In the form of digital "tokens", HullCoins can be used to pay council tax and for goods and services from firms signed up to the scheme.
Hull City Council said it hoped the scheme would eventually be extended to the major supermarket chains.
David Shepherdson, from the City Council, said HullCoins would have "a social purpose".
'Digital wallets'
He said: "We'll be generating digital tokens which we will distribute into the local economy with our partners, the majority of whom will be charities, community groups and local enterprises.
"They will then be used as a charitable payment or as a way of recognising people's community activity."
HullCoins would be paid into "digital wallets" on people's smart phones or computers and could be used as an alternative to cash at participating businesses, Mr Shepherdson added.
While several UK towns and cities such as Oxford, Bristol, Lewes and Totnes have set up local currencies alongside sterling, Mr Shepherdson said he believed HullCoins would be the "first local digital currency".
Paul Spooner, from the Max Life youth project in Hull, which runs a cafe signed up to the HullCoins scheme, said it would be "an excellent tool" to help give a boost to young people involved in voluntary work.
"It recognises the effort young people often put into their own self-development and into helping out other people as well," he said.
Source: BBC
