The purpose of this article is to shed more light on the intriguing connection between the increasingly popular virtual currency that is Bitcoin and the island of Cyprus. This will not be a very long journey, but before embarking on our venture to cover the distance from B to C, let us quickly recap some fundamentals on Bitcoin, to make the analysis that will follow clearer to even those who had not previously delved into this matter.
Bitcoins are one kind of virtual currency, in other words a form of unregulated digital money that acts as means of payment, but is not issued or guaranteed by a central bank anywhere. As a general rule, virtual currencies began as currencies within online computer gaming environments and social networks. However, as they increased in popularity it is now gradually feasible to use them offline as well, in real life everyday situations, such as paying for goods and services with retailers, restaurants and entertainment venues. Performing such transactions with virtual currencies does not involve a bank and therefore it also does not incur any additional charges or fees.
The emergence and rapid growth of the Bitcoin has set the scene for a new generation of decentralised, peer-to-peer virtual currencies - often also referred to as crypto currencies.
Bitcoins, as well as other types of virtual currencies alike, can be bought at an exchange platform using conventional currency. The purchased Bitcoins are then transferred to a personalised Bitcoin account known as a ‘digital wallet’. Using this wallet, consumers can send Bitcoins online to anyone else willing to accept them, or convert them back into a conventional currency (for example Euros, Pounds or Dollars).
Besides buying them, the other available method to obtain Bitcoins is to “mine” them. New Bitcoins are created online using computer-intensive software programmes known as ‘Bitcoin miners’. This kind of software allows consumers to ‘mine’ small amounts of the currency through solving deliberately complex algorithms. However, the increase in the money supply is fixed so that only small amounts are released over time. Currently there are more than 12 million Bitcoins in circulation and the rate of new Bitcoins being created will be halved every four years until there is a maximum of 21 million Bitcoins.
The Bitcoin has been around for little more than five years, however 2013 was rightly termed by many as the “year of the Bitcoin”, since the enthusiasm for the virtual currency at times during last year meant at even for brief intervals, the price of Bitcoin was trading higher than the price of gold. The crypto-currency kept attracting the attention of investors and on 29 November 2013, the price of a single Bitcoin reached its all-time high to date, which was $1,242 per coin, compared to $1,240 per ounce, which was the spot price for gold on the same day. This Bitcoin peak price was recorded at Mt. Gox one of the original and biggest bitcoin exchanges, based in Tokyo.
The current value of a Bitcoin is $840 or 620 euros on the open market, obviously lower than the all-time high, but also significantly higher than its price at the beginning of 2013, when a single Bitcoin could have been bought for around $12.
And here is where our trip to connect the case of Bitcoin to the country of Cyprus begins. Many analysts have argued that the increased popularity gained by Bitcoin during 2013 was the direct result of the Cyprus banking crisis back in March 2013. In order to ensure a €10 billion bailout from its international lenders, the European Central Bank, the International Monetary Fund and the European Commission, in short the “Troika”, the government of Cyprus agreed to close its second largest bank, Laiki Bank, levying all uninsured deposits over €100,000 there and up to 47.5% of uninsured deposits held at the country’s largest bank, the Bank of Cyprus. The implementation of this unprecedented to date bail-in, meant that Cypriots and depositors in Cypriot banks began losing faith in the banking system of the country. Moreover, strict capital controls where imposed on transactions, including very strict rules on overseas transactions, with the only ones allowed being sending money to a student abroad or completing payment of an invoice related to a business. Although a road map for the gradual relaxation of these measures has already being announced by the Cypriot authorities, most capital controls are still in place almost a year later, including a measure limiting daily cash withdrawals to €300.
All of these have meant that people in Cyprus or simply banking in the country, found their money less accessible and felt that their funds were less secure than ever, thus rejecting traditional banks and resorting to other solutions, such as maintaining higher cash reserves by stashing cash “under the mattress” or putting their money into Bitcoin, where the government or its international lenders could not touch it.
Indeed, Bitcoin experts have observed that the Cyprus crisis “was the catalyst for the big increase in the price of Bitcoin”.
After that, and in true Cypriot manner, just like in other cases concerning financial issues, for example the introduction of binary options as a recognized and EU regulated financial product by the Cypriot regulator CySEC, Cyprus has turned into a pioneer in matters relating to the use of Bitcoin.
Indeed, and despite the warnings issued against the Bitcoin, by the Central Bank of Cyprus in late 2013, the virtual currency is gradually creeping into an ever increasing number of services and establishments in Cyprus. Moreover, a decision by a private university based in Cyprus, the University of Nicosia, made headline news and caused ripples all around, as it became the first educational establishment in the world to accept Bitcoins as payment for tuition fees. Indeed the first such payment has already taken place by an overseas student and more are expected to come through as this is seen by university officials as a facility “for students from countries where money transfer is very difficult or too costly.”
The university’s chief financial officer, Christos Vlachos has also told local newspapers that that the university is also offering a new Master’s degree in digital currency, a field he says is the monetary equivalent of the Internet in its infancy. “It’s the gold of tomorrow,” he remarked, while also advocating that the Cypriot government should set up a regulatory framework to attract digital currency trading companies in an effort to boost the country’s foundering economy. According to Mr Vlachos, the university plans to encourage the government to develop the country into a hub for Bitcoin trading, processing and banking.
And here comes the greater twist in our journey, as February will indeed witness the opening of a real shop in Nicosia, the capital of Cyprus, to promote the virtues of the Bitcoin. More on this however, as well as detailed on the two upcoming Bitcoin related ventures that are stemming from Cyprus, namely Neo and the Bee Payment Network, in our next post to follow shortly. So…stay tuned.