Iceland is a gorgeous country, but it's also a country that was ravaged by the financial crisis of 2008. The króna fell by more than 35% against the euro in the first three quarters of 2008. Inflation of consumer prices was at 14%. Interest rates went up to 15.5% during a period of high inflation.
Major efforts by the government staved off bankruptcy. Still, the impact on the country was widespread. It affected nearly every resident. During the worst week of the crisis, Iceland's stock market collapsed with a 96% drop (in euro terms) in value. Pension assets dropped as much as 25%. Inflation was rampant. Many local businesses went bust, including Sterling Airlines. Banks were nationalized. In one case, this came after the release of internal documents on WikiLeaks showing the company's large loan exposure.
When the crisis hit, in the search for answers, the Icelandic people took to the streets in protest. This caused top leaders of the country to resign. Reforms followed that put the country on a course to correct itself. It also led to the jailing of people who had had a hand in the crisis.
- Iceland was crippled both economically and socially by the 2008 financial crisis. The country showed signs of recovery by 2015.
- The Icelandic government outlawed the exchange of Bitcoin as part of the country’s recovery efforts.
- Iceland would still mine Bitcoin, and its citizens could own it, but it could not be transferred out of the country.
- Iceland’s prime minister was named in the Panama Papers in 2016 as a world leader who was hiding assets from taxation, causing further unrest.
Iceland's Recovery Efforts
Fast-forward to 2015. The world began to notice that Iceland had righted its ship. The country was bouncing back. The Washington Post published an article entitled, “The Miraculous Story of Iceland.” The Guardian reported, "Iceland rises from the ashes of banking crisis,” and Germany’s Der Spiegel wrote about how Iceland’s rise from the abyss was a case study for other countries that encounter similar disasters.
Among the reasons for Iceland’s rebound was its ability to let its banks go bust and to implement widespread austerity measures. Also, the country had its own currency, which it devalued. Iceland also placed many new controls on the banking and monetary systems to address the crisis.
These measures included high taxes on residents (and travelers), the continued inability for foreign investors to remove assets that were stuck in the country from the crisis, and even controls on bankers’ bonuses. One control that’s often overlooked in writings about the Iceland “miracle” is the government’s decision to make the exchange of Bitcoin illegal in the country.
The Bitcoin Decision
Although Iceland is home to some of the largest Bitcoin mining facilities in the world, the Icelandic government made a strict decision on Bitcoin. Released in 2013, it is seen as a residual effect of moves to address the 2008 crisis: “It is not permitted to trade in foreign currency with the electronic currency Bitcoin according to Icelandic law on foreign exchange. A written response from the Central Bank of Iceland to Morgunblaðið states that the Foreign Exchange Act provides for general restrictions on foreign exchange transactions and capital movements between countries.”
These rules seemed to allow for Icelandic citizens to own Bitcoin and for the mining of Bitcoin in Iceland. What they're designed to do, however, is to stop the capital flight of funds out of the country in the form of Bitcoin. This essentially means that by Icelandic law, Bitcoin is not a currency.
Now, fast-forward to recent times (and a new Icelandic financial crisis).
In early April of 2016, millions of documents were leaked from a Panamanian law firm that detailed how the rich and powerful hid their assets from taxes and public scrutiny. These documents, now called the Panama Papers, revealed the names of world leaders who held these accounts. They included Russia's Vladimir Putin and the UK’s David Cameron. Neither stepped down. The first leader who did step down due to their name being revealed in these documents was Iceland’s prime minister.
When the Panama Papers came out, many other countries took the news as just another case of their leaders doing what they want. The Icelandic people were having none of it. They took to the streets almost as soon as the name was revealed and demanded their prime minister resign.
Reports show that the day after the release of the Papers, 22,000 residents of Iceland came out to protest. Note there are only 366,000 residents in the tiny country of Iceland. So that amounts to a big chunk of the country's population.
Iceland is a beautiful country, but perhaps its most beautiful aspect is its people. The sight of such a large amount of residents gathering peacefully (with no pepper spray incidents) to protest issues of financial manipulation, fraud, and deceit from its leaders is just another example of how the Icelandic people are actively, and peacefully, addressing change in their country.
As this country continues to struggle with its latest crisis and new prime minister, it will be interesting to see the changes that potentially take place there. When you look at the recent failures of the financial status quo and the growing interest in movements like the Pirate Party, it seems that the country could be ripe for evaluating the implementation of a digital currency structure,
This possibility hasn’t been lost on those within Iceland. In 2014, the cryptocurrency Auroracoin was launched within Iceland as an alternative to Bitcoin and the Icelandic krona. Auroracoin was created as an alternative cryptocurrency to address the government restrictions of capital flight outside of the country and the prohibition of the foreign exchange of bitcoin from the country.
The success of this alternative to Bitcoin within Iceland has been subdued, even after an airdrop of 50 percent of the cryptocurrency to Icelandic citizens. Much of this has to do with the lack of clarity about the legality of this digital currency within the country, which can be exchanged for bitcoins.
Now with the release of the Panama Papers, recent protests, and calls for change by Icelanders countrywide, the question becomes, Why not just make Bitcoin legal?
It’s clear that Auroracoin was created as a substitute for Bitcoin, which was considered illegal in the country. Many in the country are recognizing the impact and opportunity of the internet, including the many who are profiting from the Bitcoin mining efforts taking place there. The country is not part of the EU and not beholden to an outside currency. The Icelandic government and its people have already shown that they're willing to make drastic changes to improve their economy.
How Could Bitcoin Benefit Iceland?
Many criticize Bitcoin as a vehicle for money laundering and crime. The reality is that widespread adoption of Bitcoin could help to fight financial crime. It’s important to note that Bitcoin is pseudonymous, not anonymous, and that all transactions are ultimately public and accessible to anyone. The lack of transparency that people hoped for with Panamanian accounts wouldn’t actually occur with Bitcoin.
The implementation of Bitcoin by a country could be a more cost-efficient way to maintain a currency than existing methods. Done digitally, there’s no need for paper or physical coins. This would also position the country as a leader in the implementation of blockchain technology, which has many benefits for governmental activities, including improved record keeping.
One of the most important aspects of freeing Bitcoin in Iceland may be the ability to create the country as a hotbed for business growth around Bitcoin and the blockchain. That would help to stimulate high-tech growth in the country and bring in expertise from the rest of the world.
No country has truly taken the step of approving Bitcoin as a national currency, and although there may be many benefits for Iceland, this article is not an exhaustive view of how the digital currency could help, or hinder, the country’s economy.
Given the country's general mood to examine the status quo and institute positive fiscal change it may be advantageous for Iceland to at least consider creating an internal task force to examine the issue of Bitcoin and making it legal in the country. This should be driven by those in the country, and if there’s an interest in seeking outside assistance and expertise on the topic, expect many foreigners to step up in order to visit this beautiful country and meet its progressive citizens.