Drachmae: Greece's last hope?

Monday 18 May 2015

Is a blockchain solution all that stands between Greece and default?

Greece is, once again, teetering on the brink. It recently managed to meet its obligations to the IMF, paying a €750 million loan instalment last Monday, just hours before the deadline. It only achieved this by plundering its emergency account it held with the IMF - robbing Peter to pay Paul. Unless it meets further interest payments next month, the IMF will hold back the last tranche of bailout money, some €7.2 billion. That’s quite apart from the obligations Greece has to pay its public sector bills. In short, the next couple of months look very dicey for the country.

The odd thing is, Greece as a nation isn’t exactly poor. It has plenty of financial assets - €86 billion worth, making it the 7th most wealthy nation in the EU. The problem is, it can’t sell them. Greece is like the aging aristocrat who lives in a crumbling mansion but doesn’t have the spare cash to fix the roof.


Greece: strapped for cash but not short of valuable assets

It could sell the assets, of course, but the Greeks don’t like that idea. They want to hold onto them, and they particularly don’t like the idea of dumping them at whatever price the market will give them. These are illiquid assets and, with their feet to the fire, there’s no way the Greeks would get a good price. They’d lose their treasured state assets and, adding insult to injury, be poorly compensated in the process.

Asset-based crypto

CNBC’s Brian Kelly, founder of Brian Kelly Capital, has suggested a solution that uses the blockchain to create an asset-backed currency. Kelly is an expert in digital currencies and author of The Bitcoin Big Bang - How Alternative Currencies are About to Change the World.

Other IOU-style solutions have been proposed for Greece, but these intend to borrow from future tax revenues. They presuppose confidence in the Greek government to collect those taxes in the future, and confidence is one commodity that is not in oversupply in this situation.

Kelly’s idea takes the approach of using crypto to monetise some of Greece’s existing assets without selling them. ‘To make this work, the government of Greece would place a portion of its assets into a trust. Then a digital currency would be issued and backed by this basket of assets. The mechanism for tying the assets to the currency would be a smart contract embedded in the currency that would not allow Greece to sell any asset in the basket unless the holders of the digital currency are paid.’

This would allow the Greeks to keep its state assets, whilst using the secondary crypto money to pay the IMF and government workers with a meaningful currency - who would spend it in their communities, boosting the economy. It would always be possible to buy back the crypto coins when they wanted to sell the assets or regain full ownership.

The future of blockchain?

Kelly stresses that this is not a solution under active consideration by Greece - though Finance Minister Yanos Varoufakis has expressed interest in bitcoin and the idea of cryptocurrency in the past. Instead, the project ‘hopes to find a solution that could be adopted or at least tested in a real world scenario to determine if some of the block chain concepts currently in the market place could be used to solve real world problems.’ He calls this secondary currency the Drachmae, after Greece’s pre-EU currency the drachma.

Drachmae is an intriguing idea, not least because it explores the idea of asset-backed cryptocurrency. To some crypto-enthusiasts, this is a non-starter: the great strength of crypto is that it’s decentralised, and backing a currency necessarily reintroduces the element of centralisation, and therefore trust. How can you trust a company, or a government, or an individual to make good on the promise embodied in the crypto-token?

This misses the point. Cryptocurrency offers huge benefits beyond trustless transfers. Drachmae is a hybrid crypto that enables the easy monetisation and transaction of large but illiquid assets. It’s my view that this is one of the killer applications for crypto. It’s a way of banking the unbanked, reducing the friction of entry into the financial system to near zero. A large business - such as a telecoms company - backs a crypto coin with fiat reserves. Now USD or EUR or GBP or Kenyan Shillings can be transferred instantly from person to person, without anyone needing a bank account - and banks are not keen to give accounts to the large proportions of the world's population they deem as financially unviable. Kelly’s idea proposes just such a solution for Greece. It will be interesting to see whether Greece and the IMF are prepared to run with it.

BitScan will be following the Drachmae project closely. You can find out more at www.drachmae.org.

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