Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Estonia Considering National Cryptocurrency

The Eastern European nation of Estonia is considering a plan to launch its own national cryptocurrency.

The currency; which might be called Estcoin, is supposed to be an enhancement to Estonia’s e-residency program, Fortune reported. E-residency is a government backed digital ID program that lets entrepreneurs register a European Union (EU) company in the Baltic nation.

Among other things, participants in the e-residency can bank in Estonia and issue legal documents in the country. The idea is give non-Europeans a business address in the European Union so they can pay taxes in Estonia. Persons achieve this by having the ability to digitally sign legal documents in Estonia from anywhere in the world.

Will Estonia Leave the Eurozone?

This is an interesting development because Estonia is a member of the EU and it uses the Euro as its paper currency. What is not clear is if Estcoin would be a second currency in addition to the Euro, or a replacement for the Euro.

An interesting possibility is that Estonia’s government wants a backup plan in place in case the EU collapses, or the Euro loses value or disappears. Given Brexit and the growing anti-EU sentiment in countries like Italy and France that is possible.

A probability is that Estonia wants to become a major international financial marketplace. Think Switzerland with EU membership and a good place to register companies like the U.S. state of Delaware or the nation of Ireland.

One way to achieve this would be to establish Estonia as an international clearinghouse for cryptocurrency and blockchain assets. That seems to be the plan of Kaspar Korjus, the Managing Director of Estonia’s E-residency program.

Is Estonia planning a National ICO?

Korjus proposed that Estonia stage the first national ICO in a recent blog post.

“‘Estcoins’ could be managed by the Republic of Estonia, but accessed by anyone in the world through its e-Residency program and launched through an Initial Coin Offering (ICO),” Korjus wrote. That sounds as if he is applying for the post of head of Estonia’s central bank.

A national ICO might allow Estonia’s government to raise large amounts of money without increasing taxes which would be very attractive to politicians. It might also allow it to send large amounts of money around the world.

Among other things the ICO might be used as the basis of a national investment fund designed to finance welfare programs, pensions or basic income for Estonia’s people, Korjus proposed. He suggested the Norwegian national pension fund; or oil fund, as a model for such program. Korjus also proposed using it for economic stimulus.

“In addition, a large proportion of the funds could be used as a community-run VC (venture capital) fund on behalf of investors,” Korjus wrote of the ICO. “The money could then be used to support Estonian companies, including those established by other e-residents.”

That sounds like a stimulus program similar to the U.S. Federal Reserve’s much-maligned quantitative easing scheme. In quantitative easing the fed buys large amounts of bonds, which are used to finance low interest rates and stimulate the economy.

Korjus’s plan is to create a digital nation designed to increase Estonia’s reach around the world. An obvious goal of that would be to create a global financial industry to compete with countries like Switzerland, Singapore and the United Kingdom.

Will Estonia build an Ethereum-based Economy?

Many important details of estcoin are not available including the technology it will be based upon. The probable candidate is Ethereum which is actually a data storage solution; designed to form the basis of contracts, documents, financial instruments and entire markets, as well as a method of payment.

Interestingly enough, Ethereum’s creator; Vitalik Buterin, is deeply interested in estcoin and e-residency. These proposals seem to take Ethereum’s potential to its obvious conclusion developing a cryptocurrency-based economy.

“An ICO within the e-Residency ecosystem would create a strong incentive alignment between e-residents and this fund, and beyond the economic aspect makes the e-residents feel like more of a community since there are more things they can do together,” Buterin said.

“Additionally if these estcoins are issued on top of a blockchain (they could possibly be issued in multiple formats at the same time, nothing wrong with this) then it would become easy and convenient to use them inside of smart contracts and other applications,” Buterin pointed out. Examples of the instruments that can be created include Ethereum-based or Estcoin-based government bonds.

This shows why Ethereum is potentially one of the most disruptive financial technologies on Earth. By allowing Estonia to massively increase the amount of debt it can issue this would make Estonia into one of the richest countries in the world. Back in the 18th Century, the United Kingdom used its ability to issue government debt to finance the creation of the British Empire.

Is NEO, China’s Estcoin

So far no other government is officially developing something like Estcoin, but a Chinese Ethereum clone called NEO may have the support of that nation’s Central Bank.

Like Estcoin, NEO is an attempt to create a next-generation cryptocurrency that would be the basis of a new economy. It might be no coincidence that NEO appeared at the same time officials of the People’s Bank of China (PBOC) were discussing the possibility of replacing paper money with a digital currency. NEO might be the PBOC’s sneaky way of achieving that goal.

Interestingly enough NEO (formerly AntShares) is now one of the world’s big five heavily traded cryptocurrencies. Even though it appeared just last year, NEO’s value exceeds that of several altcoins that have been around for years such as Ripple. One reason for that might be that the PBOC is deliberately boosting its’ value by buying up large blocks of NEO.

Will the EU Tolerate an Estonian Cryptocurrency?

Estonia is a former Soviet Republic with a very small population (around 1.259 million people) so it would be a good place to test a national cryptocurrency. The population is literate and well-educated.

Estonia’s location; right next to Russia and across the Baltic Sea from Scandinavia would make it an ideal testing ground for new technologies. So would its membership in the EU, Euro-based economy and proximity to major financial centers in London, Frankfurt and Switzerland.

Important questions remain including would the European Central Bank and the EU tolerate a free trading cryptocurrency within their midst particularly one banked by a government? Also would Russia tolerate such a development on its’ historic doorstep.

Beyond that there is the question will average people accept digital currency as an exchange medium. The tiny nation of Estonia might answer that question and point the way to the future of the world’s economies.

Investors should pay attention because the Estcoin might be a good invention if it were to actually appear. Yet even a failed attempt to create a national cryptocurrency might benefit Estonia by making it into a global center and leader in cryptocurrencies.