Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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Describe how microstates could adopt a virtual currency such as Bitcoin. Presented at BTC London, July 2, 2013 (CoinSummit, London).

Describe how microstates could adopt a virtual currency such as Bitcoin. Presented at BTC London, July 2, 2013 (CoinSummit, London).

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  • 1. Bitcoin for Microstates How Iceland could adopt Bitcoin Sveinn Valfells, PhD linkd.in/wtaHi5 July, 2013 Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 1 / 18
  • 2. Outline 1 The Economic Consequences of Bitcoin 2 Iceland — A Microstate in Need of a New Currency 3 About the Author Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 2 / 18
  • 3. The Economic Consequences of Bitcoin Outline 1 The Economic Consequences of Bitcoin 2 Iceland — A Microstate in Need of a New Currency 3 About the Author Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 3 / 18
  • 4. The Economic Consequences of Bitcoin Satoshi Stands on the Shoulders of Giants Isaac Newton and the Great Recoinage of 1696 [1] Newton @ Royal Mint, 1696–1727 Significant debasement of currency (≈ 10–20%). Old coins taken back by weight (not face value). Invented ridges on new coins to reduce “clipping”. Successfully prosecuted counterfeiters. Supervised currency union of England and Scotland. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Figure: Isaac Newton; Quarter Guinea (1718). Bitcoin for Microstates July, 2013 4 / 18
  • 5. The Economic Consequences of Bitcoin Bitcoin Is a Token AND a Network Dual property: Store of value AND medium of exchange Virtual currency economics Token: Fungible, impossible to counterfeit, prescribed supply, low cost of carry, tested governance model. Network: Fast, inexpensive, open, reliable. Value of network increases faster than number of users. Winner takes all: Endstate is one dominant network, 2–3 runners-up [2]. Figure: BTC private key–public address (top); peer-to-peer network (bottom). Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 5 / 18
  • 6. The Economic Consequences of Bitcoin Bitcoin Has Large Addressable Markets Virtual currencies can store and transmit value “In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted.” — ECB [3] Global asset classes (value storage) Private investment in gold >$1T [4]. London housing stock >£1T [5]. Global payment streams (value transmission) Global non-bank payments in major economies >$609B (2011) [6]. Global m-payments ≈ $300B (est. 2013) [7]. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 6 / 18
  • 7. The Economic Consequences of Bitcoin Bitcoin Will Grow Like Bacteria in a Petri-Dish Money will rotate into virtual currencies from traditional assets, payment streams Main scenarios: Fast growth (+2σ) Fast rotation into Bitcoin from assets, payments. Steady growth Stead rotation into Bitcoin from assets, payments (expected case). Contraction (−2σ) Bitcoin stagnates, money leaks out. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Figure: Growth of Bitcoin market cap modelled as Geometric Brownian motion (µ = 50%, σ = 50%) [8]. Bitcoin for Microstates July, 2013 7 / 18
  • 8. The Economic Consequences of Bitcoin Bitcoin Is Not Fully De-Risked Systemic risk is concentrated in mining, regulation Positive shocks Negative shocks Major e-commerce company accepts Bitcoins for payments. A financial services provider launches first bitcoin ETF. Bitcoins are adopted by a sovereign nation as (de facto or official) currency. Another banking crisis in a major currency zone. Security compromised at one (or more) major exchange(s). The Bitcoin network suffers a sustained, co-ordinated attack by an organization with substantial computational resources. Co-ordinated clampdown on bitcoins by G20. Positive and negative shocks will significantly influence Bitcoin adoption Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 8 / 18
  • 9. Iceland — A Microstate in Need of a New Currency Outline 1 The Economic Consequences of Bitcoin 2 Iceland — A Microstate in Need of a New Currency 3 About the Author Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 9 / 18
  • 10. Iceland — A Microstate in Need of a New Currency Iceland Is A Wealthy, Literate, Digitised Nation. . . Main exports are fish, energy and travel services [9] Literacy: 100%. Energy per capita: 130MWh/year. Life expectancy: 82Y. Fish catch per capita: 3t/year. GDP per capita: $43K. Inhabitants per km2 : 3.1. Internet usage: 91%. Tourists per capita: 2.0/year. E-payments per capita: 328/year. Sheep per capita: 1.5. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 10 / 18
  • 11. Iceland — A Microstate in Need of a New Currency . . . With a Broken Financial System Iceland has far from adjusted from crash of 2008 [9] Some financial facts: Ringfenced economy (FX controls). Large overhang of hot-money (1.7×GDP gross, 0.5×GDP net). Bloated banks, largest banks with assets ≈ 1.6×GDP, down from ≈ 9×GDP in 2007-8. Expensive banks, 2 − 3× higher costs as % of assets than Nordic banks. Central Bank QE-ed in 2006-8 on “love letters” issued by private institutions. Central Bank recapitalised in 2009 for ≈ 10% of GDP. Icelandic kr´na (ISK) depreciated over o 50% since 2007. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Figure: Homer Simpson goes to Iceland, finds banks closed. Bitcoin for Microstates July, 2013 11 / 18
