It’s nearly impossible to definitively know why and where the tradition of challenge coins began. One thing is certain: Coins and military service go back a lot farther than our modern age.
One of the earliest known examples of an enlisted soldier being monetarily rewarded for valor took place in Ancient Rome. If a soldier performed well in battle that day, he would receive his typical day’s pay, and a separate coin as a bonus. Some accounts say that the coin was specially minted with a mark of the legion from which it came, prompting some men to hold on to their coins as a memento, rather than spend them on women and wine.