I think the reason is that there is no interfacing between federal money and their currency, it's the equivalent of bartering only with the agileness of currency notes instead of cows, lamb and sheep. To your question, if cryptocurrencies stayed in cryptocurrencies with no interfacing to fiat, it would be the same with no government having any ability to govern it aside form outright banning by force.

That makes sense, except that I don't understand this: doesn't all currency eventually "leak" via exchange into federal currency? Won't someone accepting a wooden note eventually need to give a wooden note plus $1 for the milk they need? Isn't it all going to get mixed together at some point?

There is interfacing, the town government directly exchanges the wood money for US money twice a month.... The real argument would be these are essentially redemption tokens with equal value to US money, you can't speculate or invest in them because they will only ever be worth the same amount in US money.

You could speculate on them based on the value of what you can buy in town. Maybe they’re worth more if a business would only accept fake fiat over dollars, or worth less because you can only spend this currency in this one geographic location.

Like osmosis, if there is a value gradient, you can arbitrage it given a means to exchange that value.

This isn't too far from Olympia. I wonder if there are some opportunities to buy things cheaper for cash than with the script dollars. I guess they address that by letting businesses exchange them back for the same. Still that's a tiny bit of overhead and there's a tiny chance making them less than equal to dollars because of the exchange. It's really a great idea for a small town.

There is an interface, at time of creation when the town sets aside money to back then, and at redemption when the town takes them back and pays out cash. They feel more like gift cards with most local businesses participating.