From local currency to central banks: Colu and blockchain-based tokens

Image via CNN
Image via CNN

Decentralization and fragmentation – not two words that you normally associate with currencies (or would want to, given the implied chaos). But, maybe it’s happening.

An experiment currently under way in London could reveal whether or not our relationship with money can change enough for local currencies to become possible.

Israeli firm Colu – known for their “coloured coins” platform – recently launched the “Local Pound, East London” (LPEL). As its name suggests, it is a digital currency specifically designed for circulation amongst the businesses of East London.

How is this different from the normal pound? And why bother?

The aim is to boost the local economy. The LPEL plans to do this by encouraging users to spend locally – that apparently keeps money circulating in the area, rather than have it sent back to head office in Stockholm (or wherever).

The accompanying app is meant to help residents to discover (or “re-discover”?) local businesses, and to help those businesses manage transactions.

To be honest, it’s not very obvious what the advantages are. Merchants can use the app to manage transactions, which means they don’t need to invest in a PoS system (which they almost certainly have anyway).

It works just like “normal” digital money – it can be bought (at par with the pound) using credit cards or bank transfers. This raises the question as to why the users won’t prefer to use “normal” digital money. I haven’t been able to find information on additional advantages that the LPEL platform offers (like discounts or more direct marketing, for instance?).

The “hook”, according to press reports, is that users feel good supporting local economies. (Um, maybe some, but I wouldn’t count on many.)

Additional resilience could be a factor – blockchains tend to have greater security than centralized systems. But, centralized payment rail outages are rare enough for this reason to lack conviction.

The LPEL has a sister operation in Liverpool – the Liverpool Local Pound went live in late 2016, and currently has 16,000 registered users and approximately 30 merchants on the network. Given that Liverpool has almost 500,000 people, it’s a stretch to claim that it’s a resounding success.

But, it’s good to see that the enthusiasm continues regardless, because sometimes a good idea fails to get traction simply because it’s time has not yet come.

Whether or not the LPEL takes off is beside the point, though. What really matters here is feedback, to iterate the design and to hone the message.

In interview with CoinDesk, co-founder Mike Smargon said that the objective was scale. Colu recently unified its various Tel Aviv local coins into a generic Tel Aviv coin. Not that there seem to be a lot of users there, either. In the same interview, Smargon revealed that Colu has about 50,000 users across its coins, which – subtracting Liverpool participants – leaves about 37,000 users for a city of over 3.7 million.

I puzzled for a while on how unifying coins could help “local” businesses, and on how you can combine scale with fragmentation.

But then it dawned on me: it’s actually not about small communities. It’s about testing the advantages of central bank digital currencies, starting small and working up. A smart strategy.

What’s more, last month the firm open-sourced its banking infrastructure to make it easier for central banks to experiment with blockchain-based digital currencies.  The system is already in use in one country: Barbados. In collaboration with local exchange Bitt, it has created digital Barbadian dollars, and will soon complement that with digital dollars from Aruba and the Bahamas.

The company is in the process of applying for an e-money license in the UK, so I imagine we can expect further local launches. It also recently announced partnerships with asset brokerage firm eToro and trading app Lykke, and is a member of blockchain consortium Hyperledger. So we will most likely see interesting innovations that open our eyes to the potential of local currencies.

Even if practicality continues to be an issue, the idea of combining the advantages of community with the scope of large scale is intriguing.

And not only in the realm of finance and commerce. Let’s have a think what this could do to politics and governance, too.

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