Many enthusiasts of cryptocurrencies like BitCoin are deeply sceptical of central banks, which control the world’s money supply. But now, the Central Bank of Iceland has proposed a potential move away from traditional paper-and-coin Icelandic currency, introducing instead a new cryptocurrency, the e-króna (rafkróna, in Icelandic).
And it’s not crazy. Iceland’s use of hard cash is, in fact, very low already; as of 2015, paper money in the system made up a minuscule 2.25% of GDP. Checks were almost completely out of use, though not officially.
The e-króna would replace the current Icelandic currency and all paper money in the system, and would be administered directly by the central bank, which means that there’s less risk involved (e.g., if a bank fails, or a user defaults, it would have a less dramatic impact on the user, the bank, and the economy more broadly).
It would not make the banking system invincible, but could stabilize the króna against foreign currencies.
Money is a symbol, and the way that value has been symbolized has constantly evolved.
The settlers of Iceland used gold and precious metals as currency; Iceland’s early lawbook, the Grágas, lays out laws for bartering: “An ounce of gold whose colour does not deteriorate in fire and was already good shall be worth 120 three-ell [wool] ounce-units; a load of wool from a full-grown sheep shall be worth ten-ounce units.”
Money that Looks More like an App and Less like Gold
When paper currency came into common use, partly because governments needed to change the national economy to run with significantly less gold in the system, the government had to walk very carefully to avoid causing a panic.
Now, the Icelandic government—along with governments in places like India, Sweden, Denmark, Holland, Canada, England, and others—is exploring options to implement a federal cryptocurrency that isn’t subject to dramatic swings (like BitCoin and others). Icelandic currency is shapeshifting.
But what does a cryptocurrency offer that traditional tender doesn’t?
An e-króna could, for example, allow the government to track every single króna as it travels around the financial system, which is impossible now. It would speed up the financial system, making it more efficient, and less susceptible to things like money laundering, fraud, theft, among other crimes.
Part of the Digital Revolution
In terms of Icelandic currency, the use of traditional paper money has declined, and the use of smart-phone payment services like Netgíró, Iceland’s Apple Pay, has grown. Individuals send money to one another with the flick of a thumb through their bank’s smartphone app, using social security numbers.
The prevalence of digital alternatives to cold, hard cash could mean, quite simply, that the financial system needs to catch up with the times.
A report by the Bank of England suggests that issuing a digital currency could add up to 3% to a given country’s GDP because of its efficiency. It could also mitigate the need for interest rate adjustments in times of crisis for the Icelandic currency, making it less challenging, in some ways, to combat and to overcome economic downturns.
And since the system would depend on a web of ‘ledgers’, where every bank automatically updates its system whenever money moves, it would mean that the data is more secure because of the sheer number of back-ups—the new carbon copy.
“One question for us,” the Central Bank of Iceland wrote in a report about potentially adopting e-króna as a new Icelandic currency, “is whether the public is using cash less because they want to avoid using paper, instead using a digital alternative, or if they simply feel there’s no need for access to hard cash.”
And, although the Central Bank is exploring the possibilities for fully transitioning to the provisionally named e-króna (an undertaking they’ve in some places called “Paperless Iceland”), they insist that no decisions have been on the move toward this technology, this new age of Icelandic currency.