As e-money gains ground in Japan, so do local digital currencies
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With cashless payments finally gaining some ground in cash-loving Japan amid the COVID-19 pandemic, some municipalities are hoping to take the momentum to the next level — community-specific digital money.
Regional virtual currencies can be used in a specific city or ward and are intended to stimulate local economies that have been battered by the pandemic. But another goal is for users to become more attached to their community through the use of local money, while hoping to turn the new digital tools into vital community infrastructure in the long term.
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But could localized money really take root given that consumers already have other, more convenient digital payment options?
A variety of community virtual tokens have been introduced recently, including Setagaya Pay by Tokyo’s Setagaya Ward, Mina Coin by Minamishimabara in Nagasaki Prefecture and Morio Pay by Morioka, Iwate Prefecture.
For Setagaya Ward, where a digital currency debuted last month, its initial intention was to replace paper-based vouchers that residents can spend at stores in the area.
“The paper vouchers come with various costs — printing them and exchanging them with cash. These things need to be handled manually, which requires quite a lot of labor as well,” said Shigeyuki Nakanishi, director of the commercial division at Setagaya Ward.
The paper vouchers were also unpopular with store owners because of the extra hassle of exchanging them with cash, and in the end only one-third of about 8,200 stores began accepting them.
“We wanted to do something about it, so we’ve decided to make it digital,” said Nakanishi.
Customers use a smartphone app-based payment service, scanning a QR code for payment. More than 400 shops, mostly small stores on shopping streets, accept the payment method at the moment. As a promotional campaign, people who paid via Setagaya Pay at local restaurants received 20% cash back.
Since the first state of emergency was declared in April last year, Setagaya Ward has seen an increase in consumer spending within the ward, as people have been apparently shopping more in their local neighborhoods.
“This is a good opportunity for residents to rediscover stores in their local areas,” said Nakanishi, adding that the municipality wants to encourage younger generations to contribute to the local economy. “We’d like to reach young people by changing the tool (to digital).”
Setagaya Pay is still in its early days, but Nakanishi hopes it can be a means of improving administrative services for residents — like with the distribution of the central government’s ¥100,000 cash handout last year.
Many municipalities were thrown into chaos when the government launched the cash handout program for all residents in Japan to mitigate the economic impact of the pandemic. Because of an inefficient online application form that city officials had to print out and check manually, distribution of the money was delayed.
If Setagaya Pay is digitally linked to necessary residential information, Nakashini said, it would be possible to swiftly distribute financial assistance to the public.
“If we were to launch paper-based vouchers, it could take about a half year to set everything up. But we could do it in a month via the app,” he said.
The ward also has an eye on widening Setagaya Pay’s functions in the future, such as offering points equivalent to virtual money for residents’ contributions to the community through local events or volunteering.
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Rewarding residents for their socially beneficial deeds has been a popular concept for many community currencies.
Aqua Coin, a smartphone-based community token used in Kisarazu, Chiba Prefecture, is already used for that purpose. For example, the city offers points to people who walk 8,000 steps a day and those who join community events including local beach cleanups.
Since October 2018, a local credit union has been operating the digital currency service with the municipality. As of February, the Aqua Coin app had seen 15,598 downloads and is available for use at 654 stores in the city, which has a population of about 135,000.
Aqua Coin services are not limited to shopping. City officials can also receive their salary in in the currency, while residents will be able to use it to pay their taxes in the near future.
Even though the number of downloads topped 10% of the city’s population, the user base is still limited and there are calls for further efforts to popularize the digital money, said Ryoichi Shimamura, a Kizarazu official.
A slew of surveys on people’s use of cashless payments have shown that the key to driving adoption is to offer cash back. But if local digital currencies rely on financial incentives, it would be difficult for them to differentiate from other cashless payment services.
So for a local virtual currency to take root, it is critical to come up with a different approach that will motivate residents to use the token and strengthen their sense of community, experts say.
“It’s really important to gain people’s understanding on what we want to do with this digital tool and develop a sense of unity in the community,” Shimamura said.
Unlike other major digital currencies, a user’s attachment to their community can be the impetus to get them on board, which is why a small store that sells school uniforms in Kisarazu has become an avid supporter of Aqua Coin.
“I think it’s best that money circulates within the community,” said Hiroaki Mizuno, who runs the business with his family.
Mizuno’s shop accepts credit cards and a few other e-money options, but it strongly encourages customers to pay with Aqua Coin. It has even installed a machine that can top up Aqua Coin on smartphone wallets.
As Mizuno’s family has been running the shop in the city for more than 60 years, he is supporting Aqua Coin in the belief that it could help boost the local economy.
Although more municipalities are jumping onto the community digital currency trend, the idea of local currencies is not new in Japan.
The country saw an uptick in such community currencies from the late 1990s to the early 2000s with the concept of rewarding people for socially useful activities. But the trend diminished, as many operators apparently found it difficult to keep them afloat due to heavy running costs.
In other countries, many experiments and attempts have been made to sustain alternative community currencies including Ithaca Hours, which was created in 1991 in Ithaca, New York. Ithaca Hours was considered the longest-running local currency in the U.S. and influenced other communities to follow suit.
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In recent years, local currencies have been undergoing a digital shift, in many cases using blockchain, the underlying technology of cryptocurrencies including Bitcoin.
The shift to digital may ease some running costs, but the jury is still out on whether community digital currencies are really sustainable.
Experts are skeptical, arguing that the closed nature of the money means it won’t be able to beat currency backed by the central government or other digital payments that are more widely available.
“After all, the fact that it can only be used within a community is a disadvantage from an economic point of view,” said Toshio Taki, who heads the fintech research institute under Money Forward Inc.
To become a sustainable service, local digital currencies have to speak to community values in a way that is convincing enough for users to ignore their inconvenience, he said.
“Otherwise, community currencies won’t be sustainable,” Taki said, adding that none of them have achieved this so far.
However, Shuhei Kawata, president of Finnovalley Co., which provides a digital platform for community currencies including Setagaya Pay and Aqua Coin, sees it differently. He believes that the limited use is actually a plus because money does not flow outside the community.
Kawata, who has been involved with community digital currency projects for the past several years, said they can play a key role in shoring up local economies through not just their payment function.
For instance, it is possible to set up a crowdfunding platform to launch community projects. The virtual tokens can also be integrated into financial products offered by local financial institutions, thereby motivating people to invest money sitting in their savings accounts, which then has an impact locally.
“People’s financial assets are not really circulating in their local areas, so our next step is to do something about it,” said Kawata.
But he admits that making virtual tokens an indispensable part of communities is a daunting task, and the key is to secure evangelists or community managers that drive momentum in each area.
“It makes a huge difference whether communities have these talents,” he said.
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