Bitcoin...no longer a bit player...

Whilst the developments in Cyprus are both equally appalling and frightening - especially when you consider it may well be seen as a test bed for intervention measures by the 'Troika' made up of the European Union, the IMF and the European Central Bank - it does make for fascinating reading.

Of particular interest is the recent reports that many Cypriot residents are turning to the virtual currency BitCoin as a safe harbour for their money at a time when massive restrictions on the movement of money and savings have been put in place. Withdrawals have been limited to several hundred Euros per day and movement of capital out of the country has been curtailed and recent reports suggest those with savings in excess of Eu100,000 stand to lose up to 60% of their hard-earned nest eggs.

BitCoin, seen by many as little more than a financial sideshow (a $964million market compared to the $4trillion traded each day in hard cash) and one that is vulnerable to hacking or dilution. It is also completely unregulated yet many are turning to it in response to restrictions (such as those in Cyprus) and in countries that anticipate a similar impact in the coming months (Greece, Spain etc.). As a result, the value of BitCoin as rocketed (see graph) and increased the media exposure of this peer-to-peer system that eliminates the 'bank' as the intermediary in the transfer or storage of money.

In our connected world, this can only be a good thing as it will surely help establish BitCoin as a legitimate player in the financial world and ensure that what can often seem to be archaic financial systems begin to move at internet speed and in a more sustainable way...

Cyprus crisis...EU out of options?

The surprise and shocking announcement at the weekend of the Cypriot Government’s decision to apply two layers of one-off tax to savers’ funds has many layers of meaning. The tax decision will see savers with under €100,000 hit with a 6.75% levy whilst those with over €100,000 will face a 9.9% charge. Unsurprisingly there has now been a run on the banks whilst savers (forlornly) try to get their own cash out before the surcharge was applied. The levy was made necessary as the European Union and International Monetary Fund stepped in to bail out the national economy but only if the balance of the needed money was found elsewhere.

It seems the real impetus for this move came from Europe with fingers being pointed towards Berlin. The Cyprus government is a coalition and could never have hoped to carry this directly and the reason for the needed bailout is decreasing governmental finances and high levels of bank debt from recent property booms and links to the Greek crisis from lending. The banks are tapped out and the only organisation that could help recapitalise them, the Cyprus government, is too. The result? EU bailout...

Most worrying however, when looking at the bigger European picture, is that this move smacks of desperation with many commentators fearing this shows the EU is out of ideas on how best to avoid a bigger financial meltdown that would incorporate more countries and I do think they are right.

The EU brass have probably booted the idea of a ‘savers’ tax’ around many shadowy boardrooms but then had to cast it aside knowing that it would never work unless it could be tried first in a small test case to see what happens. Cyprus may well be a victim of their size - they would never try this in Spain or Portugal but a small island nation on the geographical edge of the Euro zone is ideal. The country also apparently has a number of wealthy foreign ‘investors’ whose income came from less than clear sources - an ideal faceless demographic to hit with a big surcharge.

The scary thing is if the bailout fails then many believe this could be the spark to cause a much bigger EU collapse - the nuclear refinancing option seen to publicly fail - and savers' security and confidence in tatters. But if it succeeds, many governments may well bring this move to the front page of their playbook for avoiding new recessions. And what would stop them coming back to the well in future? What will savers in countries outside Cyprus think? Probably ‘where is my money safest?’ and the answer might well be ‘fewer places than before’...