A number of ‘local currency’ initiatives have emerged over recent years within particular towns and cities. Although such schemes are likely to differ as regards their operation and precise terms and conditions, this page gives some general information to help explain the broader context within which they operate.
This article explains how local currencies differ from banknotes. Existing local currency schemes are unlikely to pose a risk to the Bank’s objectives. However, consumers should be aware that local currency instruments do not benefit from the same level of consumer protection as banknotes.
The following short video explains some of the key topics covered in this article:
Frequently asked questions
What are local currencies?
‘Local’ or ‘complementary’ currency schemes generally aim to promote local economic activity by implementing a payment mechanism (often including physical vouchers) that can be used for purchases from local businesses. The concept is that the payment arrangement encourages consumers to purchase goods and services from local businesses that in turn purchase goods and services from local suppliers, or pay their staff partly with the local currency. The intention is that the scheme creates a ‘positive multiplier’ effect, keeping spending within the local area.
Are local currencies linked to the Bank of England?
Local currencies are independent, local initiatives and are not linked in any way to the Bank of England or to Bank of England notes.
What is the Bank of England’s role with regard to banknotes?
The Bank of England is the Central Bank of the United Kingdom and as such it is the sole issuer of legal tender banknotes in England and Wales. Banknotes issued by the Bank of England carry the ‘promise to pay’ which signifies the Bank’s undertaking to give full face value for its notes for all time. If your local bank, building society or Post Office is not willing to accept old series Bank of England notes they can be exchanged at the Bank of England. For more information on how to exchange Bank of England banknotes that have been withdrawn from circulation see the exchanging banknotes page.
The Bank of England also regulates the issuance of banknotes by the seven commercial banks authorised to issue banknotes in Scotland and Northern Ireland. To ensure that holders of these notes receive a similar level of protection to holders of Bank of England notes, the seven banks are required to hold backing assets to the full value of their notes at all times. For more information on regulating the issue of Scottish and Northern Ireland banknotes see the Scottish and Northern Ireland banknotes page.
Are local currencies legal tender?
No. The only banknotes to have legal tender status in England and Wales are those issued by the Bank of England.
However, legal tender status has a very narrow meaning in relation to the settlement of debt which is of little relevance to most everyday transactions. All that legal tender means is that if debtors pay in legal tender the exact amount they owe under the terms of a contract, they have good defence in law if they are subsequently sued for non-payment of the debt. In ordinary day to day transactions, the term ‘legal tender’ has very little practical application.
Although payments backed by a local currency scheme are not legal tender, they may be accepted as a means of payment by the mutual agreement of the parties to the transaction. Acceptance is often restricted to particular geographic areas.
I have seen ‘notes’ issued by local currency schemes – what is the status of these?
Banknotes are payable in Pound Sterling to the bearer on demand. In England and Wales it is not legal for anyone other than the Bank of England to issue banknotes. In Scotland and Northern Ireland certain commercial banks are authorised under the Banking Act 2009 to issue banknotes alongside the Bank of England. Scottish and Northern Ireland banknotes are fully backed with Bank of England banknotes, coin or interest bearing accounts with the Bank of England. No other entity, including the promoters of local currency schemes, may legally issue banknotes.
Local currency schemes often issue paper vouchers that have some similar physical characteristics to banknotes. However whilst the appearance of the vouchers are superficially similar to banknotes the legal form of a voucher is different from that of a banknote. Vouchers typically represent a pre-payment for goods or services from a specified supplier(s) and cannot be redeemed by consumers for cash. These are different to banknotes and the precise nature of the paper vouchers will typically be governed by terms and conditions which should make clear the status of the vouchers and the restrictions on their convertibility with Pound Sterling.
In the event that a local currency scheme fails, can I receive compensation from the Bank of England?
No. Paper vouchers issued by local currency schemes are similar to vouchers issued by other businesses in that they typically act as a prepayment for goods and services to be provided in the future. If the scheme provider is unable to supply the goods and services, paid for in advance, the holder of the voucher will have no recourse to the Bank of England or HM Government.
Additionally, local currency paper vouchers are not protected by the Financial Services Compensation Scheme (FSCS) even if the local currency scheme is operated by a financial institution which itself is protected by the FSCS. The legal position of any local currency paper voucher holder in the event of administration or insolvency will depend upon exactly how the individual scheme has been set up and operated.
While paper vouchers are not covered by the FSCS, deposits held with an authorised deposit taking institution are protected by FSCS, if held by eligible depositors up to a limit of £85,000. For more information on this, please contact the individual scheme or FSCS.