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 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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