Grexit Probably Won't Test Parallel Currencies — But For Tech's Sake, It Should

Besides the unusual insertion of an extra second in the trading day — the Leap Second, as we've all been instructed to call it — the markets' biggest news this week has clearly focused on the dramatic events coming to a head (finally, sort of) in the tiny but embattled country of Greece.

It's fitting to combine a discussion of timing — and any week before the Fourth of July always seems longer, no? — to that of the Grexit situation. One of the more infuriating aspects of what's gone on with Greece, its creditors, and the various European and international governing bodies jammed in between is its enduring, seemingly interminable murkiness. It's like watching a slow-motion trainwreck.

Earlier this week, when Prime Minister Alexis Tsipras haphazardly called for a national referendum on the situation, it was thought that perhaps, maybe, the circumstances for exit were falling into place — if the people voted for it, there would be no turning back.

Two days later, with his country officially in default of IMF loans, the PM backed off with a letter expressing interest in more refinancing — one which was cooly received by his interlocutors. For all the drama, we're right back where we started.

What Comes After?

The better question is: what happens if (and at this point, more like when) the country does decide to leave the Euro? Beyond all the legal wrangling and short-term chaos that would surely ensue, what mechanisms could be brought to bear to make sure the drachma comes back with a modicum of smoothness?

All of this is prologue, obviously. From the markets' standpoint, the interesting stuff always comes afterward. Greece defaulting wasn't really a surprise; it's been priced in for a while, and the country's government debt has to be some of the most closely-studied of all time, as many major hedge funds will attest.

The better question is: what happens if (and at this point, more like when) the country does decide to leave the Euro? Beyond all the legal wrangling and short-term chaos that would surely ensue, what mechanisms could be brought to bear to make sure the drachma comes back with a modicum of smoothness?

This is where the financial technology angle comes in — at least potentially — and for whatever reason, these kinds of unique situations have always held a personal fascination for me. A Waters feature I wrote last year on Spain's very effective "bad bank" regime comes to mind.

Some have suggested that a Grexit would look like the mess that happened in Argentina in the early 2000s, when that country defaulted on its debts and instituted a 'parallel currencies' scheme to slowly help the economy back to life as inflationary pressures quickly took hold.

Many argue that it didn't work, or not fast enough anyway, and they say the fundamental problem in Greece's case — that a supranational currency is involved — makes this even less of a possibility.

But don't tell Greece's finance minister that.

FT-Coins

Indeed, Yanis Varoufakis and a small but vocal group of European economists believe this could work, potentially with the help of a technology model that has sprouted up since the Argentine crisis.

And yes, hold your breath: it's Bitcoin. As Varoufakis wrote last year:

The question is: Is there something that the peripheral [European] countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?

The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

Now, I recommend anyone who is interested read the entirety of the minister's piece to get a full understanding of his proposal, but the short story is that a newly-created, fully-electronic store of value — to be exchanged later for tax relief — would be used to incent Greece's average citizens, who have been mostly ignored in the discussion of the crisis, to remain invested in the country. Talk about bold.

Mindset Change

Could it work in 2015? We'll probably never have the opportunity to find out, unfortunately. Most analysts believe other externally-driven means of "massaging" a Grexit through the next year or two will be tried instead. The reasonable expectation is that a number of Greek governments will come and go as part of that process, too.

If nothing else, though, it shows the extent to which new, even radical ways of thinking about decentralization have burrowed their way into mainstream thinking around currency crises. And of those, the global economy has never run short.

So perhaps not yet, and not in Greece, but at some point in the fairly near future, we'll get to see it tried: fintech as national salve.