What Is Private Currency?

Private currency is money issued by a private entity, such as a company, rather than by a public entity, such as the government. Like any other currency, private currency must have some backing or it has no value. One problem with this currency is that it has to be adopted by other people, or only the issuer will use it. This currency depends on an issuer that may not be around forever, so it can go out of use if the issuer is no longer around. Many countries and regions ban the creation and use of private currency, while others just have legal restrictions.

To make private currency valuable, it must be backed by a source. The majority of currencies are backed by precious metals, usually gold, and this also is common among private money. At the same time, the currency can be backed by any source. For example, jewels, work hours, products, other financial instruments or just faith in the money can back the currency. In this regard, private and public currencies are similar.

Unlike public currency that is immediately accepted by most people, private currency issuers may find adoption difficult. Unless other people or businesses adopt this currency system, only the issuer will be using it. This means private money usually is used only by a small local group or through the Internet. If this currency reaches a wider audience, then it may be difficult for the issuer to have enough resources to back all the money.

Just like public currency, private money normally depends on the issuer. If the issuer dies, pulls the resources backing the money or otherwise disappears, the private currency may no longer have any value. At the same time, if the currency is backed by something intangible — such as work hours or faith — and people still use the currency after the issuer is gone, then it may hold its value.

While there are many private currencies in circulation, many countries and regions ban or restrict the printing and usage of this money. This may be out of fear that the private money will become more valuable than the public money, that it may undermine the government, or that it may facilitate money laundering. Before someone decides to create private currency, he should check any applicable laws to see if it legally can be made, and if there are any restrictions.