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What would widespread crypto-currency mean for Greece?

Today’s situation in Greece is bad for all parties and for once the media are using word “unprecedented” correctly. There have been currency union crises before (such as the Latin Monetary Union, from which Greece was expelled in 1908 for debasing its gold coinage) and banking crises before. Yet it is possible that this may be one of the last financial crises in which crypto-currency is not a major consideration for central banks.

The diminution of capital controls? - Capital controls have long been one of the central bank’s main tools in a currency crisis. In financial markets, memories are often short, but widespread use of capital controls are well within living memory (e.g. Britain only abolished capital controls in 1979). Investors sometimes have longer memories, and as early as June, Reuters reported that some Greeks were using BitCoin as a way of avoiding capital controls

Of course, in the past the wealthy could sometimes avoid or mitigate such controls and taxes (...and hence some of Greece’s pre-crisis problems), but if used more widely BitCoin could make that capability far more widely available. In turn, a more widespread ability to move value freely makes it much harder for central banks to control the movement of capital in a crisis, with huge implications as to what crisis management tools central banks will have at their disposal.

A supra-national alternative to the Euro - One of the challenges with the euro is that it is a currency without a nation state and a central bank without clear political leadership. (This is one of the big issues of the crisis, who or whom can give the ECB political direction rapidly in a fast moving crisis and is the ECB obliged to accept that guidance without endorsement from all euro member states?). BitCoin (and other alternatives) have many advocates who quite rightly stress the value crypto-currency offers to citizens as an asset that is beyond the reach of much political interference. This is a potentially double-edged sword, as while using a crypto-currency to move wealth out of reach of the government has benefits for citizens in countries where the government is corrupt or parasitical, strong governments can provide huge benefits for currency and asset stability and BitCoin will not have that underpinning.

How volatile and liquid are crypto-currencies? -  One element of the Greek crisis is FX liquidity. In a traditional currency crisis, one of the challenges for smaller countries is to maintain the liquidity of their currency in the FX market. Being in the euro has for some time masked some of Greece’s liquidity issues, as the FX market hasn't been able to directly show the stress signs in the Greek economy. In any future crisis it is debateable how well a BitCoin/ BlockChain would cope with rapid changes and high volumes of volatile trading. It’s not a given that any crypto-currency wouldn’t cope, but with the inherent latency of the blockchain there are question marks in my mind as to whether it is ideal for a maket that might want to trade and settle high volume rapidly.

In short, the next crisis may be distinctly different from this one if we see the widespread adoption of crypto-currencies. The structural difficulties inherent in the euro may have aggravated this crisis, but throughout history citizens look for alternative repositories of value to national currencies when governments are in financial difficulties. Greece has a history of being such an environment, with defaults in 1843, 1860 and 1890, the dichotomisation (halving) of the drachma in 1922 and 1926, the re-issue of the drachma in 1954 and then its steady erosion in value. Quite rationally with that history, citizens are cautious about the government’s willingness to preserve currency wealth. 

BitCoin is not the first alternative asset (the Victorian era was not short of financial innovation), but it is the first alternative to be so portable, so accessible to ordinary citizens and so easy to move outside government controls. Should it become more widely used (perhaps because of this crisis), it could have a profound effect on how governments and citizens manage any future crisis.


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Alex Noble

Account Director


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10 Jan 2008



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