WHAT IS 'Private Currency'

Private currencies are units of value issued by private organization, such as a corporation or nonprofit enterprise. A private currency is typically issued by a private firm or group, to act as an alternative to a national or fiat currency, which would otherwise be the standard unit of value in a country.

Private currencies are often issued and backed by physical commodities, such as gold or silver. By backing a private currency with a commodity, issuers are able to increase the security of the asset, while limiting the effects of inflation on the currency's value, since commodities tend to move closely in line with inflation.

BREAKING DOWN 'Private Currency'

Private currencies have been used in the United States since the mid-1800s and continue to be used today in some localities. For example, the "Ithaca Hour" is a printed currency which has been exchanged in Ithaca, NY since 1991, and allows participating workers to earn or purchase Hours to buy goods and services locally. Launched in 2006 in the Berkshires region of Massachusetts, a local currency called BerkShares is issued from branch offices of several local banks and is accepted at hundreds of businesses in Berkshire County.

Although issuing private currency is restricted by law in many countries, there are still estimated to be thousands of private currencies circulating in dozens of countries worldwide. In Hong Kong, although the government issues currency, bank issued private currency is the dominant form of exchange and most ATMs dispense private Hong Kong bank notes. In the U.K., several local currencies are used, including the Totnes pound, which is equal to one pound sterling and backed by sterling held in a bank account.

Many private currencies struggle to survive for more than a few years, due to being relatively illiquid, narrowing the range of choice for businesses and consumers, suffering from a trust deficit and the complications of having to deal with two parallel currencies.

Cryptocurrencies: The Future of Private Currency

A cryptocurrency is a form of decentralized private digital currency that uses cryptography to safeguard transactions and control the creation of additional units of the currency. Bitcoin was created in 2009 and has quickly become the best-known and largest cryptocurrency in terms of total market value. Although investing in digital currencies can be extremely risky and volatile, its use has skyrocketed over the last decade. Digital currencies still must overcome many important technological and legal obstacles, but they are widely predicted to become more than a passing fad. Some economists and other experts believe that cryptocurrencies could eventually become a part of the mainstream financial system that could involve the trading of digital assets and potentially even replace some national currencies.

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