According to Greek finance minister Yanis Varoufakis, the government of Greece is likely to create its own parallel cryptocurrency, in case the ongoing economic crisis in Greece is not overcome in the near future.
Last year, in a blog post about bitcoin, Varoufakis revealed his criticism of digital currency, saying it is unlikely to succeed because of deflation and adding the negative impact of deflation is underestimated.
Greece's new finance minister was already thinking about a variant of Bitcoin as a national currency one year ago. http://t.co/9wQMS1Dir4
— Balaji S. Srinivasan (@balajis) February 20, 2015
“[…] the technology of Bitcoin, if suitably adapted, can be employed profitably in the Eurozone as a weapon against deflation.”
At the same time, he admitted the potential of the technology behind bitcoin. “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 said.
Comparing the Euro and bitcoin, Varoufakis noted: “The major difference with Bitcoin is that there is no fixed upper limit to the quantity of euros because private banks in the Eurozone are subsidised by member-states (through the availability of deposit insurance and the promise of bailouts, if need be) to provide credit lines (on the basis of fractional reserve banking principles).”
“While this is a crucial difference between Bitcoin and the euro, the two are similar in one respect: whereas in Bitcoin there exist no monetary authorities that could expand the money supply in times of deflation, in the Eurozone the existing monetary authorities are constrained by the ECB’s charter in a manner that stops them from expanding the money supply in deflationary times,” he added.
The recent negotiations held by the Eurogroup, resulted unfavorably for Greece, as Germany refused to extend the loan. The European Central Bank (ECB) is not allowed to expand the money supply through quantitative easing.
If the dispute will not be resolved in the near future, economic default is inevitable for the country. The government will not be able to comply with requirements of the ECB, despite multiple actions taken to overcome the crisis.
With the creation of new alternative digital currency, it is possible to delay the economy’s default. After the companies and financial institutions will be forced to utilize the virtual currency, the money supply will be increased.
The state with its own currency can always create more money and can always run a deficit – use state spending to decrease unemployment.
Varoufakis proposed to build a money system, called FT-Coin, backed by future taxes and denominated in Euros. The system “could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free.”
FT-Coin would be a source of liquidity for the governments that are outside the bond markets. The mechanism will enable taxpayers to cut their inter-temporal tax bill.
Here is how Varoufakis explained the system: “You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website under a contract that binds the national Treasury to redeem your FT-coin for €1000 at any time or to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.”
However, some do not believe the introduction of digital currency will help the country to deal with the financial crisis. According to Tim Worstall, the plan of issuing Treasuries won’t work, as the country has limitations upon the number of Treasures issued.
“That exact equivalence with issuing Treasuries is also why it won’t actually happen. Because one part of the deal imposed upon Greece is that they have limitations upon how many Treasuries they’re allowed to issue,” Worstall said.
“But the conclusion to be drawn from what he’s saying is that Greece should leave the euro. Which, of course, is also true but then we’ve been saying that for a long time,” he concluded.