Over the next few months, Greece must repay its bailout and large public-sector debts. Greece and the euro zone need a quick, simple solution that allows Greece to stay in the euro zone and retain ownership of its plentiful and prized assets. An IOU currency isn't the answer — but there is one solution that could work.
Source: drachmae.money.com
A screenshot for a Bitcoin Blockhain Solution for Greece event.
This past Wednesday, Greece was able to make a 200-million euro (US$224 million) interest payment to the International Monetary Fund, but only by requiring all state enterprises — including schools and pension funds — to transfer reserves to an account at the Greek central bank. Next Tuesday, Greece faces an even bigger payment of 750 million euros to the IMF. As of now, it is unclear how Greece will manage to make this payment.
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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 euro zone.
IOU currency will not work
The European Central Bank is apparently working on an IOU-based secondary currency similar to the IOU's used by California in 2009, according to a Reuters report last month. Interestingly, Yanis Varoufakis (Greece's new Finance Minister) wrote a blog post in February proposing a similar currency, which he dubbed Future Tax Coin (FT-Coin).
In both of these cases, the secondary currency would borrow tax revenue from the future to pay for obligations today. Furthermore, the secondary currency would be tantamount to a T-bill that was backed by the full faith and credit of the Greek government. As a trust-based financial instrument, acceptance would be a function of the confidence in the Greek government to collect future taxes. 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.
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Using block-chain technology (the technology behind bitcoin) there is a simple and elegant way for Greece to monetize assets and pay government employees.
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 held 86 billion euros 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 evident — it must monetize the assets. This understanding has not escaped the IMF, euro zone and the ECB (the troika), 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, a digital currency based on block-chain technology can provide the solution.
Instead of selling assets in what will likely be a fire sale, the Greek government could use block-chain 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. 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.
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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.
1. Greece would retain ownership of its highly prized state assets, satisfying the voter mandate to curtail privatization.
2. The currency could be used to pay government salaries and workers would be able to spend the currency at local businesses providing a much-needed economic boost.
3. This creates an investable asset that would be a proxy for a recovery of the Greek economy.
4. 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 euro zone — 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 euro zone while internally expanding money supply and paying off debt. As well, it could quell fears of contagion by providing a template for other liquidity-challenged countries.
It is useful to note that this solution does not need to be implemented nationwide — the flexibility and scalability of digital currencies allow a stepwise progression. It is possible for municipalities and agencies within the government to adopt this solution individually.
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 block-chain technology community. Over the last few days, 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 block-chain technology.
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In my view, this is an opportunity for real-world implementation of block-chain technology. This is not a solo act; it will require a collaborative effort. To that end, a wiki page has been created where block-chain technology firms can submit and discuss all the technology that will be needed. On May 20, I will be hosting an online symposium 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.org.
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 block chain 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 usable solution for Greece and illustrate the potential for block-chain technology. We are fortunate to have this powerful technology at our fingertips and now is the time for the block-chain community to demonstrate its game-changing potential.
Brian Kelly is founder and managing member of Brian Kelly Capital LLC, a global macro investment firm catering to high net worth individuals, family offices and institutions. He is also the creator of the BKCM Indexes, benchmarks for multi-asset money managers. He's also the author of the upcoming book, "The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World." Kelly, a CNBC contributor, often appears on "Fast Money." Follow him on Twitter @BKBrianKelly.
