Friday, July 03, 2015

The Greek financial mess; and some ways Bitcoin might help

Many years of government debt buildup in Greece has ultimately resulted, in the last few days, in a political and financial maelstrom.  The political maelstrom includes demonstrations in the run up to a referendum on obscure debt-restructuring provisions to be held this Sunday (July 5th). This article focuses on  financial problems and some potential practical steps that can be taken to mitigate them. The imposition of capital controls is a disaster for a modern trade-driven economy, a catastrophe which however digital technology, and in particular the digital currency bitcoin (which given the Greek environment usually must involve direct use of the Bitcoin blockchain), has the potential to mitigate.  This article will explore some of the severe practical problems that capital controls are causing Greek individuals and businesses, and suggest some potential bitcoin solutions, many of which could also be applied to other countries with some similar financial problems and controls such as Argentina and Venezuela.  These aren't solutions that can be applied in time to help with the current 6 days of capital controls, but could substantially help some Greeks and some aspects of the Greek economy if some version of these controls is continued for months or years.

At root the Greek financial problem is that the Greek government has spent more, compared to the GDP generated by its economy, than the vast majority of other governments.  It has borrowed copious sums to do so, falling ever deeper into debt.  Here is its payment schedule:

And you thought your student loan debt was bad

The only place the Greek government has left to go for money to fund its ongoing expenditures and pay these debts is Greek banks.  Fearing capital controls and "haircuts" (government confiscation of certain fractions of bank deposits), many Greeks in recent months have, quite rationally, started withdrawing money out of their banks and sending it overseas.  More trusting Greeks kept their savings in their banks, with the result that, with the imposition of capital controls last Monday, they have been locked out of their savings, and plans for "haircuts" of 30% or more have been reported (If somebody lopped off 30% of your head, you’d have more than a haircut).

When capital controls were first rumored and then announced on Sunday, vast lines formed at ATMs as Greeks rushed to rescue what little of their life savings that they could:

ATM line, Thessaloniki

ATM line, Larissa City

On Tuesday, the Greek government defaulted on its scheduled debt payment to the International Monetary Fund (IMF).

Under capital controls, ATM withdrawals from Greek bank accounts are now limited to 60 euros a day.  Debit cards can still be used for payments within the country, but the money simply gets transferred from one frozen bank account to another.  As a result many businesses no longer accept debit cards, and many more are demanding a substantial premium price (in  at least one business, double) for debit cards (transferred bank balances) versus hard cash.  There is a growing shortage of such cash; as a result some stores are paying their suppliers in private "scrip", which can be used by the supplier's workers to purchase goods from the issuing store. (more on this below).

Use of credit and debit cards to pay out of the country is banned and effectively blocked, resulting in a near-complete freeze-out of Greeks from Internet commerce. This restriction, along with the controls resulting in Greeks being excluded from the pan-European money settlement system, means that Greek businesses can't pay for imports.  Many shipments into the country have been halted as a result. (The government plan is to create a whitelist of politically approved cases in which such payments for imports will be unblocked).

A crucial feature of store-issued scrip is that it literally circulates through a complete closed cycle: store --> supplier --> workers --> store.  Such specific cycles are a pattern that is commonly found when currencies are primitive or newly emerging, and every Bitcoin marketer and evangelist should be familiar with them.

The kula ring, two specific cycles (counter-circulating cycles of shell money) allowing exchange of seasonal goods in the precolonial South Pacific

It doesn’t help much to sell bitcoin to isolated individuals: as a mere store of value its volatility is much greater than most existing currencies; as an investment it only makes sense as a tiny high-risk fraction of one's portfolio.  Bitcoin does have some political-affinity and status value in developed countries; by contrast in many developing countries and in countries under financial crisis such as Greece, there are urgent needs bitcoin potentially can address.  In terms of these needs Bitcoin is mainly useful as a way to send money across borders for investment in more stable assets overseas, and to substitute for cash or other substitute currencies in a money-starved environment.

To have value as a medium of exchange, bitcoin must be taken up by a community of people who already frequently trade with each other,  and who have a strong need to use it in these trades. It is especially important to market to the links in the cycle that have the strongest negotiating leverage with the others (in the case of Greek the Greek store scrip cycle, the store and its larger suppliers).  The link in the cycle with the greatest incentives to switch to bitcoin here are likely the store's suppliers, because they don’t fully trust the store, nor the underlying currency, euro or post-euro, that is the “O” in an IOU, but are participating in the scrip because, sans bitcoin, they have no other choice.

In bitcoin specific cycles create other cost savings.  Almost everywhere they economize on the increasingly high KYC/AML (know your customer/anti-money-laundering) costs of going through a fiat-bitcoin exchange.  What's more, in a capital controls environment like Greece specific cycles avoid the capital controls that would be imposed on a Greek-based fiat-bitcoin exchange, and avoid the need nearly all Greek customers using out-of-country exchanges would have to futilely try to tap into their frozen bank accounts in order to purchase bitcoin. Bitcoin will not, contrary to some feverish news reporting, help Greeks get money out of their frozen bank accounts.

But bitcoin does have great potential to help in less obvious ways: for one thing, as a superior (not vulnerable to trust in an issuing store, and in any currency underlying an IOU) substitute for the emerging store scrips.  For another, it could help greatly with the severe cross-border commerce issues that are emerging.  Exporters, including freelancers working over the Internet, can bring bitcoin into the country, thereby avoiding earning wages that get deposited to frozen bank accounts (per Greek lore, be wary of a cave with many tracks coming in but few coming out). Importers can pay for goods with bitcoin while other electronic payment channels (European money settlements, Paypal, and credit & debit cards when paying foreign businesses, etc.) remain frozen. Again specific cycles must be set up: isolated marketing to just exporters or importers will be far less effective than organizing existing supply chains that involve both.

There are likely many other, mostly highly non-obvious, niches in which bitcoin, and other cryptocurrencies, and smart contract platforms could play a quite valuable role in capital-controlled and other financially handicapped countries.

Bitcoin is not easy to learn, either conceptually or in setting up businesses and individuals with the software (and preferably also the secure hardware) to accept it. This is especially the case in a capital controls climate where the traditional bitcoin exchanges and retail payment companies, with their consumer-friendly front ends, as they normally operate in developed countries, likely can't effectively operate. To take advantage of bitcoin many Greeks will have to use the Bitcoin blockchain directly. So it's too late for bitcoin to help much with the current 6 days of bank closure,  but once the learning curves have been surmounted, the participants in specific cycles educated, bitcoin has great potential to address likely many ongoing problems with capital control, in Greece as long as they continue in various forms, and in many other parts of the world where such financial restrictions designed for a pre-digital era have been imposed.

[Update: various minor edits: the first version was rather rough, sorry :-)]