March 2013 the world witnessed an unprecedented government money grab. In a good faith measure with the European Central Bank (ECB) and the International Monetary Fund (IMF), the government of Cyprus seized all uninsured deposits of its second largest bank, Laiki Bank, and levied 40 percent of uninsured deposits of the Bank of Cyprus. This fiscal ‘haircut’, a contingency of the assured ECB-IMF €10 billion bailout, was deemed necessary for Cyprus to raise its international credit rating from ‘junk’ to a notch above junk.
As with most government interventions, this fiscal ‘haircut’ came with unintended consequences. Nine months have passed and Cypriots have come to terms with the ramifications of the government’s what’s ours is ours, what’s yours is ours policy. In an indictment of Cyprus’ monetary system and government restricted access and consumption constraints, Cypriots are diversifying their cash investments by swapping their euros for lira and bitcoins.
According to officials, “…Greek Cypriots looking to protect their assets from harsh capital controls have found an alternative by turning north to Turkish Cypriot banks in the land of their traditional nemesis.” In an aside, the island of Cyprus is divided by geopolitical lines – to the north Turkish Cyprus, to the south, Greek. Lines were drawn in the aftermath of the Turkish Invasion of Cyprus in 1974. Turkey is now witnessing an influx of Greek Cypriot immigrants not seen in a half century as they flee Greek territories to escape financial crises and austerity measures.
In keeping with diversification and alternatives to traditional fiat currency, Cypriots are turning to bitcoins – a new digital currency based upon algorithms, not commodity backing. Being the first to do so in the world, the University of Nicosia now accepts Bitcoin as payment for tuition. For those unfamiliar with the Bitcoin buzz, Bitcoin is a non-commodity-backed, decentralized, person-to-person electronic currency. (Here in the US, Libertarians love it since there is no third-party intermediary to regulate transactions.)
The situation in Cyprus highlights the tenuous stability of fiat currency. Government bank heists and austerity measures are driving the free market to produce alternatives to the devalued dollar and fledgling euro. Already the Bitcoin is valued on exchanges at $1,005 a piece. The trend cannot be ignored.
“We are acutely aware that digital currency is an inevitable technical development that will lead to significant innovation in online commerce, financial systems, international payments and remittances and global economic development. Digital currency will create more efficient services and will serve as a mechanism for spreading financial services to under-banked regions of the world,” said Dr. Christos Vlachos, member of the Council of the University of Nicosia.
In keeping with inevitabilities, senatorial committee hearings on the Bitcoin and its charmed possibilities have commenced on Capitol Hill. Once denounced by Sen. Chuck Schumer (D-N.Y.) as, “an online form of money laundering,” Bitcoin is now being heralded by Obama administration officials as legitimate.
One local US municipality is already testing its legitimacy. Vicco, Kentucky now pays its police chief in bitcoins. “We just want to be on top of things, and up-and-coming and more progressive as a city,” Mayor Johnny Cummings stated in response to Vicco being the first municipality to utilize Bitcoin as payment for salaries in the nation.
Private sector retailers such as Target, Toys R’ Us and Timberland also embrace Bitcoin as a legitimate payment option. Even iPhone accepts Bitcoin for mobile payments.
In its history, the US has progressed from using beads as currency to purchase New Amsterdam to the gold-backed dollar to fiat currency – it seems inevitable that we would go the way of Cyprus and go digital.
Cypriots do it, Libertarians do it, and even Vicco, Kentuckians do it. Should we do it, too?