The history of challenge coins dates back all the way to World War I. A challenge coin is simply a coin or medallion that is given to specific members of an organization due to a challenge or hardship that those members faced. It is debated about who is the founder of the challenge coin, but most people believe the challenge coin to have originated in the United States Army Air Service (United States Air Force).
As the story goes, it was common for Ivy League students to join the United States Air Force due to the attraction of adventure and romance. One such Ivy League student cave members of his squadron medallions to commemorate the service that they held together. One of the pilots in the squadron crash-landed behind enemy lines in Germany and was held as a POW (Prisoner of War) and despite the Germans stripped the pilot of all of his beloveds, they failed to take his medallion which he wore around his neck. The pilot was later able to escape during a firefight within the POW camp. He later was picked up by a French patrol looking for Germans dressed as civilians. The Frenchmen were about to execute the pilot, and in his desperation the pilot showed the Frenchmen the medallion and one of the Frenchmen recognized the symbol. The pilot was later reunited with his squadron and after the pilot let people know how his medallion had saved his life, it was required that all members of the United States Air Force wear there coins at all times.
It became tradition for these pilots to carry the coin at all times and to ensure they did so, a pilot would challenge another pilot to produce their coin, if they did not show the coin then the pilot had to buy the challenger a drink of their choice, if the pilot showed the coin to the challenger then the challenger owed the pilot a drink of his choice. This type of challenging continued on to several different organizations who chose to use the idea of a challenge coin within their organization. There is more than one version of the challenge coin. One version goes as: If you are able to steal a challenge coin, then everyone in that specific organization has to buy you a round of drinks. Another such version goes as: If you are the holder of the highest ranking coin in a group, then everyone has to buy you a round of drinks.
Besides challenge coins being used as tools for challenging others, they are also used as rewards for those who deserve them as a boost in morale. Challenge coins remain in today's United States military, which goes to show that the idea of the challenge coin was a big one.