What Is a Private Currency?

Private currencies are units of value issued by a private organization, such as a corporation or nonprofit enterprise to act as an alternative to a national or fiat currency, which would otherwise be the standard unit of value in a country. As a result, these are not legal tender.

Company scrip was a common form of private currency issued to employees by their employer, which could only be exchanged in company stores also owned by the employers. This was seen in the 19th century in the U.S. and Europe as the industrial revolution created factory or mining towns, far away from other forms of economic activity.

Key Takeaways

  • Private currency is a means of value and exchange issued and maintained by a private entity such as a corporation, often for the benefit on members of that entity.
  • Company towns were once a common locale for private currency issued as scrip by the employer to be used to purchase basic necessities and other goods from company stores.
  • Private currencies are not legal tender, and may be illegal in some jurisdictions; however, the advent of cryptocurrencies may spark a renaissance in digital private currencies.

Understanding Private Currencies

Private currencies have been used in the United States since the mid-1800s and continue to be used today in some localities.

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.

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 due to the complications of having to deal with two parallel or complementary currencies. As a result, 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 and viability of the asset, while limiting the effects of inflation on the currency's value, since commodities tend to move closely in line with inflation.

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.

Because blockchain-based cryptocurrencies are open-source, virtually anybody with basic programming skills and an understanding of the technical infrastructure can create and market their own private digital currency.

Private vs. Local Currency

While similar, local currencies differ from private currencies in that they are not issued by a private organization for internal use, but by a community or local government with the goal of stimulating local economic activity.

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 similarly issued from branch offices in the community and is accepted at hundreds of businesses in Berkshire County, MA.