Whether or not to make a community currency convertible into another currency, usually the national currency, is an essential question during the design phase. The decision will have major ramifications for the whole system, from the issuance process to the detailed legal requirements that convertible currencies have to follow.
The spectrum on which currencies sit can be illustrated by looking at how Brixton, Bitcoin and the WIR handle conversion of their currencies. At one end is the Brixton Pound, which states within the rules of the currency that all users and businesses may at any point convert any Brixton Pounds that they have in their possession at par for pound sterling.
At the other end is the WIR in Switzerland. Under the terms and conditions of the currency, exchange for Swiss francs, or any other currency, is not permitted. This is clearly stated in the agreement signed by all members and infringement can lead to exclusion from the WIR network. However, despite the prohibition and potential consequences in place, numerous users convert WIR francs into Swiss francs over the counter or though third-party platforms, usually for considerably less than their nominal parity of value.
Bitcoin inhabits the middle ground, leaving convertibility purely up to market demand. Many companies and trading platforms offer to convert legal tender into Bitcoin and vice versa. Interestingly the fact that conversion is not specifically prohibited means that regulators treat it as convertible and are starting to regulate Bitcoin exchanges rather than the Bitcoin currency itself.
Table 6: Pros and cons of convertibility and non-convertibility Pro Con Convertible Guaranteed conversion can help businesses and users feel comfortable getting into the system Allows businesses to participate even if their suppliers are not part of the network Allowing conversion opens the possibility of generating revenue Requires the maintenance of funds to meet conversion liability Requires compliance to financial system regulations Reduces the incentive, especially for businesses, to find creative ways to spend the currency or to encourage others in their supply chain to join the currency network Not convertible No legal tender reserves are required Closed-loop, non-convertible currencies operate outside financial regulation Users and businesses can be more reticent to join such systems, especially if spending options are limited Requires active management of the volume of money being created to ensure that it grows in line with spending volumes