Bitcoin Forum

Interesting conversation with a friend last night; over beers we discussed the possibility of a small country, maybe one that currently pegs to the USD, pegging to BTC for their currency.

I'm curious as to people's reactions to this. How would we do such a thing?

My friend suggested the block chain could, for a period of time, allow extra BTC to be generated in exchange for destruction of the existing national currency; separate to his above suggestion, but also intriguing. That is, imagine you're a resident of fijilandia. You'd put in your 50 Fijibucks somewhere, they'd get destroyed, and the next block would include 50 fijibucks worth of BTC for you.

Anyway, fascinating to me. I think it would jumpstart an economy, especially one that produced and exported goods to be based on BTC. I'm trying to figure out how this could be done in a small scale to test viability; maybe some permaculture farmers want to try selling just for BTC?

They'd need to provide BTC purchase access to many of their customers of course; anyway two intriguing ideas.

Sounds like a great idea.  I'd like to see a country try a bitcoin like currency.

You're thinking nonconvertible?  National currency goes in and doesn't come out?  That would mean the government is the sole exchange for awhile.

What country would give up or severely reduce their inflationary powers?  I might move there.

The U.S. constitution says the country deals only in gold and silver but we've been strangled by the Federal Reserve since 1913.

Do you have the skills to modify the code?

Cool idea. Maybe Island could peg their currency to the BTC. They are very much into the Internet.

Greece.  That's where I'd be setting up a Bitcoin exchange if I were a native.

One problem is that the value of a bitcoin changes so much. So for example a Big Mac costing 3 bitcoins today may cost 1 bitcoin next month, and 0.1 bitcoins in three months. So for practical purposes having a currency directly pegged to the BTC is perhaps only feasible when/if the value of a bitcoin stabilizes.

That's only if you're comparing the currency to USD.

If so, you could say the same thing about the price of a bigmac in AUD, EUR, JPY... and yet in those countries, the price of bigmacs stays the same. Why? Because an aussie in australia using AUD to purchase bigmacs, doesn't care about the USD exchange rate.

Same would be for BTC if the price were set in BTC and it was the official currency of a whole country.

But the bitcoins would still be related to other currencies, such as the USD, in the rest of the world even if Island used only bitcoins themselves. And McDonald's wants dollars. So Island would need to pay McDonald's and all other companies outside Island in dollars (or euros etc) which means that the price for a Big Mac and most other goods and services would change every day! That would be impractical.

Which McDonalds? McDonalds USA headquarters, McDonalds Island edition?

McDonalds Australia still buys meat, bread, lettuce, etc and I'm sure they pay for it in AUD, not USD.

Why couldn't the Island Maccas pay for their ingredients in BTC?

Island's economy would not be an isolated system. Their economy would still be heavily dependent on trading with other countries and large international corporations. So the price of goods and services in Island would still be determined for the most part by the world economy which today in turn is based on the U.S. dollar and other big currencies.

I don't get the pegging idea. Does that mean that, for example La Isla Bonita has $10,000,000 in its vaults and having a 100 pesos bonitos guarantees that $100 from these vaults belongs to the bearer or rather La Isla Bonita writes a financial novelty saying "from now on, 1 peso bonito will buy $10" without any capital?

Well neither is Australia's.

But you don't see the price of a Big Mac in Australia changing every day! The price of a Big Mac, in any country, in bitcoins, WOULD change every day.

You just argued against your own point. It's exactly what I've been saying.

Why should a bitcoin-based island big mac fluctuate when an aud-based australian big mac doesn't?

What I'm saying is simply that the price of things, such as a Big Mac, remains fairly stable over time when the price is in ordinary currencies.

If a Big Mac, or other ordinary goods or service, is priced in bitcoins, the price will change almost on a daily basis.

As an experiment: How many bitcoins does a Big Mac cost today? How many bitcoins did it cost one month ago? One month ago the value of one bitcoin was $1. Today the value of one bitcoin is $7! That's an enormous deflation rate. And it could continue. And no economy can in practice be made isolated from the USD. So what I'm saying is that it would be impractical to have the price of things in the real world in bitcoins. On the Internet it's easier to have prices in bitcoins because the price can be made to change automatically and dynamically minute by minute.

This is where we disagree.

I believe that is only the case currently, but wouldn't necessarily have to be the case for an 'island' adopting BTC as it's official currency.

But that would only work for an island essentially isolated from the rest of the world, without any import or export of goods or services. The trend is that the economy in the world is becoming more and more global.

it will happen when the facebook $50 billion valuation goes bust and they have nothing but bitcoins and hardware to show for it.

I think there are also practical considerations aside from the economic ones.  It would already need robust infrastructure capable of providing internet service to most of its residents, which may or may not be possible. How would they make every day transactions or offline transactions?  What happens when a tsunami, or hurricane hits it and power is out everywhere, how will people access their money?

I guess my point is that its great for e-commerce, not so much for brick and mortar.  Especially not relatively poor country where access to internet and computers may be considered the exception rather than the rule.  Not to say this wouldnt be possible, im sure solutions could be found.

