Cryptocurrency & the Blockchain – Fiat Replacement, Alternative or Parallel? Can It Save Greece?

With a projected US$1 billion in venture capital invested for 2015 and a rapidly growing user base, it is fairly obvious now that cryptocurrency and the blockchain technology have an important role to play in the development of global financial technology going forward.

The question is whether digital currency could replace fiat currency or play as significant of a role in the every day lives of people.

Interestingly, economic volatility and fiscal crisis have forced some governments to consider removing cash all together from their economies.

In response to “administrative and financial burdens,” the Danish government has put forward a new law that seeks to abolish physical currency completely. The Danish Chamber of Commerce has called for a first step of allowing shops and services to have the the option of going completely cash-free.

A prominent German economic advisor, Peter Bofinger, recently said that “with today’s technical possibilities coins and notes are in fact an anachronism”. The Würzburg economics professor called on the German federal government to add the abolition of cash to the agenda of the next G-7 summit in Elmau and promote it at an international level.

After the passage of a new finance law in Ecuador’s national assembly in July 2014, the government began a process of establishing a national digital currency. The electronic currency will be used parallel to the existing currency in Ecuador, the US dollar and, according to the government, will help poor Ecuadoreans who cannot afford banking make and received payments using mobile phone technology. For bitcoin and cryptocurrency enthusiasts, the problem is the law establishes a centralized digital currency and appears to ban other such currencies in Ecuador.

The Bank of England in a February 2015 discussion paper pondered whether central banks should use the blockchain technology to issue national digital currencies. The bank was focused more on the distributed ledger technology of the blockchain rather than abolishing fiat currency.

Certainly, the primary and original impetus behind cryptocurrency has been as an alternative to fiat currency or simply as a cheaper, secure and enabling payment technology.

Recently, an effort has emerged to develop cryptocurrencies as national secondary or parallel currencies for countries like Greece that are racked by debt and economic crisis. The idea is to issue a parallel currency backed by physical assets to improve liquidity in an economy. In a sense, these digital asset-based currencies would become rescue vehicles for such economies.

For Greece, the concept was explored further on 20th of May by an online conference, called Drachmae, organized by Wall Street veteran Brian Kelly and Lee Gibson Grant of blockchain tech consultancy Coinstructors. The premise of Drachmae Expo challenged the blockchain community to present technological solutions for a parallel currency in Greece.

The pre-conference whitepaper,“A Blockchain Solution for Greece” , sums up the concept of an asset-backed parallel currency for Greece:

Instead of selling assets in what will likely be a fire sale, the Greek government could use blockchain technology to create an asset backed digital currency that can be used to repay creditors and pay government employees. Initial proceeds from the sale of the currency could be used to meet  obligations to the Troika, while government employees could be paid in this parallel currency.

The steps to creating the Greek asset-backed digital currency would include:

  • The government of Greece places a portion of its assets into a trust
  • A digital currency is issued and backed by this basket of assets
  • The assets are tied to the currency by a smart contract embedded in the currency
  • The smart contract will prevent Greece from selling the asset until digital currency holders are paid

The above approach is a hybrid of a parallel fiat currency and an asset backed security, according to the whitepaper. The combined attributes of the currency and security will result in the following benefits:

  1. Greece retains ownership of its highly prized state assets satisfying the voter mandate to curtail privatization.
  2. The currency could not only be used to pay government salaries, but workers would be able to spend the currency at local businesses providing a much needed economic boost.
  3. It creates an investable asset that would be a proxy for a recovery of the Greek economy.
  4. Greek banks could hold this hybrid asset instead of T-bills, the asset backing would immediately strengthen bank balance sheets.

Greece apparently has considerable assets. According to Eurostat, as of September 2014 Greece possessed  €86 billion in financial assets on its general government balance sheet. As a portion of GDP, those assets make Greece the 7th wealthiest nation in the EU. In comparison, Germany ranks 17th on the list of state owned assets as a percentage of GDP.

Parallel currencies however have been a mixed bag. The experiment in  Argentina, for example, was a disaster.