  • 12. Iceland — A Microstate in Need of a New Currency The Saga of the Icelandic Kr´na (ISK) o An epic tale of value destruction Icelandic kr´na leads fiat currency “race to the bottom” [10]: o US$ has lost 92% of its value since WW2 (≈ £ has lost 97% of its value since WW2 (≈ 1 12 ) 1 30 ) [11]. [12]. Icelandic kr´na has lost 99.99% of its value since WW2 (≈ o 1 10,000 ) [13]. ⇒ Figure: One kr´na in 1945 (left); 10,000 kr´na in 2013 (right). o o Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 12 / 18
  • 13. Iceland — A Microstate in Need of a New Currency Iceland Needs a New Currency The current choice is between fiat and fiat Currency Liquidity Store of Value Cultural ties Economic ties Labor mobility USD Good Middling Good Middling Poor EUR Good Unproven Good Good Good NOK Middling Middling Good Good Good CAD Middling Middling Middling Middling Poor Table: Rough comparision of some fiat alternatives to kr´na. o Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 13 / 18
  • 14. Iceland — A Microstate in Need of a New Currency How Will Bitcoin Qualify as Currency for Iceland? For Iceland, Bitcoin can meet several straightforward criteria RFC: Criteria for a microstate (Iceland) to adopt Bitcoin Market Cap Bitcoin market cap (≈$1B) must exceed monetary base needed by comfortable margin (current monetary base ≈$0.6B) [14, 15]. Liquidity Bitcoin liquidity (≈$2B/year) must exceed Iceland’s gross imports by comfortable margin (≈$7B/year) [14, 16]. Volatility Bitcoin volatility (σ ≈ 100% of avg. price in last 12 months) must reduce to “fair weather” range of Icelandic kr´na σ 20%. o Mining At least two independent, reliable ASIC technologies deployed and in operation for 3–5 years. Exchanges At least two independent, reliable exchanges in operation in 1st world jurisdictions for 3–5 years. Governance Bitcoin Foundation agrees to board representation for sovereigns. Mindshare A substantial part of the population must have gained trust in Bitcoin. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 14 / 18
  • 15. Iceland — A Microstate in Need of a New Currency Bitcoin Has Partly Qualified To Replace ISK Virtual currencies will eventually become credible alternatives for microstates Conclusions: Hackers make great central bankers! Money from traditional asset classes & payment streams will rotate into virtual curencies, including Bitcoin. The Icelandic kr´na is “walking dead”; o Bitcoin is on a fast trajectory to becoming a credible alternative. Buy some Bitcoins, experiment. . . Figure: Satoshi Nakamoto is a modern Isaac Newton. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 15 / 18
  • 16. About the Author Outline 1 The Economic Consequences of Bitcoin 2 Iceland — A Microstate in Need of a New Currency 3 About the Author Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 16 / 18
  • 17. About the Author About Sveinn Valfells, PhD linkd.in/wtaHi5 Some relevant previous predictions: Iceland’s leading banks may go the way of Northern Rock. — Letter to FT, March, 2008 Icesave deposit guarantee claims have “no legal basis”, Icelandic public will reject the agreement between Iceland, UK and Netherlands to guarantee them. — Today Programme, BBC Radio 4, April, 2011 Bitcoin can easily be projected to rise to $20 – $120 within 3 years. — Communication with Pamir Gelenbe, January, 2013 Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 17 / 18
  • 18. About the Author References [1] Wikipedia. Isaac Newton. http://en.wikipedia.org/wiki/Isaac_Newton. Retrieved June, 2013. [2] Wikipedia. Network effect. http://en.wikipedia.org/wiki/Network_effect. Retrieved June, 2013. [3] European Central Bank. Virtual Currency Schemes. http://www.ecb.europa.eu. October, 2012. [4] Wikipedia. Gold reserve. http://en.wikipedia.org/wiki/Gold_reserve. Retrieved June, 2013. [5] Savills. UK Housing Stock Climbs [to] £5T. http://www.savills.co.uk. February, 2013. [6] Global Finance. Payments Volumes Worldwide. http://www.gfmag.com. Based on BIS report published January, 2013. [7] Eileen Yu. Global mobile payment transactions to surpass $235B. http://www.zdnet.com. June 4, 2013. [8] Wikipedia. Geometric Brownian motion. http://en.wikipedia.org/wiki/Geometric_Brownian_motion. Retrieved June, 2013. [9] Various sources incl. Central Bank of Iceland, Statistics Iceland. [10] Bill Gross. Sell currencies of serial QE offenders. Financial Times. February 27, 2013. [11] Information Please. The shrinking value of the dollar. http://www.infoplease.com. Retrieved, June 2013. [12] Ed Parry. Uk inflation calculator. http://www.moneysorter.co.uk. Retrieved, June 2013. [13] Hafsteinn Hauksson. Icelandic krona lost 99.99% of value since WW2. http://www.visir.is. December 20, 2010. [14] BitcoinCharts. Bitcoin charts / markets. http://bitcoincharts.com. Retrieved, July 2013. [15] Central Bank of Iceland. Statistics from the Central Bank of Iceland. http://statistics.cb.is/. Retrieved, June 2013. [16] Statistics Iceland. Various publications. http://www.statice.is. Retrived June, 2013. Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 18 / 18