Blockchain revolutionizing community currencies

A group of development scholars is proposing what they term community inclusion currencies (CIC)—which are anchored on the blockchain technology—as a new and revolutionary way of tackling poverty that afflicts African communities that dwell in rural places.

New medium of exchange

According to these scholars, CICs are shares or a form of community credit that acts as medium of exchange in communities where national fiat currencies are in short supply. In that sense, the proposed CICs are potentially a tool that can used to narrow the financial exclusion gap.

Will Rudnick—one of the scholars who co-authored the whitepaper document explaining the CICs—told Africa Blockchain Media that they see the novel currency as tool for leveraging existing capital into a share structure. Rudnick explains:

“CICs are essentially shares acting as a medium of exchange. When applied to larger businesses and industries I would call them an industrial credit of sorts.”

Rudnick further explains that such CICs can be extended to include marginalized communities in urban areas. He cites an ongoing project in Nairobi, Kenya where a non-government organization is attempting to do the same with United Nations Environment Programme (UNEP) supported recycling plants.

African countries are often plagued by poorly performing currencies, a phenomenon which ultimately result in loss of value or wealth. Therefore, for the proposed CICs to be seen, not only as a tool that helps local economies to thrive, but also as an avenue to shield value in times of economic turbulence and hyperinflation, such currency must be collateralized with an asset that has a stable value.

When asked how they intend for CICs to be collateralized to ensure continuity even in times of rapid devaluation of national currencies, Rudnick said:

“The collateral behind the CICs is based on the USD right now, as a stable reserve, which we can convert to (a) national currency. But even with a strong faith in reserve, the CICs are essentially shares of a reserve held by an organization or a group of organization. (For these to function) CICs need anchors in the local industry that back, issue and continue to accept them.

The reserve fund is an instrument that locks in value over time and the CICs are means of circulation. As CICs mature, they can be used to pull out of the fiat reserve. This lowers the share value and once the share prices drops, actors—such as clients and other industrial partners—will be incentivized to buy more shares in order to buy goods and services at the anchors.”

Stability in value is vital for a community currency just as much as it is vital for regular currencies. Solving this challenge will result in growing confidence in any such currency and the subsequent growth in its use.

Sustainable aid

Meanwhile, the whitepaper document explaining CICs also touts these as a reinvention of the cash and voucher assistance programs so they act as a catalyst for sustainable growth for communities.

Often cash and voucher assistance programs nurture a dependency syndrome. Recipients are not capacitated to fend for themselves but are conditioned to wait for the next hand out.

However, when the same recipients realize that through CICs, they can for instance, use their labour or excess grain to earn a credit, which they can use to pay for goods and services, this encourages them to work and to be less dependence on aid.

This CICs proposal is an attempt to build on the success seen with the Sarafu-Network community currency model. Sarafu Network is a brainchild of Grassroots Economics Foundation, a Kenyan non-governmental organization working eradicate poverty among Kenya’s most vulnerable.

Community currencies (also referred to as complementary currencies) under the Sarafu Network are credited for stabilizing seasonal markets in that country as they inject a new medium of exchange that is more readily available than national currencies. Communities then use these tokens to increase local trade.

Grassroots Economics Foundation has introduced community currencies that have been used by roughly 4,500 businesses and schools among communities of over 200,000 people to date. According to Grassroots Economics, this model has a potential to scale if the community currencies are built in a decentralized manner and this forms the basis of this new proposal.

Different ecosystem

Part of the CIC whitepaper document reads:

“We propose creating community currencies using blockchain technology to create inclusive and empowering eco-systems that enable communities to develop and trade their own form of credit backed by their own productive capacity and seeded by local governments and the aid industry.”

From the studies cited by the CIC whitepaper, it is now apparent that when tackling poverty as an institutional problem, standard development practices often miss a key component, currency design.

It is this design that causes income and profits to be extracted and accumulate with financiers in cities far away from rural areas. In this environment, national currencies given directly to beneficiaries often stay in local circulation only for a limited time.

This happens in part, due to the poor circulation of conventional currencies and the general absence of banking infrastructure in remote areas.

Decentralized community currencies on the other hand, seek to enable communities in such remote places to develop a source of local credit based on productive capacity and local values thus creating a monetary system better suited to eradicate poverty and the multiple indicators of deprivation targeted by the UN’s SDGs.

It is true that a community currency can help a local economy shake off the effects of an economic turbulence which happens at national or global level. The story of the Sardex community currency attests to this fact.

Sardex is the Italian equivalent for a community currency, and it has been credited for helping Sardinians ride out of a recession caused by some financial institutions thousands of miles away. Similarly, African rural communities too, can potentially minimize the effects of bad economic decisions by adopting community currencies.

And as findings of one study suggest, the availing of endogenous sources of credit through circulating vouchers—also referred to as community currency— can counteract seasonal conditions and increase overall trade volume.

Nevertheless, regular community currencies have historically not been able to expand (and stay autonomous) to include the 2 billion plus people living in poverty for several reasons. This happens due to the inability to exchange these easily among more businesses and neighboring communities and this limits local economic development.

Limiting the utility of the currency exclusively to services provided in the community can cause the community currencies to accumulate in hands that would struggle to spend them quickly enough.

Bonding curves

Now through the employment of the blockchain and what the whitepaper terms bonding curves, the researchers hope to tackle this challenge.

Under the concept of bonding curves, the envisioned community inclusion currencies (CIC) are established with a connecting exchange protocol built into their smart contract. Exchange protocols on a blockchain enable community currencies varying degrees of connectivity to other community currencies as well as national fiat currencies, providing adequate liquidity for large transaction volumes.

Such tokens are linked to each other by staking a common token into their “reserve”. If two tokens (smart contracts) with this exchange protocol and share the same reserve (or a reserve of a reserve and so on, with a common token) the protocol is able to create an automatic exchange ratio between the two tokens. This enables community currencies built with such a protocol to interact with their neighbor by choosing or establishing common reserves.

This CIC proposal seems to make a lot sense and it has rightly sparked interest of some leading aid agencies.

There are plans already to have CICs in several African countries especially those facing economic downturns.