Michael J. Casey, Wall Street Journal and co-author of the highly acclaimed book “the Age of Cryptocurrency”, said this at the Drachmae Expo:

Argentina’s experience with parallel currencies was an especially bad one… Their version was an IOU currency, which is one that inevitably is going to lose the confidence of the population… One that is built on the notion that there is going to be some kind of future tax revenues.

Argentina’s experiment ultimately failed because the population lost faith in the parallel currencies as they were backed by future tax revenues that might never materialize. The parallel currencies actually became a “symbol” as Casey noted in the conference debate of a country trapped in a deflationary arrangement.

In contrast, Casey is upbeat about the concept of an asset-based secondary currency:

This idea that you will basically tokenize assets of some kind and give people a de facto claim on that is a far more solid one.

Basically, people are more likely to develop faith in something that is backed by an asset rather than a promise like an IOU. The questions are whether the Greek government asset-backed tokens would trade at a discount of the Euro and how they would be redeemed. More importantly, there is still a counterparty risk even if asset backing is involved.

Ryan Selkis, Director of Investments at the Digital Currency Group, said this in response to the question of whether current blockchain systems are robust enough to handle asset-backed tokens:

That is the billion dollar question right now. Like many of the startups ups we see.. It does feel like a little pie in the sky right now from the standpoint the infrastructure is so early in this industry. Where we are in cryptocurrency and blockchain technology right now is I think the 1.0 payment infrastructure is still being built out.

Selkis however noted that the ecosystem had come a long way in terms of security and liquidity but there is still a big challenge considering the types of applications that many would like to seen built on top of the blockchain. He is optimistic about the technology’ eventual application.

Now having said that, there are a few different protocols that have been built, Counterparty, Omni, Colored Coins, which hypothetically allow for this type of digital currency or asset backed security.

NASDAQ just recently announced that they will be now not only be using blockchain technology but bitcoin blockchain technology to facilitate some of the trading of private shares for their pre-IPO companies on the private placements platform that they have.

So, we are getting there. If we had this conversation in two years, this would be much more actionable.

So, there could be an issue with even the largest blockchain, the Bitcoin Blockchain, handling the enormous assets in question, as well as security technology handling the keys necessary to keep the end users interests secure.

Nonetheless, such capabilities are on the horizon. Selkis noted:

If smart contracts and blockchain technology gets to the point where it is sophisticated enough to execute those types of agreements and eliminate the counterparty risk, then it gets interesting.

Lee Grant believes that hybridization of the blockchain and existing systems is a solution to dealing with many of the issues of bringing blockchain technology to use cases like the Greek economic crisis.

Grant has recent experience in developing hybrid system incorporating the blockchain in Africa. He has been advising a customer developing a blockchain-based mobile network by merging an existing mobile payment network in Africa with the blockchain technology.

Grant described how he is helping Coinstructors’ customer bring bitcoin to the unbanked in Africa:

You need an Internet connection and a smart phone. Not everybody can use it as it is not accessible as you’d think. You cannot accept that a bank is going to quickly accept bitcoin or use the technology when has got billions of dollars invested in infrastructure already.

I started off about a year and an half ago with hybrid systems. People started laughing. But I was like you are going to realize pretty soon that it is the  only way people are going to accept it and start using the technology unless it is something they understand.

Grant indicated that it is important to look at the existing problems, and in Greece there are thousands. He also noted that there isn’t a guarantee that a blockchain can scale up to say a thousand transactions per second.

I know that Ripple says that they can do 1250 but has it really been done in real life?… or is that just on a test net?

Grant believes that a solution is to take an existing banking system and integrate it with the blockchain technology. By doing this they can spread the load over multiple blockchains which would help it to scale.

Grant pointed out there are also new blockchains being developed with completely new functions built into their core. As an example, he highlighted Java-based Nxt – the multifunctional blockchain protocol that, in addition to an embedded monetary system and marketplace, has built-in functions such as smart contracts, colored coins (creating and trading asset tokens), alias creation, token authentication, and voting. All of these functions would be extremely useful to establishing and trading a national asset-based currency.

Drachme Expo Conference