Inside the world of national cryptocurrencies

April 9, 2014: 12:44 PM ET

What Auroracoin can learn from old-school analog predecessors Berkshares and Philadelphia equal dollar.

By David Z. Morris

Auroracoin and Berkshares

Auroracoin and Berkshares

FORTUNE -- In the past two months, programmers and activists have launched a wave of national cryptocurrencies – systems inspired by Bitcoin, and affiliated with various specific nations and communities. These include MazaCoin, from an American Indian group, Spaincoin, and Auroracoin, from Iceland. More national cryptocurrencies are coming, including Aphroditecoin, targeted at Cyprus and planned to launch April 21st.

It's no coincidence that the most prominent national cryptocurrencies have emerged from landscapes of financial turmoil. The engineers and promoters of these cryptocurrencies are often motivated by the same resistance to central monetary institutions as the libertarian anti-Federal Reserve types that formed an important constituency among the first wave of Bitcoin adopters. Aphroditecoin's homepage declares that it will help Cypriots "break the shackles of a fiat currency," while Spaincoin's slogan is "Freedom for the Spanish People."

Eurozone citizens have more obvious justification for resenting their national monetary and financial systems than Americans. The collapse of Iceland's overextended banks in 2008 and 2009 led to the nationalization of bad debts worth more than eight times national GDP, triggered runaway inflation, and cratered the foreign exchange value of the currency, necessitating strict foreign exchange controls that largely remain in place today. The euro crisis of 2011-2013 led to extreme measures such as the "bail-in" of Cypriot banks through the seizure of deposits just last Spring.

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Then there's MazaCoin, which claims affiliation with the Oglala Lakota Nation. As with many sovereign American Indian tribes, a legacy of exploitation and marginalization has left the Lakota in a state of persistent, extreme poverty, and Mazacoin cites "economic sustainability" and "lasting wealth and prosperity" among its overriding goals.

The idea of nongovernmental regional currencies is not new. In the United States alone, there are currently several local currencies that use old-fashioned paper money, including the Philadelphia equal dollar, Detroit cheers, and Ithaca hours, a system in place since 1991 (no law prohibits the introduction of private paper currency systems in the U.S., though minting coins for currency purposes is illegal). Emerging national cryptocurrencies may have something to learn from these local analog projects.

One of the most vibrant local currencies currently operating in the U.S. is the Berkshare, launched in 2005 by the Schumacher Center for a New Economics and serving the Berkshires region in Western Massachussets. Susan Witt, a spokesperson for Schumacher, says that the goals of the currency are to increase the capital base of the region and provide democratically-driven loans for local development.

Berkshares are distributed through local banks in a one-for-one exchange for U.S. dollars, and the dollar deposits are distributed as loans to local businesses. More than $5 million dollars have been traded in for Berkshares since 2005, and about $135,000 dollars' worth of Berkshares are currently in circulation, adding to local banks' available capital. In a region of only 19,000 residents, even such a relatively small expansion of the money supply could have a meaningful growth impact.

Witt says that while this dollar-backed system is intended to drive adoption, the eventual goal is to "create new money at the point of making productive loans," unbacked Berkshares that would support local development.

Though the new national cryptocurrencies share many of these goals, they have not been as thoughtfully implemented, and adoption remains uncertain. Auroracoin has been most successful in this regard, conducting a highly coordinated "airdrop" offering USD$380 worth of the new currency to every citizen of Iceland. Since the program began on March 25th, more than 9% of Icelandic citizens have claimed their Auroracoin. Aphroditecoin is planning a similar distribution.

But other parts of the community work behind creating an alternative currency remains to be done. More than 400 local merchants have been convinced to accept Berkshares, says Witt – "everything from excavators to dentists." But merchants have not been a priority so far for most national cyrptocurrency creators. In a forum post prior to Auroracoin's launch, its creator seemed to take a laissez-faire attitude to merchants, saying that "At first I suspect we will see spontaneous acceptance in niche areas."

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Community-based cryptocurrencies face certain hurdles that are different from those of paper-based local currencies. The infrastructure for retail acceptance of cryptocurrencies is still developing, and users in truly economically depressed communities are less likely to have the smartphones that are key to spending cryptocurrency in physical stores. Above all, despite the excitement of a global community of tech types and entrepreneurs, understanding and acceptance of the concept of cryptocurrency in general is still not widespread.

National cryptocurrencies face another substantial challenge. Because they are tradable internationally by cryptocurrency enthusiasts rather than only locally, these new currencies have been subject to immense speculative volatility. Auroracoin's price on cryptocurrency exchanges has nearly halved in the two weeks since its launch, as holders exchange the new currency for Bitcoin or fiat currencies. Spaincoin's exchange value has plummeted even more dramatically since its introduction on March 12th of this year.

These value collapses have added fuel to suspicion among cryptocurrency insiders about the tactics and motivations of those behind the national cryptocurrencies. Many of the organizers have followed the lead of the anonymous Bitcoin creator known as Satoshi Nakamoto, keeping their identities secret. According to one of the anonymous engineers behind Mazacoin, this is because creating cryptocurrency "pisses off people with great wealth and power."

But anonymous creators also make it harder to establish the legitimacy of a new currency. For example, Auroracoin's founder, known online by the pseudonym Baldur Friggjar Odinsson, is a complete unknown among those who would be most likely to support the Auroracoin project. Brennan Novak is an American programmer living in Iceland, and is affiliated with both the Icelandic Pirate Party and one of the small country's only active groups of cryptocurrency advocates. He claims that none of the technologists in this community has any idea who Odinsson is, and that attempts to engage him in cryptocurrency advocacy initiatives have been met with silence. "He's played up the [role of] the mysterious founder who doesn't want to engage with people too much," says Novak.

In part for that reason, according to Novak, "there's a lot of healthy skepticism" surrounding Auroracoin among Icelandic Bitcoin supporters. Suspicion isn't out of place in the world of so-called "altcoins," which is rife with pump-and-dump schemes. New coins are regularly launched to great hype, then abandoned by founders who cash out at the expense of those whose enthusiasm they've stoked.

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In the face of these challenges, it's worth looking at one other precedent for decentralized currency systems – pre-Civil War America, before the introduction of the Federal "greenback." Berkshares' Susan Witt says that era's system, in which banks issued their own scrip, was in some ways more economically efficient – "Bankers would know who the trustworthy entrepreneurs were, who had a good business plan, and what the resources were." Of course, that system also enabled fraudulent issuance, and necessitated complicated exchange for anyone traveling between regions.

The new national cryptocurrencies illustrate one of the lesser-acknowledged features of the cryptocurrencies inspired by Bitcoin – they are relatively easy to create. The code for a wide variety of existing coins is open-source, and they can be copied, modified, and re-branded freely. In fact, the anonymous engineer behind Mazacoin says that he "just happened to have an experimental altcoin sitting un-used on the shelf" when he connected with Payu Harris, the Lakota activist who has become the face of Mazacoin. Only a bit of graphical packaging was required to turn it into a Lakota-branded project.

This technical ease has clearly led to the launch of currencies that local populations aren't quite ready to adopt. But once infrastructure, education, and best practices are more established, secure currency that can be issued inexpensively by private groups will have a huge range of potential uses, from supporting local or regional community development to internal corporate currencies to customer loyalty programs (think airline miles).

The political implications and regulatory grounding of such systems will be an important question in the near future. Alice Witt and others who have worked hard to implement local currencies are eager to see those conversations gaining a higher profile. "Who's issuing our money, and why? What are their intentions?" asks Witt. "That's the question the cryptocurrencies are raising, and that's good."

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