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Virtual Currencies

Cypriots want their old pound more than Bitcoin

Despite reports of Bitcoin's soaring virtual value and its use in cash-strapped Euroland as an alternative currency, it's not taken off in Cyprus. Yet. Cypriot economist Marios Zachariadis tells us why.

Bitcoin is a largely unregulated, decentralized digital currency that was invented by an unknown person - or group of people - by the name of Satoshi Nakamoto four years ago. The virtual currency can be exchanged for real cash and over a Bitcoin peer-to-peer (P2P) network. Its value has reportedly doubled in the past month and it's recently been referred to as a billion dollar market. But how real is the market? Some reports have suggested Bitcoin is experiencing a surge - or a bubble - as people in cash-strapped European countries, such as Spain and Greece, hope it will help them protect their money. But that's not the case in Cyprus, where economist Marios Zachariadis says more people want the return of the Cyprus pound than Bitcoin.

DW: How bad is the situation in Cyprus right now?

Marios Zachariadis: When it comes to me, it's mostly the uncertainty that's killing me. But then my perception of what's going on in the rest of the economy as a macroeconomist is also killing me! But the worst thing happening right now, two things actually… One, is the loss of working capital. So, if there was a business, or organization, hospital, health clinic, university, or any medium to large business that has more than 100,000 euro, if it was at Laiki Bank, they lost 100 percent…

Laiki is one of Cyprus' banks…

Yes, one of the two. If it was at Bank of Cyprus, they lost almost 40 percent, but they have another 50 percent - a total of 90 percent - frozen. So, this creates a liquidity problem which is going to drive healthy companies out of business in a matter of weeks.

And when you say it's a liquidity problem, you're basically saying that people don't have money, and this is also true of you at the university because university staff have also not been paid as you said in the last month…

Associate Professor Marios Zachariadis, economics department, University of Cyprus

Marios Zachariadis: Cypriots want their old pound back more than Bitcoin

It's a little more complicated than that because when it comes to the university - because a lot of it comes from European funds and grants, there has been some deal to reinstate some of these funds, and we are going to get paid by the government within a week or so. But when it comes to private business, it's different. So, this is working capital. This is much more important than my personal finances. It's not households. It's working capital wiped out or frozen for months.

Is that the sort of climate where people will start to think about parallel currencies - parallel means to make transactions - say, for instance, something like Bitcoin, which has apparently risen in value massively recently and people are saying is being used in countries like Cyprus, Greece or Spain?

Yes… but not necessarily Bitcoin. And I'm pretty sure that it's not being used in Cyprus. I mean, there's all this confusion about how similar Cypriots are to Greeks, and it's really confusing the hell out of people. But the fact is that the Cyprus pound was a very, very stable currency. There was 15 years when part of my family was in the US and the Cyprus Pound was worth pretty much 2 dollars per pound in this 15-20 year period. So, this is not the Greek drachma, it is not the Spanish peseta, it is not the Portuguese escudo, and Cyprus didn't enter the EU because it didn't have a stable currency. It had capital controls and one of the most stable currencies in the world. So, a new Cyprus pound is probably something people are looking towards even more than a parallel currency.

But whether it's a parallel currency - say, it's bonds or Bitcoin, other virtual currencies, or a return to the Cypriot pound - these are all, in a sense, promises, and you've spoken about it being a matter of whether people believe the promise…

Exactly. And that's why I made the comparison with Greece, Spain and Portugal. The Cyprus pound was something that people believed in, and they still do.

And it was very strong.

It was pretty much like Germans are proud of their deutschmark. Cypriots were proud of the Cypriot pound. So, you see, I see Cyprus going to the Cyprus pound much sooner than going to Bitcoin or something like that.

Bitcoin logo

Bitcoin's value has reportedly doubled in the past month

Because you're saying that this is an issue of trust and people trusted the previous Cyprus pound, are you of the opinion that there is no chance for something like Bitcoin in a country like Cyprus - Bitcoin being something that is largely unregulated and totally decentralized. Is that something that the Cypriot people would never have the inclination to move towards?

Well, your questions are very straightforward, but I have to give you a complicated answer because right now there is a liquidity problem. Right now, there is also a trust issue with whether we are going to keep or not keep the euro because everybody is looking at the fact that there is no liquidity extended by Europe. This means we might be on a very short probation and might move out. So, this creates a lack of confidence. That means that I - and most of my colleagues - do not talk in public in terms of promoting ideas like Bitcoin or parallel currencies, or going back to the Cyprus pound because this breaks people's confidence even more - in terms of losing value right now, you see? People will have faith in that new currency, but by talking about it at this point, people are realizing that their savings will be half or less in a few days. If there is no liquidity injected in the country, I think it's just a matter of time before people start using some sort of parallel currency - even if it is some company's promise to pay, or the government's promise to pay, which is then exchanged by people in the second and third stage. And it's going to happen in the next few weeks, I think, if there's no extra liquidity, which goes with a relaxation of the capital controls.

So, you cannot really say for absolute sure that people wouldn't use something like Bitcoin?

People will have to use some form of a parallel currency - very soon - if there is no euro liquidity injected into the system very soon.

Marios Zachariadis is an associate professor in the department of economics at the University of Cyprus, Nicosia.

DW.DE