Legal backed tender currency refers to a complementary currency which is guaranteed to be exchangeable for legal tender, whether on a one-to-one value basis or with the imposition of a malus.
Making a complementary currency exchangeable for legal tender in this manner is commonly done in order to increase public trust and belief in the currency’s value. The guarantee of exchange to legal tender greatly reduces (in the case of a malus) or entirely eliminates (in the case of one-to-one value) any economic disadvantage or risk, whether real or perceived, associated with the complementary currency.
Operators must, however, ensure that they have sufficient reserves of legal tender to underwrite the guarantee of exchange. Making complementary currencies exchangeable in this manner carries other risks as well, increasing the opportunity for fraud and money laundering and making it possible for money to leak out of the community for which the currency is intended.
Examples of community currencies which guarantee exchangeablilty (with or without a malus) for legal tender are the Transition Currencies in the UK. Conversely, the Swiss WIR Bank, for the reasons cited above, explicitly bans the exchange of its currency for legal tender.
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