End of August, when most of Europe was busy on vacation, Kaspar Korjus, MD of Estonia e-Residency, introduced an interesting thought in his blog – what if Estonia started issuing Estcoins? He also requested further thought and discussion on the topic, which is forthcoming.
As a background, Estcoins would be a country-initiated digital currency – similar to Bitcoin but subtly different. Kaspar might have just been testing the waters with his blog-post, but it certainly raised a lot of interest and news. Since then it has been a regular discussion topic whenever digital identity and security professionals have met over cocktails, beers or both, like in Tallinn for the signing of the EU declaration for eGovernment three weeks ago.
ECB Mario Draghi soon knocked back the suggestion of Estcoins by insisting that “no (Euro) member state can introduce its own currency” (FT September 7:th). But let’s not allow his unworthy and timid rebuttal hinder us pushing Kaspar’s thought a bit further. In our discussions we have come up with some thoughts and ideas through which Estcoins could be realized, for the benefit of Estonia, e-Residents and everyone else.
Initial Coin Offerings, ICO’s, are currently literally minting money for those launching them. The combined value of Bitcoin, Ethereum and basket-case of other crypto currencies is now over $ 150 billion. Investor appetite has remained strong, even if price rises make Dutch tulips in 17:th century look conservative. Despite the coming inevitable reckoning, cryptocurrencies do have benefits over existing central-bank controlled fiat money – the type that Mr. Draghi creates every month to the tune of € 60 billion.
The key challenge with cryptocurrency is how to securely store and access the “wallet”, the keys to your currency. eEstonia digital identity solution and infrastructure are perfect for this. But instead of “Estonia the state” issuing the Estcoins, and becoming liable for them, it could copy an established solution from the venture capital markets and set up a sovereign investment fund – private management company structure.
Management company could be a private company that has a contractual arrangement to issue Estcoins and use the eEstonia identity solution for security. When Estcoins are sold, the proceeds are “taxed” into a sovereign investment/wealth fund, which is owned by “Estonia the state” and managed by the management company as per the funds rules. The fund invests into Estonia and eEstonia related assets, like physical and digital infrastructure, company shares and company and government bonds. The management company gets compensated by a fixed fee and incentivised with some “above the threshold” revenue share. Norway’s fund can give good example on how to set up the fund and the management.
Estcoins should be freely exchangeable into other currencies by currency exchanges. Part of the smart agreement and public promise should be that new Estcoins can only be sold, if the sales price (market exchange rate) is higher than the value of a basket of global currencies. This gives some stability to the value of Estcoins. The fund would also have at its discretion the right to re-purchase Estcoins from market to reduce their amount and increase their value, if needed, to facilitate the additional sale of new Estcoins. Therefore Estcoins are not government backed nor are they pure fiat money – they are backed by the sovereign wealth fund and its returns and with limitations to supply.
This approach of management company and sovereign investment/wealth fund would have multiple benefits. First, “Estonia the state” is not issuing or guaranteeing Estcoins but would benefit from the proceeds they generate. Capital would be “imported” into the country allowing investments into Estonia society and eEstonia network generating growth, employment, wealth and taxes for the country. Secondly, anyone wanting to own and trade Estcoins would need e-Recidency credentials growing the network faster and creating secondary benefits for Estonia. Thirdly, Estcoins would create a digital currency, where ownership is based on a verified strong identity and security is state-managed, but still with all the other benefits of cryptocurrencies. Fourthly, this separates political influence from the currency and the investment of the proceeds and keeps market incentives in efficient management of the capital. Even better, it does not allow politicians to fund short-term election promises.
I encourage Estonians to move fast forward with Estcoins as it would benefit us all. The ambitious aim should be to update money into the 21st century – over time to even replace US dollar as the dominant currency in e-commerce and other digital use-cases. It would be much better to have Estcoin in that role rather than some other anonymous, untrustworthy crypto currency wasting our resources on mining, which is the alternative. Or maybe some private consortium just launches an “Estcoin-like” currency on the back of the existing infrastructure. In the long run crypto currencies will replace traditional money in most use-cases and who better to benefit from that than Estonians.
Espoo, Finland 30.10.2017
Janne Jutila
Digital identity specialist with a background in asset management and a keen interest in economics and financial history.
Internos Partners 