Why Greece should befriend its bitcoin foes

Whenever a country suffers any kind of liquidity crisis, you can be sure that the bitcoin faithful will start queueing up to proclaim that their precious currency is the answer to all the beleaguered nation’s problems. The Greek crisis is special only in that it has managed to elicit a post along those lines from Nick Szabo himself, who is widely believed to be the creator of bitcoin.

Szabo’s essay, in which he dreams of ways in which bitcoin could help Greek citizens evade capital controls and forced devaluation, manages to get the feeling in Greece exactly wrong. On Sunday, Greeks voted with their government, in a show of national solidarity. The European Central Bank was willing to keep the euros flowing to Greece — but it had conditions, and Greeks rejected those conditions. The flags flying on Sunday night in Syntagma were the flags of the Greek government, being waved by a proud and defiant people. The NO vote was exactly what the Greek prime minister had asked for, and is being taken as a mandate that his government should continue to try to fulfill the wishes of the people.

Szabo, by contrast, seems to think that the main desire of the Greek people is to circumvent everything the government has put in place. He talks, for instance, about the “catastrophe” which is “the imposition of capital controls”, and says that bitcoin “has the potential to mitigate” such a disaster — by allowing Greeks to get money out of the country regardless. Szabo sees the problem in Greece as a problem of individuals being at risk of losing monetary assets: “there are urgent needs bitcoin potentially can address,” he writes. “In terms of these needs Bitcoin is mainly useful as a way to send money across borders for investment in more stable assets overseas.”

This is a positively Thatcherite view. The former British prime minister famously declared that “there is no such thing as society” – that an economy is just a group of self-interested individuals. But a glance at the jubilant crowds in Athens is all you need to see that there is such a thing as society — and that society is an extremely powerful force which today’s Greeks want to be a part of. An economy is a highly interlocked network of economic relationships between millions of players, and if one person tries to game the system by changing the rules on the fly (by, say, sending money across borders when nobody else can do so), then that hurts everybody else.

The whole point of capital controls is that they’re a necessary temporary measure to keep money in the country, allowing the banks to be recapitalized rather than go catastrophically insolvent. Greece’s banks are teetering on the brink of bankruptcy, which means that the banking system is much more likely to be a recipient of Greek government spending than it is to end up lending much-needed cash to the state. Yet Szabo, who’s still in “banks = rich enemy” mode, thinks that Greece’s banks are the “only place the Greek government has left to go for money to fund its ongoing expenditures”.

This is the classic bitcoin mindset: government, banks, institutions generally are all cumbersome and clumsy dinosaurs, while bitcoin is a way for individuals to break free of such things. Szabo frets about the “increasingly high” costs of protecting against money laundering, despite the fact that the costs of not protecting against money laundering are surely much higher — especially for Greece, where money laundering is what rich people do. It almost goes without saying that in Szabo’s bitcoin-based utopia the amount of money that the government could collect in taxes would go down, rather than the direction it desperately needs to go in.

Under Szabo’s plan, Greece as a whole would pay a high price, even as its internet-adept elite might manage to disassociate themselves even further from their home country. But the NO vote was precisely a vote against the elites who have historically plundered Greece while giving nothing back.

Still, bitcoin’s default stance of anarcho-libertarianism is not the only possible use to which blockchain technology can be put. For a much more constructive idea, you need look no further than a proposal put forward last year by none other than Yanis Varoufakis, the man who would become Syriza’s first finance minister.

Varoufakis could see, back in 2014, that economies like Greece “are in desperate need of greater liquidity and of a respite from austerity” — and he came up with a rather clever idea which would provide up-front money for the government. He called it FT-coin, with the FT standing for “future taxes”.

The government would sell FT-coins (which would be issued under a standard blockchain protocol, like all alt-coins) for €1000 each. The government would also promise to redeem any coin, at any time, for €1000. But there would be another use for each coin: two years after it was purchased, the owner could used it to pay €1500 in taxes owed.

As a result, a coin worth €1000 today will be worth €1500 in two years’ time, giving citizens a lot of opportunity to buy the coin and thereby provide much-needed cash to the government. As Varoufakis put it, it would be “a source of liquidity for the governments that is outside the bond markets, which does not involve the banks and which lies outside any of the restrictions imposed by Brussels or the various troikas”; it would also create a payment system which existed outside the banking system. (That would be pretty handy, right now.)

What’s more, because the value of Greece’s scrip would go up over time rather than down, the FT-coin parallel currency would in no sense constitute a devaluation. Because bad money drives out good, and because FT-coin would be a higher-value currency than the euro, the introduction of FT-coin would not effectively mean Grexit, or a Greek exit from the euro. Indeed, most Greeks would much prefer to spend euros than to spend FT-coins which they’d be better off hoarding and then using to pay their taxes.

Varoufakis concluded:

While Bitcoin is too deflationary by nature to act as a widespread currency alternative to the dollar or the euro, its design can be used profitably in order to help the Eurozone’s member-states create euro-denominated electronic payment systems that help them, at least in the medium term, overcome the asphyxiating deflationary pressures imposed upon them by the Eurozone’s Gold Standard-like (and, indeed, Bitcoin-like) austerian design.

Varoufakis is no longer Greece’s finance minister, but he’s surely still extremely influential within the Syriza government. It’s almost inevitable that the Greek government is going to have to issue some kind of scrip, if the European Central Bank doesn’t open wide its liquidity faucet. Will Varoufakis be urging a blockchain-based solution? It’s entirely possible.