Banks, Trust and Cryptocurrencies

Words by Darius Ghadiali

Do local Cryptocurrencies work?

After the launch of the Libracoin, Facebook’s new digital currency, many financially-minded and digital-savvy individuals have predicted that the coin’s initial mixed reception from central banks will give way to these banks issuing alternative forms of currency. Very recently, the MIT Technology Review highlighted the changing view of the Bank for International Settlements (a bank advising many other big banks) on the possibility of setting up cryptocurrencies. This change of mind of these big banks reflects the fact that cryptocurrencies are becoming more mainstream. In this article, we delve into what this might mean if local currencies were made entirely internet-based.

No bank account?

Facebook has shown that it may be possible to trade with Libra coins without ownership of a bank account and by doing so are allowing previously marginalised groups to engage in economic activity. Barriers to getting a bank account set up won’t prevent people from buying and selling things. This is only possible because of Facebook’s size and reputation with the big banks. Despite the public’s lack of trust in the company’s ethos, they are still able to ensure that the currency is accepted as an alternative to many traditional ways to pay and bypass the need for a bank account.

A local cryptocurrency may, ideally, be able to provide the same service to its users – though due to its size find it harder to be as widely accepted as the Libra coin. A local currency like Bristol Pound might allow the same freedom that Libra coin provides without the ethically questionable behaviour behind Facebook’s actions. For an overview of Facebook’s ethics around data, check out the Guardian article evaluating Facebook’s updates to their ethical processes.

Local cryptocurrencies: what’s been tried?

Iceland’s Auroracoin was the first instance of testing the concept of a geographically restricted cryptocurrency after the financial crisis. Half the total amount of the money was given out to the Icelandic population, which stimulated the Icelandic demand-side of their economy. Each person received an amount of around £2300 worth of Auroracoins – given that the launch price of the coin was around £70 per coin in March 2014 – and now the value is less than £0.04 per coin. This massive price drop meant Icelnadinc people were much less able to buy and sell with the coin compared to when the coin was at its higher price. There’s now only £413,000 worth of Auroracoin circulating in Iceland’s digital economy, meaning there’s an average of £1.22 worth of the e-money circulating per person in Iceland. This doesn’t spell good news for the future of the currency, as the primary goal for the money is to circulate as much as possible and keep the Icelandic economy running. With such a low amount circulating per person, it is becoming more and more difficult to justify keeping the currency running.

The e-Krona is the Swedish central bank’s idea for a centralised digital currency as a response to the declining need for paper and metal cash. Supporters of the coin argue that in Sweden’s almost cashless society, giving local currencies an online platform could be a way to guarantee to keep money in the region. Those against the central bank’s idea argue that the e-Krona is a strategy to keep up with technological advances, not necessarily as a means of providing a better service.

A common issue that cryptocurrencies run into is that their legal status is often uncertain due to lack of official governmental approval. This can make prospective users sceptical about using the currencies, with many questioning whether buying the currency is part of an elaborate scam. This was something that had come up when the Auroracoin was launched and is still something that occupying the general public’s mind.

Flooding the internet with cryptocurrencies could be detracting from the public’s confidence, as it becomes harder and harder to know what’s a legitimate coin and what’s a scam.

South Korea and ‘stablecoins’

Busan, the second largest city in South Korea, recently expressed interest in blockchain currency under supervision from their city bank. The city wants to implement a ‘Stablecoin’ (which is a cryptocurrency tied to the value of the South Korean won). Where Stablecoins were previously considered to be only available for globally circulating cryptomonies, the setting up of a Stablecoin at the local level seems to be a big step forward for the success of locally-circulating currencies. This means the first steps for a local currency to compete with the likes of the Facebook Libra as alternative money have been taken. Their local government is strongly supportive of promoting the local economy, which could boost the public’s support for currency shortly.

If this initiative is successful, it could mean that there is scope for local governments, banks and independent organisations to work together to run a local cryptocurrency. Given that the majority of banks are still sceptics of cryptocurrencies, this is a significant achievement for advocates of regional and crypto-economics.

What does the future look like for local cryptocurrencies?

The concept of cryptocurrencies being set up on the local level is relatively new and there isn’t much to go by on whether they work or not. If big banks are on the side of supporting locally run cryptocurrencies, their future looks bright. Though many argue that this is not very likely, the advocates of cryptocurrencies also say that the involvement of local governments in supporting and distributing the currencies are vital for their uptake.