There are many types of complementary currencies. Many of them are legal, but some are not. When I tell people that Bay Bucks is a complementary currency and a barter exchange, most people immediately ask: "Is it like Bitcoin?" Those with some legal knowledge may even follow up with: "Is it illegal?"
The simple answers to these two questions are: No, and No.
We are not like Bitcoin because you obtain Bitcoins by buying them with cash; whereas you don't buy Bay Bucks, you just create the Bay Bucks you need and they are backed by your own goods or services.
The official answer to the legal question can be found on the IRS website, where it says:
Not all complementary currencies are the same
In order to clear up this confusion, we must first outline a few main types of complementary currency. They are:
1. Mutual Credit System: In this system we start with everyone at $0 balance. A member Alice can create money by going into negative balance. Alice pays Bill $1,000 to build her a web site. Alice now has -$1,000 and Bill +$1,000. Charles later pays Alice $500 for some tax advice. Charles' balance is now -$500 and Alice's balance has become -$500. Notice that at all times, all the accounts in this system sum up to 0. This is why it is called a mutual credit system. In this system, money is created only when it is needed. The creator's own goods and services back every dollar created, so there is no inflation. Barter exchanges, time banks, LETS are all mutual credit systems.
2. Reward Point System: In this system, you get a rebate or points for spending cash. You can then spend your points at participating businesses. For example, you get airline miles for purchasing plane tickets in cash, and can use these miles to shop on the airline's online shopping site.
3. Gift Voucher System: In this system, you use cash to buy the voucher, sometimes at a slight discount, e.g., you get a $100 voucher for $95 cash. You then spend this voucher at participating businesses at full face value.
There are many other less common types of complementary currency, but these are the 3 main types you will encounter here in the Bay Area.
What are the laws that impact complementary currency?
From my layman's research, I found three key areas of legislation that concern complementary currency here in the USA:
1. Taxation. The general principle here is that all transactions in complementary currency are taxable. In the 1970s, people were using barter to avoid paying tax and the IRS came down hard on it. Consequently, Congress passed the Tax Equity and Fiscal Responsibility Act in 1982, where it clearly spelled out how barter trade are taxed. Thereafter, all reputable barter exchanges have become tax compliant. There is one exception. Time banks can generally operate on a tax exempt basis provided that they treat everyone's hours the same, and hours have no cash value.
2. Coin minting. This is generally not a good idea. As recently as 2011, the federal government convicted Bernard von NotHaus of Liberty Dollars under 18 USC § 486 – which reads:
Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both.
Although the prosecution used the argument that Liberty Dollars tried to "pass" as US currency, the law itself is much broader because it says "whether in the resemblance of coins of the United States or of foreign countries, or of original design".
3. Money Transmitter Act (MTA): This law generates the most uncertainty because it is very new. It was signed into law in 2010 and came into full force in 2011. The language it uses is so broad that it snares many unlikely activities. A great story by Business Insider reports that Apple, Zynga, and Airbnb are all potentially in violation. I quote two paragraphs from that story:
We asked the Department of Financial Institutions, which licenses money transmitters, for a clarification on which companies the law covers. Alana Golden, a spokesperson, said the department uses this plain-English test as a guide:
Do you take funds/value from A and agree to pay them to B on behalf of A; and/or Do you take funds/value from A, and store it so that A can make purchases from third parties or take cash out at a later date? What doesn’t matter. The purpose of the transactions (P to P, bill pay, pay a merchant, loan payment, etc.); how the transaction was funded (debit, cash, check, cc).
Reward points may or may not be caught under it. If the reward points are not sold and are not redeemable for cash, and it neither takes funds/value from anyone, nor stores it, nor allows cash-out at a later date, then it should be fine. But many airline miles now allow cash-out. When this happens, the situation becomes more grey. It is quite inconceivable that the law is meant to outlaw such a common practice as loyalty programs in retail. In situations like these, a little common sense would tell us that a complementary currency that uses a typical reward points system without allowing cash out is safe.
The clearest case is barter exchange. The IRS defines barter exchanges as third-party record keepers. Barter exchanges, by definition, do not take funds/values, and do not allow cash-out. Despite this, when the MTA took effect, the industry's body, IRTA, in order to dispel any misconceptions, made a formal inquiry to FinCEN (Financial Crime Enforcement Network) to inquire whether barter exchanges and their internal currency now violate this act. The reply they received was a clear no. The president of IRTA posted this finding in public. They key sentence is quoted here:
“Unless a barter company was trading “real currency” for their currency to be turned back into a “real currency” on the other end, there are no concerns.”
And here is the full announcement.
Not only is Bay Bucks legal, most complementary currencies that behave like a barter exchange, time bank, or reward program are also, in my opinion, legal, provided they operate within the restrictions discussed above. However, there are certain types of complementary currency that are more at risk of breaking the law. These includes the currencies that behave like gift vouchers because they are convertible to cash, those that involving the minting of coins, and any system that are not tax compliant.
Here are some additional legal resources on bartering:
SELC article on barter published on Shareable.net