektivo (previously CuraDAO) is an impact network that focuses on developing frameworks and institutional tools to assist local communities in creating regenerative economies.15 These frameworks aim to strengthen local collaboration and boost regenerative impact through tokenization, co-governance, and co-management of natural assets, thereby promoting local impact and eco-entrepreneurship.

Leveraging the ReFi-focused16 Celo blockchain, Kolektivo aims to transition from a traditional LETS (Local Exchange Trading System) into a DETS (Decentralized Exchange Trading System). It proposes to use DETS to enhance environmental and ecological resilience, addressing interdependent financial and biospheric risks through a natural capital system. Using the geospatial smart contract standard Astral Protocol, Kolektivo allows communities to register ecosystem assets and geographic zones on Ethereum as non fungible tokens (what they refer to as GeoNFTs), which establishes the basis for a system of Natural Capital Currencies (NCCs) collateralized by ecological assets and services. Kolektivo’s innovative planned pilot in Curaçao proposes to tokenize all ecosystem services, natural, and commodity assets as

15 See Kolektivo’s blue paper “Kolektivo Framework: Regenerative Finance at Institutional Scale” (2022). Available at: https://assets.website-files.com/5fcaa3a6fcb269f7778d1f87/63297723f700491a0698ab5a_Kolektivo%20Bluepaper. pdf; and “Kolektivo Framework: Decentralized Exchange Trading Systems” (2021). Available at: https://assets. website-files.com/5fcaa3a6fcb269f7778d1f87/60d98b3c2e36c87bfdecadc9_The%20Kolektivo%20Framework_%20 Decentralized%20Exchange%20Trading%20Systems%20v.1.pdf.

16 ReFi = regenerative finance.

GeoNFT collateral, with the collateralization ratio decreasing as nonrenewables deplete.

This approach promotes protection of the natural capital and disincentivizes natural resource extractions such as deforestation since the DETS’ money supply depends on the amount of natural resources available. The protection of ecological assets results in the allocation of ecological credits to local communities, which follows the OpenEarth conservation credits principles. These credits can then be sold as impact claims to companies and investors to address the growing demand for nature conservation goals and carbon offsets, driven by corporate net-zero pledges and government regulations. By leveraging Web3 tokenization tools and programming mechanisms to expand the carbon credit market beyond just carbon, Kolektivo sets up a framework to include smaller landholders to participate in the market that typically has a high barrier of entry. This particularly benefits smaller countries and regions with underdeveloped land, which were previously excluded from traditional carbon markets, allowing them to finally harvest the latent value of their ecological assets and services. Employing a system that allows accounting for the ecological state’s economic value, Kolektivo is able to create a stable Curaçao community currency called Kolektivo Guilder (kGuilder) that is backed by natural assets in Curaçao’s local reserve, which has been launched in late November 2022.

While the project remains under development and its potential impacts are yet to be assessed, the proposed framework showcases innovative applications of decentralized technologies and tokenomics. These advancements could transform community currencies beyond simple financial transactions, but potentially addressing broader challenges such as ecological pollution, biodiversity crisis, and sustainable development issues. However, concerns pertaining to ecological interdependencies warrant attention, as the safeguarding of ecological assets often transcends the capacity of local stewardship. For example, pollution from industrialized nations may have downstream impacts on developing regions across borders. Thus, the incentive structure needs to engage a global network of stakeholders to preserve ecological assets as opposed to relegating the responsibility to local communities, whose efforts may be undermined by external forces beyond their control.

Ibiza Token: Supporting Local Tourism of Ibiza Island

Ibiza Token, developed by Spanish startup Defi Proxima SL, is a project focused on developing a local utility token for a focused use case. It strives to help the island of Ibiza to retain more of the economic wealth it generates as a renowned tourist destination in Spain. With many local artists and small businesses on the island lacking global market access, the Ibiza Token Web3 ecosystem aims to boost revenue for these local entities and connect tourists to distinctive, locally-crafted experiences.

Designed as a fungible token under the Ethereum ERC-20 token standard, the Ibiza Token ($IBZ) is a utility token that grants access to an exclusive NFT marketplace featuring NFTs created by local artists, as well as discounts in local shops and tickets to local events. Similar to City3 and Kolektivo, the Ibiza Token team invests significant efforts on the ground in educating and onboarding local traditional artists to Web3 technologies and assisting them in converting their works into digital assets that can be accessed by a wider global market. This caters to the growing demand for art NFTs and enables local artists to benefit from the digital art revolution. However, with the NFT hype having significantly subsided in recent months, it remains to be seen whether efforts should concentrate on developing the NFT marketplace or prioritizing and supporting the more tangible aspects of local art and craft.

