Can individual communities be vested with the power to create, circulate and deal currencies? Do digital currencies offer us a more inclusive and secure future? Professors Eduardo Henrique Diniz and Erica S. Siqueira, FGV-EAESP, and Eric van Heck, Rotterdam School of Management, analyze the current situation in the world of digital community currencies and offer us a peek at the future.
Is the Future of Currencies Digital? by CoBS Editor Pavan Jambai Narayanan Sedhu. With kind acknowledgements to Prof. E. H. Diniz. Related research: Diniz, E. H., Siqueira, E. S., & van Heck, E. (2019). Taxonomy of digital community currency platforms. Information Technology for Development, 25(1), 69-91.
With the exponential increase in the accessibility to technology and a flurry of crises in the mainstream global economy, individual communities are starting to decentralize conventional currencies and create a more localized substitute. Can this trend become a widespread sustainable solution or is this a ticking time bomb?
Community currencies as people’s tools
According to the European Central Bank, Virtual currencies can be defined as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”. The concerns of regulation institutions are implicit from the definition. In their research, Profs Diniz, Siqueira, and van Heck focus on a specific branch of the virtual currency – community currencies.
Community currencies are generally regarded as tools for fighting social exclusion and encouraging local development by promoting financial inclusion. Usually operating in a restricted geographic area or community, community currencies redefine the hierarchy between local and national levels as a means of payment. They are also seen as an instrument for fighting the problems caused either by money in the capitalist system or by the system itself.
Moreover, community currencies have a positive role in refugee camps suffering from a shortage of currency and local resources, and act as a useful tool for liquidity risk management for small and medium-sized enterprises.
Apart from the skepticism and scrutiny, there are other problems related to community currencies management and implementation that can undermine their acceptance. A key hurdle facing the community currencies is the difficulty in making them be used as a substitute to conventional currencies, to access exchange channels, and to be accepted by local businesses.
Digital Community Currencies (DCC) as a multidimensional solution
Digital community currencies are community currencies that are issued and operated digitally, often with the help of online resources such as point-of sale card systems, websites, mobile applications and in the cryptocurrency format. DCC can represent a solution to some of the problems mentioned above. To understand the digital community currencies in detail, Diniz, Siqueira, and van Heck delve into four main dimensions of the DCC as a platform: architecture, governance, transactionality, and virtuality.
By the architecture of the platform, the professors refer to the maturity of the technological infrastructure, what impacts in cost, availability and profile of technology providers a. Governance refers to the power of decision on what the platform effectively does, and who will approve its future directions. It also includes the degree of openness and transparency in a platform, which is one of the key issues about governance.
The distinct group of users that the platform brings together, such as between peers or multiple businesses, constitute the transactionality aspect of the platform. The dimension virtuality depends on two requirements: sensory and relationship interconnections. The sensory requirements refer to the convertibility to the official currency to ensure its real value, thus making it more amenable to adoption and the relationship requirements are related to the physical closeness between the two sides operating a payment transaction.
Future of community currencies: Autonomy vs Accountability
Despite the many dimensions and advantages, the creation and maintenance of DCC do not take place without some difficulties. There is always friction between the actors that bring the new technology infrastructure and the community that issues the currency. We are also forced to consider how technology affects social aspects of financial transactions in a community. Transactions happening without physical presence could risk the raison d’être of the community currency itself, thus compromising its local development goals.
While digital format can lower the operational costs and provide better management for community currencies, on the other hand, it demands the presence of new actors, the technology providers. Within the digital ecosystem, the technology might represent a black box to the community, compromising the accountability of the currency.
So, to answer the million-dollar questions – if the future of community currency is digital, how to keep the community sharing principles and at the same time keep the currency more accountable? – we might need to wait a little longer. However, we better pay attention on the evolution of the universe of cryptocurrencies.
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