This Could Happen Again

Back in 2013, Cyprus made world headlines.

The tiny Mediterranean island was in financial trouble. Well, more accurately, its banks were.

Cypriot banks had been lending heavily to Greece’s private and public sector. Yet once Greece hit trouble, they lost a lot of money. It left them exposed, holding more debts than deposits.

To avoid a banking collapse, the Cypriot government asked the Troika (the European Commission, the European Central Bank and the International Monetary Fund) for help.

The Troika agreed, but there was a caveat.

What was it?

They told Cyprus they would have to use bank deposits to pay down the debt. You may have heard this referred to as a ‘bail in’.

On 16 March 2016 they reached a deal. The Troika would lend Cyprus 10 billion euros. Yet bank deposits held in Cyprus banks would get hit with a one-off tax.

Of course, people panicked. Yet to prevent a bank run, as they announced the deal they also sent the banks on holiday.

With banks closed, all confidence was lost. People queued in front of ATM’s to take out as much money from the wall as they could. Yet there is only so much cash you can take out of the ATM.

The parliament rejected the bill though.

Nine days later, the government and the Troika agreed to a new deal.

In the new agreement, depositors still took the brunt of the losses. While any deposit under €100,000 got spared, deposits of €100,000 and over lost much of their money.

For the first time in Europe, people’s deposits were used to help pay for a bank rescue. The controversial move sent shivers to savers around the world.

And the thing is, this can very well happen again anytime the next crisis hits.

Yet the 2013 crisis is probably one of the reasons why the small island is quite involved in blockchain projects.

If you are not familiar with blockchain, it is the technology behind bitcoin. The blockchain is basically a shared database, a public ledger that every member of the network can see and contribute to. Blockchain allows people to transfer alternative currencies over the internet without the need of a middleman.

The University of Nicosia in Cyprus is also making headways in this space. It was the world’s first accredited university to accept bitcoin as a payment option, and the first to offer a digital currency degree.

Battle of the Titans: Who wins when bitcoin and gold head-to-head…and how can you profit? Find out more here. 

An alternative way to store money

Back in 2013, people were looking for an alternative way to store their money, and some found their way into bitcoin.

As you can see in the graph below, bitcoin’s price surged up as people rushed in during that time.

Bitcoin (USD) Price 06-07-18

Source: Coindesk

[Click to open new window]

Bitcoin has been struggling this year, mainly because of regulator scrutiny. At the end of June, Bitcoin fell below the US$6,000 threshold. Yet it has recovered since. At time of writing it is trading at US$6,538.49.

One of the reasons for the recovery is that cryptocurrencies just got a nod from the European Parliament.

As they wrote on their research paper ‘Virtual currencies and central banks monetary policy: challenges ahead’ (emphasis mine):

Virtual currencies (VCs) are a contemporary form of private money. Thanks to their digital form and the use of Blockchain technology (in many, but not all, cases), the transaction networks of VCs are relatively safe, transparent, and fast…

‘Despite their technological advances and global reach, VCs are far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas. However, in extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies.

That’s quite a statement from an official institution!

But it doesn’t end there. The paper comes with a recommendation for regulators not to ban cryptos:

Financial regulators may dislike VCs because of their anonymity or cross-border circulation. They tend to fear that VCs will facilitate money laundering, the financing of illegal activities, tax avoidance, the circumvention of capital controls (in countries where such controls are in place), and fraudulent financial practices. Such concerns may be legitimate in some instances but must not be generalised. In most cases, transactions in VCs result from the free business choices of economic agents and, therefore, should be treated by regulators as any other financial transaction or instrument—that is, proportionally to their market importance, complexity, and associated risks. Given their global, trans-border character, it is recommended that regulations concerning VCs be harmonised across jurisdictions (which is far from the case now). Investment in VCs should be taxed similarly to investment in other financial assets.

As we wrote before, what’s interesting about cryptocurrencies is not the price, but what is going on behind the scenes.

A European institution has asked regulators not to ignore cryptos.

Don’t dismiss them either.


Selva Freigedo,
Editor, Markets & Money

PS: Bitcoin was the first application of blockchain. Yet this technology could change the whole way the world operates. Exponential Stock Investor’s editor, Ryan Dinse, has found some trailblazing opportunities to invest in blockchain. Click here to find out more.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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