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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.
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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
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Page 1: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Bitcoin for MicrostatesHow 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

Page 2: Bitcoin for Microstates: How Iceland Could Adopt 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 2 / 18

Page 3: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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

Page 4: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

The Economic Consequences of Bitcoin

Satoshi Stands on the Shoulders of GiantsIsaac 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 (notface value).

Invented ridges on new coins to reduce“clipping”.

Successfully prosecuted counterfeiters.

Supervised currency union of Englandand Scotland. Figure: Isaac Newton; Quarter Guinea

(1718).

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 4 / 18

Page 5: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

The Economic Consequences of Bitcoin

Bitcoin Is a Token AND a NetworkDual property: Store of value AND medium of exchange

Virtual currency economics

Token: Fungible, impossible tocounterfeit, prescribed supply, lowcost of carry, tested governancemodel.

Network: Fast, inexpensive, open,reliable.

Value of network increases fasterthan number of users.

Winner takes all: Endstate is onedominant 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

Page 6: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

The Economic Consequences of Bitcoin

Bitcoin Has Large Addressable MarketsVirtual currencies can store and transmit value

“In an extreme case, virtual currencies could have asubstitution effect on central bank money if they becomewidely 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

Page 7: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

The Economic Consequences of Bitcoin

Bitcoin Will Grow Like Bacteria in a Petri-DishMoney will rotate into virtual currencies from traditional assets, payment streams

Main scenarios:

Fast growth (+2σ)Fast rotation into Bitcoinfrom assets, payments.

Steady growthStead rotation into Bitcoinfrom assets, payments(expected case).

Contraction (−2σ)Bitcoin stagnates, moneyleaks out. Figure: Growth of Bitcoin market cap modelled as

Geometric Brownian motion (µ = 50%, σ = 50%) [8].

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 7 / 18

Page 8: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

The Economic Consequences of Bitcoin

Bitcoin Is Not Fully De-RiskedSystemic risk is concentrated in mining, regulation

Positive shocks

Major e-commerce company acceptsBitcoins for payments.

A financial services providerlaunches first bitcoin ETF.

Bitcoins are adopted by a sovereignnation as (de facto or official)currency.

Another banking crisis in a majorcurrency zone.

Negative shocks

Security compromised at one (ormore) major exchange(s).

The Bitcoin network suffers asustained, co-ordinated attack by anorganization with substantialcomputational resources.

Co-ordinated clampdown onbitcoins by G20.

Positive and negative shocks will significantly influence Bitcoinadoption

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 8 / 18

Page 9: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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

Page 10: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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%.

Life expectancy: 82Y.

GDP per capita: $43K.

Internet usage: 91%.

E-payments per capita: 328/year.

Energy per capita: 130MWh/year.

Fish catch per capita: 3t/year.

Inhabitants per km2: 3.1.

Tourists per capita: 2.0/year.

Sheep per capita: 1.5.

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 10 / 18

Page 11: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Iceland — A Microstate in Need of a New Currency

. . . With a Broken Financial SystemIceland 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 withassets ≈ 1.6×GDP, down from≈ 9×GDP in 2007-8.

Expensive banks, 2 − 3× higher costsas % of assets than Nordic banks.

Central Bank QE-ed in 2006-8 on “loveletters” issued by private institutions.

Central Bank recapitalised in 2009 for≈ 10% of GDP.

Icelandic krona (ISK) depreciated over50% since 2007.

Figure: Homer Simpson goes to Iceland,finds banks closed.

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 11 / 18

Page 12: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Iceland — A Microstate in Need of a New Currency

The Saga of the Icelandic Krona (ISK)An epic tale of value destruction

Icelandic krona leads fiat currency “race to the bottom” [10]:

US$ has lost 92% of its value since WW2 (≈ 112 ) [11].

£ has lost 97% of its value since WW2 (≈ 130 ) [12].

Icelandic krona has lost 99.99% of its value since WW2 (≈ 110,000 ) [13].

⇒Figure: One krona in 1945 (left); 10,000 krona in 2013 (right).

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 12 / 18

Page 13: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Iceland — A Microstate in Need of a New Currency

Iceland Needs a New CurrencyThe current choice is between fiat and fiat

Currency USD EUR NOK CADLiquidity Good Good Middling MiddlingStore of Value Middling Unproven Middling MiddlingCultural ties Good Good Good MiddlingEconomic ties Middling Good Good MiddlingLabor mobility Poor Good Good Poor

Table: Rough comparision of some fiat alternatives to krona.

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 13 / 18

Page 14: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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 bycomfortable margin (current monetary base ≈$0.6B) [14, 15].

Liquidity Bitcoin liquidity (≈$2B/year) must exceed Iceland’s gross importsby comfortable margin (≈$7B/year) [14, 16].

Volatility Bitcoin volatility (σ ≈ 100% of avg. price in last 12 months) mustreduce to “fair weather” range of Icelandic krona σ / 20%.

Mining At least two independent, reliable ASIC technologies deployed andin operation for 3–5 years.

Exchanges At least two independent, reliable exchanges in operation in 1stworld 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 inBitcoin.

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 14 / 18

Page 15: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Iceland — A Microstate in Need of a New Currency

Bitcoin Has Partly Qualified To Replace ISKVirtual currencies will eventually become credible alternatives for microstates

Conclusions:

Figure: Satoshi Nakamotois a modern Isaac Newton.

Hackers make great central bankers!

Money from traditional asset classes &payment streams will rotate into virtualcurencies, including Bitcoin.

The Icelandic krona is “walking dead”;Bitcoin is on a fast trajectory to becoming acredible alternative.Buy some Bitcoins, experiment. . .

Sveinn Valfells, PhD (linkd.in/wtaHi5 ) Bitcoin for Microstates July, 2013 15 / 18

Page 16: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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

Page 17: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

About the Author

About Sveinn Valfells, PhDlinkd.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 theagreement 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

Page 18: Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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


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