What Is an Off-Ledger Currency?

An off ledger currency isa currency which does NOT reside on blockchain or other distributed ledgers, which includes all currencies employed by nation states. While an off-ledger currency isn’t developed specifically for a blockchain, they may be used in it thanks to their utility and wide acceptance. For instance, Ripple’s Ripplenet and the Stellar blockchain may be able to transfer and convert off-ledger currencies worldwide via their bridge currencies, XRP and XLM, respectively.

Fiat money is an example of an off-ledger currency since it is issued by the central banks outside blockchain networks. The United States dollar (USD) is a prime example of an off-ledger currency, which is used worldwide because of its worth and is typically held as a reserve currency by most financial institutions. Unlike an on-ledger currency, it is centrally controlled and issued without any limits.

As a consequence, off-ledger currencies do not have any intrinsic value. Rather, their value is derived from a government’s backing and subsequent declaration as legal tender. Central banks’ right to issuance and control fiat money gives them absolute power and influence over the economy. Unfortunately, they can still be counterfeited by malicious actors. And if their issuance is left unchecked, they can incur negative effects to economies. 

Unlike an on-ledger currency, they don’t need continuous incentivized computational power (or other consensus mechanism requirements) to exist. Some off-ledger currencies are actually digital fiat equivalents, being used on blockchains like USD or EUR due to their stability and popularity. Fiat-based stablecoins (tokens pegged to the value of nation state currencies) may fall under the definition of off-ledger currencies since their value is still derived from off-ledger currencies.