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

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
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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
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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
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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).
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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
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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 )
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July, 2013
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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].
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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
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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
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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: $43K.
Inhabitants per km2 : 3.1.
Internet usage: 91%.
Tourists per capita: 2.0/year.
E-payments per capita: 328/year.
Sheep per capita: 1.5.
Sveinn Valfells, PhD (linkd.in/wtaHi5 )
Bitcoin for Microstates
July, 2013
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11. Iceland — A Microstate in Need of a New Currency
. . . With a Broken Financial System
Iceland has far from adjusted from crash of 2008 [9]
Some financial facts:
Ringfenced economy (FX controls).
Large overhang of hot-money
(1.7×GDP gross, 0.5×GDP net).
Bloated banks, largest banks with
assets ≈ 1.6×GDP, down from
≈ 9×GDP in 2007-8.
Expensive banks, 2 − 3× higher costs
as % of assets than Nordic banks.
Central Bank QE-ed in 2006-8 on “love
letters” issued by private institutions.
Central Bank recapitalised in 2009 for
≈ 10% of GDP.
Icelandic kr´na (ISK) depreciated over
o
50% since 2007.
Sveinn Valfells, PhD (linkd.in/wtaHi5 )
Figure: Homer Simpson goes to Iceland,
finds banks closed.
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12. Iceland — A Microstate in Need of a New Currency
The Saga of the Icelandic Kr´na (ISK)
o
An epic tale of value destruction
Icelandic kr´na leads fiat currency “race to the bottom” [10]:
o
US$ 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
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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 )
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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 )
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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
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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
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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 )
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