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March 30, 2013, 03:11:14 AM |
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Unconventional investment manager Peter Schiff has just become an unlikely beneficiary of the bank deposit drama in Cyprus. In August, Mr Schiff started his own offshore bank, based on the island chain of St Vincent and the Grenadines, a place most famed for its appearance in Disney’s 2002 hit Pirates of the Caribbean.
Mr Schiff says that in the days since plans to clip depositors in Cyprus’s ailing banks first surfaced, his new venture, known as Euro Pacific Bank, has seen a 150 per cent increase in interest from potential customers eager to park their cash.
A snapshot of Google Analytics shows a conspicuous bump in Euro Pacific’s web traffic just after mid-March, combined with a deluge of new visitors to the site.
While some eurozone account holders may be eager to switch their money away from the debt-ridden region, Mr Schiff’s bank is not necessarily an obvious alternative. Accounts at Euro Pacific boast the same sort of privacy benefits as their Cypriot counterparts, but they do not come with any sort of deposit insurance.
On the other hand, neither does Euro Pacific make loans with the deposits it takes.
That, Mr Schiff says, makes it stronger than many banks which currently boast insurance. It certainly makes them stronger than Cypriot banks, Mr Schiff says.
“Banks in Cyprus took deposits and lent them to the Greek government by buying Greek government bonds,” he notes.
Under bailout plans hammered out this week, large depositors in Cyprus’s two biggest banks will pay the price for those loans; they could see their money wiped out entirely.
“What’s going on now is a wake-up call from Cyprus. People are thinking about these things more and doing more research,” says Mr Schiff, who has made his name based on an ultra-bearish view of the US economy and its currency.
The sudden spike in interest in a small offshore bank on a tiny island outpost just north of Granada, may seem like an unremarkable affair against the wider ripples of the Cyprus saga. But it is indicative of an important truism in modern finance.
That is when one area of finance is squeezed, money will flow elsewhere – to unusual offshore banks such as Euro Pacific (which also offers debit cards backed by silver and gold) or even potentially to more deconstructed forms of finance.
Bitcoin, a virtual currency created by a secretive technologist called Satoshi Nakamoto, has become one of the best performing assets this year despite its crypto-currency status and entirely computer-based existence.
Mr Nakamoto has been blunt about his rationale for inventing the cyber coinage ever since first laying out the Bitcoin concept in a late 2008 paper.
“Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments,” he wrote in November that year. “While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.”
Bitcoin attempts to eliminate the need for a trusted – financial – third party by allowing users to “mine” the currency online.
The amount of coins in circulation is tightly controlled by computer code, but still susceptible to volatile booms and busts. The lack of any type of Bitcoin “authority” means the currency is also vulnerable to attacks by hackers and thieves who target virtual wallets.
But the point is that uncertainty surrounding traditional banking and monetary mechanisms is helping create a motley set of experiments and new entrants – from the mysterious Bitcoin of cyberspace to new offshore banks in the Caribbean.
Things which once appeared undeniably safe – ostensibly insured bank deposits, the dominance of central banks, or the sanctity of government bonds – are now being questioned. Meanwhile new monetary outlets which might seem on the surface to be less than solid – uninsured offshore bank accounts in the Caribbean and a virtual currency that lives online – have been gathering new adherents.
Investors and savers will, in the words of the unorthodox Mr Schiff, have to do their research before deciding where to put their money – and they will probably have an increased variety of places to research.
Those who placed large amounts of money in Cypriot banks certainly appear to be casting around for alternatives. A Caribbean offshore bank or even Bitcoin may be one of those.
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