Broader adoption and sustained interest are essential for $IBZ’s success. Post-lockdown events have attracted around 400 people, which is a modest number compared to the island’s over 40,000 residents and millions of annual visitors. As $IBZ is not pegged to any assets, its value is vulnerable to cryptocurrency market fluctuations, rendering it unsuitable as a currency. However, it does help establish a local user base familiar with digital wallets and crypto payments, preparing the community for a future digital local currency launch. Consequently, the project team intends to introduce a Euro-pegged stablecoin as a local community currency in later development stages, facilitating fee-free local transactions.

4. Lessons Learned

In this essay, we first highlighted shared characteristics among successful instances of community currencies. During times of economic distress when a volatile or scarce national currency harms local economic development, well-implemented community currencies can fill this void by facilitating monetary circulation within these local communities. The advent of decentralized distributed ledger technologies has catalyzed the proliferation of digital community currencies that seek to achieve scalability and address adoption challenges of physical community currencies.

The selected “Web3” case studies exhibit distinct objectives and approaches. For instance, CityCoins represents a crypto-native-first experiment designed to garner interest from cryptocurrency enthusiasts and individuals seeking to profit while supporting a city of their choice. This top-down strategy, targeting city figureheads, stands in stark contrast to the grassroots community engagement and local backing emphasized by city3’s $OAK initiative, which aspires to build on this user base to establish a community currency (pegged to fiat currency) and a community endowment governed by local community members.

Two additional community-based tokens, Ibiza Token and Kolektivo, serve markedly different purposes. Ibiza Token is a utility token aimed at empowering local artists and small businesses by offering exclusive access and discounts to a specialized marketplace, but presently lacks substantial community buy-in. Kolektivo, on the other hand, centers around environmental conservation through tokenization of natural assets, but may confront the challenge of addressing ecological interdependencies, which are complex and often transcend local boundaries.

As most of these initiatives are still in their nascent stages, it remains to be seen whether these more grassroots-oriented approaches to digital community currencies can genuinely achieve scalability and overcome the adoption challenges that have beset many previous community currency projects. Nevertheless, we can begin to glean insights and distill valuable lessons learned from existing evidence and. We unpack some of the key takeaways on the next page:

1. Decentralized technologies can potentially address challenges faced by traditional community currencies, but they require careful design with appropriate social and governance goals. In the past, paper-form community currencies have aided local communities during economic hardships. However, their sustainability has been hindered by factors such as limited circulation, lack of widespread acceptance, inadequate technological infrastructure, insufficient marketing efforts, difficulties in scaling, and an absence of long-term vision and support. Today, decentralized technologies paired with mobile-friendly apps have the potential to address these scalability and adoption challenges by offering secure instant settlement and low transaction fees through the removal of financial intermediaries. Nonetheless, their success hinges on thoughtful design that emphasizes ethical considerations, which should be addressed within the social layer of the design rather than the technological layer.

2. Digital community currencies should avoid volatile cryptocurrencies and explore fiat-backed or asset-backed stablecoins. Community currencies are designed to foster economic stability, inclusivity, and local focus. Volatile cryptocurrencies can introduce significant fluctuations in value, which shift the focus away from local transactions and towards speculative behaviors. With CityCoins, there is no connection between the funds available for cities to use and the value of the tokens held by token investors, resulting in considerable volatility for these tokens. On the other hand, community currencies that are fiat-backed or asset-backed stablecoins offer the essential stability required for a currency, while still allowing for innovative mechanisms to be programmed within their design to increase wealth generation overtime that would benefit the community. Experimental examples from the Global South such as Kolektivo suggest that alternative forms of assets, such as ecological assets, could not only increase liquidity circulation in cash-strapped developing regions, but also incentivize the conservation of nature and democratize participation of smaller landholders in the carbon credit market.

3. Digital community currencies should emphasize community-first adoption over endorsements from city figureheads. Community currencies should prioritize establishing a sustainable

financial system that benefits cities and residents both economically and socially, rather than becoming flashy speculative financial vehicles. While top-down, rapid launches may be tempting, a gradual, bottom-up approach can lead to more enduring and sustainable results. It is crucial to prioritize community buy-in over mayoral support, as this creates resilience against changing political regimes and fluctuations in political priorities.

4. Permissionless participation in digital community currency can lead to speculation; incorporating an identification layer is preferred and recommended.

In the CityCoins model, the absence of an identification layer becomes problematic when the project transitions to DAO governance, which requires members who were mostly pseudonymous to vote on funding allocation that would impact local residents. In contrast, City3 plans to take a different approach by incorporating KYC functions (know your customer) in its purpose-built app. This identification layer allows implementation of more flexible programming to provide benefits to local communities, and it becomes particularly valuable when incorporating governance models that involve collective decision-making around public goods.

