How a Small Country Could Convert Their National Currency to Bitcoin

[forbun]

Let's say there's a small country called Elbonia with a national currency called the Lek. For the sake of simplicity let's say there are 100,000,000,000 Leks in circulation. The King of Elbonia today has decided to switch to Bitcoin as their national currency. So he goes on the exchanges and converts Leks into Bitcoins. None of the exchanges accept Leks, but there is, of course, a floating exchange rate between Elbonian Leks and every other currency in the world, so he converts from Leks into other currencies, and then uses those currencies to buy Bitcoins on the exchanges. Say the exchange rate is 1 ELK (Elbonian Lek) = 1 USD. As the King of Elbonia, he can, of course, create an unlimited number of Elbonian Leks out of thin air. So he creates 1,000,000 new Leks, converts them to USD, and spends the 1,000,000 USD buying Bitcoins on the exchanges.

He keeps doing this. Of course, due to the new Leks flooding the market, the value of a Lek begins to fall. Soon it takes 10 ELK to buy 1 USD. Then 100. Then 1,000. Eventually it takes 1,000,000 ELK to buy 1 USD, but by this point, the King has purchased a substantial number of Bitcoins. Perhaps he has around 2 million BTC, or about 17% of the BTC in existence today (and about 10% of all BTC that will ever exist). With all of the new ELK he has created, he has doubled his money supply so there are now 200,000,000,000 Leks in circulation.

He then announces that Bitcoin is the national currency of Elbonia, and all ELK are now backed by Bitcoins at an exchange rate of:

200,000,000,000 ELK / 2,000,000 BTC = 200,000 ELK per BTC.

He promises to the world that he will always keep enough BTC in his central bank to fully back every ELK in existence. No fractional reserve shenanigans.

People who don't trust the King and want their BTC go to the central bank and get their BTC. No problem. Same goes for the citizens of Elbonia. They can get BTC in exchange for their ELK, at the fixed exchange rate which shall remain fixed forever. Eventually almost all ELK are converted to BTC, and everyone lives happily ever after. Denominated in BTC, the prices of goods and services in Elbonia fall continually, making everyone richer simply by holding on to their money. Savers are rewarded and people go into debt when they really need to. The government can't, and thus doesn't, interfere with the free market.

And that is how Elbonia becomes the first country in the world to use Bitcoin as their national currency.

[Ekaros]

Wouldn't the results of that operation be quite catastrophic in midway? And would people really trust a person who already debased his currency ones?

[j68r]

Let's say there's a small country...

Isn't the whole concept that the people would do it for themselves not the government... ?

[inform]

i think this be if country difirents and must be some europe?

[Elwar]

The easiest way would be for the government to set up a 0% exchange and start only accepting payments in bitcoin.

The exchange could be set up so that it is as simple as paying your government bills, sending a check or whichever process was done previously to pay your taxes or fines. The money is then converted and the bill is paid in bitcoins.

The government would then use a bitpay type of setup to allow people who get government funding to receive either bitcoins or their local currency. But all they pay out is bitcoin.

They could then start paying off all of their debts in their local currency until all of their debts have been paid. This would likely have the affect of the bitcoin price going up vs the local currency which would encourage people to move their money over to bitcoins until the old currency becomes worthless and people are just paying directly in bitcoins for their taxes and fines.

The government could also help with an education campaign to help people understand how to pay and accept payments in bitcoin and safeguard their wallets.