Once again Greece is dominating the headlines as the country is struggling with a heavy debt burden and stagnant economy. The newly elected government was voted into power with a mandate to renegotiate the austerity measures and find a permanent solution to Greece’s financial problems. Over the next few months, Greece must repay the bailout from the Troika and faces large public sector debt repayments. On Wednesday May 6, 2015, Greece was able to make a $220m interest payment to the IMF, but only by requiring all state enterprises, including schools and pension funds, to transfer reserves to an account at the Greek central bank. Next week, on May 12, 2015 Greece faces an even bigger €750 million payment to the IMF. As of now, it is unclear how Greece will manage to make this payment.
The situation has become unsustainable even though there has been no shortage of solutions. However, implementation has been a significant hurdle. In particular, privatization of Greek assets is a lengthy process that has run into political resistance. Adding to the urgency, the recent sharp rise in Italian, Spanish and Portuguese interest rates suggests markets are fearful of contagion if Greece were to exit the Eurozone.
Greece and the Eurozone need a quick, simple solution that allows Greece to stay in the Eurozone and retain ownership of its plentiful and prized assets.
IOU Currency Will Not Work
It was recently revealed that Greece is working on an IOU based secondary currency similar to the IOU’s used by California in 2009 - a comparable scheme was also proposed by the Greek Finance Minister Yanis Varoufakis.
This secondary currency essentially borrows tax revenue from the future to pay for obligations today. This secondary currency would be tantamount to a T-bill that was backed by the full faith and credit of the Greek government. As a faith based financial instrument, acceptance would be a function of the confidence in the Greek government to collect future taxes. Furthermore, without a way to easily spend the IOU currency it would likely go unused by government employees and thus have no impact on economic growth. These limiting factors make it clear that an IOU currency issued by a government under financial stress is not a workable solution.
Using blockchain technology (the technology behind Bitcoin) there is a simple and elegant way for Greece to monetize assets and pay government employees.
Greece Has Sizable Financial Assets
While Greece may not have the liquidity to satisfy its current obligations it does have enough illiquid assets to solve much of its financial problems. According to Eurostat, as of September 2014 Greece had €86b of financial assets on its general government balance sheet. As a percentage of GDP, this makes Greece the 7th wealthiest nation in the EU. As a point of reference, financially sound Germany ranks 17th on the list of state owned assets as a percentage of GDP.
Given the amount of assets held by Greece, the solution to its financial problem becomes obvious - it must monetize the assets. This contingency has not escaped the IMF, Eurozone and the ECB, but it has run into resistance from the citizens of Greece. Greece needs a method to monetize state owned assets while still maintaining ownership. In my opinion blockchain technology can provide the solution.
Solution: An Asset Backed Digital Currency
Instead of selling assets in what will likely be a fire sale, the Greek government could use blockchain technology to create an asset backed digital currency that can be used to repay creditors and pay government employees. Initial proceeds from the sale of the currency could be used to meet obligations to the Troika, while government employees could be paid in this parallel currency.
To make this work, the government of Greece would place a portion of its assets into a trust. Next 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 approach is a hybrid of a parallel currency and an asset backed security. Combining the attributes of a digital currency and an asset backed security would result in several benefits. First, Greece would retain ownership of its highly prized state assets satisfying the voter mandate to curtail privatization. Second, the currency could not only be used to pay government salaries, but workers would be able to spend the currency at local businesses providing a much needed economic boost. Third, it creates an investable asset that would be a proxy for a recovery of the Greek economy. Finally, Greek banks could hold this hybrid asset instead of T-bills, the asset backing would immediately strengthen bank balance sheets.
This is NOT a Grexit
I want to be clear that this proposal is not suggesting Greece leave the Eurozone, in fact, just the opposite. This new digital currency would work in parallel with the existing financial system. This would allow Greece to benefit from remaining in the Eurozone while internally expanding money supply and pay off debt. As well, it could quell fears of contagion by providing a template for other liquidity challenged countries.
One Thing Challenge
While many proposals sound good on paper they are often not reasonable to implement. In order to ground this proposal in reality a “One Thing Challenge” has been issued to the blockchain technology community. The community has been challenged to provide a working prototype of technology that aids in the implementation of the parallel currency. Start-up and established companies have been given a global stage to demonstrate products based on blockchain technology.
In my view, this is an opportunity for real world implementation of blockchain technology. This is not a sola act; it will require a collaborative effort. To that end, a wiki page has been created where blockchain technology firms can submit and discuss all the technology that will be needed. On May 20th We will be hosting an online conference www.drachmae.money where companies will have the opportunity to present their piece of the workable solution.
Importantly, reasoned disagreement is welcomed as the solution requires examination from multiple angles.
Let this serve as an open invitation to contribute. Everyone is invited to be a part of the solution by submitting proposals at www.drachmae.info
Blockchain’s Killer App?
This is not a pie-in-the-sky proposal; there is already a company with a mobile banking solution and payroll function that will enable the Greek government to pay government workers via mobile phones. Another company is working on storing asset ownership records in a blockchain so that ownership can be verified and tracked by everyone. The goal of this project is to create a decentralized organization that can provide a useable solution for Greece and illustrate the potential for blockchain technology. We are fortunate to have this powerful technology at our fingertips and now is the time for the blockchain community to demonstrate its game changing potential.
Previous Event on 5th of May 2015 announcing A Bitcoin Solution for Greece Seminar www.drachmae.money
A Blockchain Solution for Greece