Island is country with a small population and massive Internet connectivity. And as for offline money, consider RFID chips with the private Bitcoin crypto keys programmed into them. That would be like real physical coins! Almost.  8)

Therefore under that logic it wouldn't work for Australia.

However it is working for Australia currently.

Unbelievable!

Yes, the important point to note here is that using a deflationary but infinitely (well highly) divisible currency throughout an economy, including for production of basic goods might be interesting. It would likely fluctuate vis-a-vis USD some due to trade imbalances, and more due to currency speculators, but could well be useful and stable in a community as is.

As I read through the responses, I think that it raises some interesting questions; using mobile phones, and scratch-and-reveal type cards is likely necessary in a scenario like this, unless the government issues BTC-notes.

Actually, the whole thing would be quite easy if the government kept a BTC wallet and didn't allow fractional reserve banking; you could verify the money supply easily, 1 bill = 1 BTC. The issue then has to do with divisibility though.

We are facing this issue in the Bitcoin community in general right now; decimals are hard to think in. Nefario's 1 satoshi = the actual unit is not a great solution either right now, it's also hard to think in 8 zeros. This is a psychological issue, and one that doesn't seem to be well thought out or solved right now. It would be a factor in this thought experiment as well.

Yes, it's difficult to think that way but I think that's because the transaction fees force the matter.

Transaction fees are not deflating.

So Australia has no export or import, no trading with foreign nations at all? Are they manufacturing flat sceen TVs on their own? What kind of car companies do they have?

Just letting you know I have read your post and have no intention of responding further.

http://xkcd.com/386/

Ha! I won! ;)

The government could sanction/bless 21 million coin blockchain currencies of any bank that puts 21 whole actual original bitcoins on deposit at the central bank to "back" them. The government could thus act as buyer of last resort for each bank's branded currency (branding is in, branding is cool, everyone wants to brand stuff), buying it at one bitcoin per million coins if no-one else will buy the stuff.

Thus people need not use actual bitcoins, the global reserve currency, in their day to day domestic affairs...

-MarkM- (Actual number of bitcoins to be deposited to back each coin not necessarily having to be 1 per million, of course, that is just an e.g.)

And every bank pays for their own hashing to keep attackers out instead of all of us hashing on one chain? High price to pay just to restrict the number of people you can transact with and add parties that can screw you who incidently have a history of screwing you.

You want the banks to let *you* join the "folk who can screw them" club?

Unlikely. Right now "all" you have to do is splice into their Interac cables, little hashing required. Why would they *give* you a line into their network?

How much is their existing network costing them? $1.50 per transaction they do at a box in a bar for a patron of the bar? Or are they soaking that sucker er I mean patron for a whole lot more than their actual costs?

I expect the only "thick clients" on their network will be their own branches, the government central bank watchdog of each nation they have licensed branches in, and the clearing house / exchange centre of each other bank they interac(t) with.

-MarkM- (Regular Joes don't want thick clients anyway, right?)

P.S. They could even set difficulty targets. "We know the authorised processing power for hashing each participant has registered and contracted to maintain, so if difficulty rises we start a network audit to discover where the unauthorised hashing is taking place..." (Such attempts to disrupt the network would probably be at least a federal offence, if not an act of war...)

Implementing this plan would not be too difficult. In fact, it has already been done before in Brazil with the Plano Real (Real Plan, in English) (http://en.wikipedia.org/wiki/Plano_Real).

Basically, the Brazilian currency, cruzeiros, was suffering from hyperinflation of up to 1200% per year. So they made spending reforms and an imaginary currency called Unidade Real de Valor ("URV"). Everyone was forced to list the prices of their goods in URV. Each day, the government listed the exchange rate between URV and cruzeiros.


Finally, all the cruzeiros were exchanged for URVs (which are now called "reals").

A country could use this same method with Bitcoins instead of URVs.

Also see the NPR Planet Money podcast (http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil).

That government would not get a free ride to stable currency and shouldn't.
The government of Fijilandia can sell state assets to bitcoin holders and so build up their bitcoin reserves. They can then issue a BTC backed currency that they themselves would need to manage at whatever peg they wish. Bitcoin is highly divisible, so that should be fairly simple.

Bottom line is, if bitcoin works in Fijilandia, it will work without the backing of Fijibucks by bitcoin.

Freedom to Fijilandia!

Ok, now we need a small island willing to try out BTC as a seconday ad-hoc currency to test your assumption. Anyone?

The issue would be when there are less bitcoins for sale than people wanna exchange for Fijibucks, or vice-versa, sure the government would enforce the price inside it's borders, but people could still go to other countries and try to offer an exchange at better rates than can be achieved inside Fijilandia, then come back inside Fijilandia and do the exchange in the other direction and profit lots.

I agree that's a problem if there was a fixed exchange rate, (although, see China). I was more imagining a one-time move-over to a situation in which there is no more fijibucks after the "E-Day" (for exchange day).

I'm not clear in that case that there would be exchange pressure. I bet someone who knows what hard currency issues are like in Zimbabwe right now would be able to tell us a bit about this.