Luke F. Gale
After the first Gulf War started in 1990, sanctions were imposed on the Hussein government. These included the importation of official paper currency notes that were printed in the U.K. using Swiss-engraved plates. This created a problem because there was no way to replace worn out or torn notes.
The response of the Hussein government was to decry the former notes and print their own “Saddam” dinars. The problem was that the security features of these new notes were of poor quality and counterfeiters were rampant. These new notes were also subject to the risks that all fiat currencies face – namely depreciation caused by the arbitrary decisions of central banks to print money, currently called “quantitative easing”.
The collective decision of the Iraqi Kurds in the northern Iraq region was to retain and continue to use the old “Iraqi Swiss Dinars” as they became to be known, despite the risk that these notes would become unusable because of deterioration that ultimately happens to paper notes. An example of an unplanned synthetic commodity currency. (Selgin 2013)
That the Iraqi Kurdish population made this decision is the basis for this proposal. This proposal relates to the current interest in digital currencies such as Bitcoin – also characterised as a synthetic commodity currency by Selgin (2013). I propose that an attempt at a denationalised cryptocurrency for Iraqi Kurdistan is likely to succeed.
Was it that they were resolutely independent thinkers? Or was it something more like the Austrian School’s notion of subjective value? Was it forced on them by Saddam? It implies a sophisticated understanding of economic theory. The decision was highly successful and prescient as the exchange rate of the Iraqi Swiss Dinar to the new ‘Saddam’ Dinars rose to as much as 300 to 1 for the period 1990 – 2003, avoiding an inflationary spiral.
Iraqi Kurdistan is perhaps a natural candidate for a population that may one day adopt a cryptocurrency as its “official” currency, although as Selgin points out, no government can make a cryptocurrency official. Indeed at no stage did the KRG make the Iraqi Swiss Dinar official.
The advantages would be that the infrastructure of such a currency would be beyond the seizure and control of despotic regimes such as Isis or Saddam’s Iraq. Thugs could of course coerce private keys out of people, but as the possessors of these coins would have pseudo-anonymity (at least) it would make this difficult. The best way to keep a secret is for no one to know you have a secret. Oil majors also like to keep the terms of their contracts opaque to the marketplace.
The currency would be underpinned by the region possessing the 6th largest oil and gas reserves. Conventional (cheap to extract) and associated gas reserves are estimated at 100 tcf – a very big number for a relatively small geography and population (although much associated gas is currently flared due to lack of gas pipelines).
Indeed, international oil companies may prefer a KurdCoin as a unit of account, store of value, and medium of exchange. It could be used to pay oil and gas companies their share of return on investment, and used by oil and gas companies to pay taxes and petroleum rents to the semi-autonomous state also known as the KRG.
It may also be used between oil majors as they often trade interests between themselves.
Refinery and oil well workers can be paid in KurdCoin.
If the coin appreciates substantially in value in step with the developement of its petroleum economy it would also be a form of foreign investment. A very efficient form of accessing capital and (investment) merit. Such capital could fund important infrastructure such as natural gas pipelines. This infrastructure is more expensive and difficult to finance because gas has less energy density than crude oil and returns on investment take longer.
It may also indirectly encourage the rule of law, especially in relation to contracts, as KRG courts, and legislators, would have a greater incentive to maintain the value of the coin rather than ‘cheat’ international oil companies and other investors with unjust decisions, short-term capricious policy changes, nationalisation of assets (compare Venezuela), and other strategies that come under the heading of sovereign risk including inflation – a subtle form of theft. A country can reduce the debt she owes to foreigners by devaluing its currency.
This notion of incentive has been described in relation to cryptocurrencies by Nakamoto (2009) but the idea could extend beyond. Remember, cryptocurrencies are international and the marketplace might respond to such decisions by selling off the coin as suggested by Hayek (1976 -1994). The informed wisdom of the distributed international marketplace will always be greater than local ‘captured’ politicians. (Hayek, p.103). Compare the antagonism between the Shia and Sunni populations in Iraq and the ridiculous failure of politicians to balance their policies.
Note, the KRG would be able to buy KurdCoin to support it, and sell it to take profits if exports become uncompetitive due to currency appreciation. It is reasonable to expect the KRG together with private Kurds to have a significant holding in the coin. Some percentage of the total, but it’s not clear what that would be. For KurdCoin to succeed it would have to be a “people’s currency” where every man and woman is considered equal. Where trust in one’s family is given priority over 3rd parties such as banks. Fractional reserve banking not necessary.
Cryptocurrencies are multi-disciplinary in nature including studies in mathematics, engineering, and economics. Subjects that Muslim societies excelled in many centuries ago.
But its success would not be guaranteed as a similar cryptocurrency, AuroraCoin, in Iceland has not been overly successful. As the cryptocurrency space shifts almost every day, including debates over proof-of-work vs proof-of-stake, rewards vs fees, blocksize, blocktime, etc, it would be premature to consider cryptocurrency theory settled. It maybe many years, even decades, before such a proposed currency emerges.
Hayek, F. A. “Denationalisation of Money, The Argument Refined” (1976 – 1994) https://mises.org/library/denationalisation-money-argument-refined accessed sept. 2015.
Ibid, p.103; “Once governments are given the power to benefit particular groups or sections of the population, the mechanism of majority government forces them to use it to gain the support of a sufficient number of them to command a majority. The constant temptation to meet local or sectional dissatisfaction by manipulating the quantity of money so that more can be spent on services for those clamouring for assistance will often be irresistible. Such expenditure is not an appropriate remedy but necessarily upsets the proper functioning of the market. ”
Nakamoto, Satoshi; “Bitcoin: A Peer-to-Peer Electronic Cash System” , (24 May 2009), page 4, “The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.” (my emphasis) https://bitcoin.org/bitcoin.pdf accessed sept. 2015
Selgin, George; “Synthetic Commodity Money” (2013) , Department of Economics University of Georgia Athens, GA 30602 Selgin@uga.edu Revised April 10, 2013 accessed sept 2015. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118