Community digital currencies should prioritize local residents over crypto-native users. Allowing a group of unrelated Internet users with no real connection or stake in the local community to make decisions about public resource allocation can be detrimental. The “network state”17 thesis which advocates for global collaboration and connection can pose challenges when the virtual and real-life worlds intersect. Community currencies should focus on attracting local users, many of whom may not be tech-savvy or familiar with crypto. As such, adoption will likely be gradual, necessitating patience to educate people, establish trust, onboard users, and foster sustaining relationships.

6. Current token-based on-chain voting leads to plutocracy. Alternative forms of voting that integrate locality and equity should be prioritized. This entails ensuring that financial stakes and governance power are not to

17 Proposed by Balaji Srinivasan, the “network state”is a decentralized, digital organization transcending geographical boundaries, enabled by Web3 technologies. It allows for global collaboration, decentralization of power, and new governance structures, but raises questions about jurisdiction, regulation, and the balance between virtual and physical communities.

be conflated. Consideration of alternative voting mechanisms, such as the aforementioned quadratic voting, is warranted. Incorporating residency or identity verification for residents may help to counterbalance the influence of wealthy non-residents holding tokens, thus preventing them from dominating decision-making processes related to the allocation of public goods funds.

7. A city-branded stablecoin can help create a sense of community and identity, thereby encouraging local spending and local value capture. As cities transition to digital currencies for payments, they can harness the economic advantages of instant settlement and low transaction fees offered by readily available stablecoin solutions such as USDC. However, adopting a city-branded local currency (e.g., $OAK) presents a strategic approach that can more effectively stimulate local spending and value retention, ultimately benefiting the community. Promoting local expenditure in a designated local currency can enable the implementation of smaller transaction fees linked to that currency, which would be more difficult with a generic stablecoin. Instead of trying to enforce community-oriented transaction fees on a standard stablecoin like USDC by whitelisting merchant wallet addresses, a more refined technical solution involves reversing this approach. By associating transaction fees and monetary velocity with the financial incentives offered to consumers, a linkage is established. As more funds are returned to consumers, they are further incentivized to spend locally, reaping increased rewards in the process.

8. Regulatory risks like stablecoin bans create challenges for innovations, requiring cautious evaluation from policymakers. Regulatory uncertainty continues to be a significant obstacle for innovations related to digital tokens and decentralized technologies worldwide. Innovations such as stablecoins currently fall outside the purview of existing financial services legislation. In regulating stablecoins, it is essential to acknowledge the subtle distinctions between those issued by centralized entities and collateralized algorithmic stablecoins that lack a managing entity for token issuance. Overarching solutions, such as blanket bans on all algorithmic stablecoins, could severely hamper the growth of asset-backed stablecoins and generate substantial compliance challenges for projects involving either type of stablecoin. Regulators need to be cognizant of the technology’s intricacies and provide diverse avenues

for compliance with the same regulatory goals, including considering technological solutions that can be deemed equivalent to existing legal protections.18

5. The Future of Digital Community Currencies

While this paper delves into several emerging case studies, it is by no means an exhaustive survey of the burgeoning and fast-evolving landscape of crypto-based digital community currencies. In reality, numerous paper-based forms of community currencies are now exploring blockchain technology to facilitate their digital transformation. For instance, Sarafu in Kenya began as a paper-based community currency from 2010-2018, before transitioning to blockchain-based Sarafu tokens.19 Because users do not need smartphones or Internet access to trade their tokens, this has been incredibly useful, with a $2.5 million trading volume and 58,000 users, half of whom live in rural areas.20

Dismissing cryptocurrencies indiscriminately is an oversimplified generalization that fails to acknowledge the value and positive impact generated by many purpose-driven projects. Many of these projects genuinely experiment with innovative strategies to enhance urban environments. However, the hype associated with blockchain projects seeking issues to resolve can also impede local community trust. As a result, it is essential for stakeholders to focus on the core objectives of digital community currency projects, assess the potential for real-world impact, and scrutinize the underlying technology. Ultimately, fostering collaboration between local communities, technology developers, and regulators can help unlock the true potential of digital community currencies and contribute to sustainable, inclusive growth.

19 See: https://africancrypto.com/sarafu/.

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18 A perspective expressed by Dr. Primavera De Filippi. See: Rong, Helena and Sarah Hubbard.“Event Recap: Policymaking in Web3.” Perspectives on Public Purpose, December 16, 2022, https://www.belfercenter.org/publication/event-recappolicymaking-web3.

Transactions can be made through SMS or a smartphone app, depending on the user’s mobile device.