Honestly, nobody knows for certain. The origin of the challenge coin is genuinely disputed, and the story most often repeated has no contemporary evidence behind it.

The famous story. A wealthy American lieutenant in the First World War has bronze medallions struck for his flying squadron. One pilot is shot down over Germany, captured, escapes to French lines, and is about to be executed as a spy when the medallion identifies him. It is a good story. It also names no pilot, no squadron and no date, and no contemporary record of it has been produced. It appears to have spread long after the war.

The Roman claim. Some accounts say Roman soldiers received specially struck coins as rewards and kept them as mementos. No Roman source is cited for this, and the link to the modern practice is an assumption rather than a documented line.

What is verifiable. The oldest surviving unit coin usually identified is from the US Army’s 17th Infantry Regiment, attributed to Colonel William “Buffalo Bill” Quinn in the 1950s. The tradition then spread widely through the American military in the later twentieth century, which is when the practice becomes well documented rather than anecdotal.

Most suppliers tell the WWI story as fact. It is a legend, and the real history is interesting enough without it.

See challenge coin history, Army coin history, or what a challenge coin is.