A Role for Bitcoin in Puerto Rico? – Helping local economies grow.

Between a rock and an oversight board, many Puerto Ricans struggle, their economy running in the red for years, followed by two major hurricanes.  Getting back on track may require some outside help, but it will certainly require creative thinking.

Creation of goods and services to rebuild the island can be started more quickly if there is a way to connect local towns through means of exchange.   Bitcoin (BTC) or other crypto currencies might provide a way to do this with a multi-tier system and using BTC as an intermediary currency.   BTC’s can link into a system that creates G&S of real value where an existing system does not yet exist.

Local Currency and the role of Bitcoin

Local Currencies (LC) have been tried in many places with mixed success, but it does  provide some way for local exchange of goods and services. Currency of any kind is only a representation of the value of goods and services (G&S), which themselves have the real value and many of which are produced locally.  There are natural limiting pressures however, when an LC becomes successful enough so that some people start printing their own.  In these cases the government will not come to their rescue.

Example for Puerto Rico:

One town on the coast has surplus of fish to sell.  Another town in the central highlands has learned how to make Passive Solar Hot Water Heaters (HWH). The two towns might trade one hundred fish for 5 HWH’s, but the fish are ready now and the HWH will not be finished until two weeks from now. There is a need for a currency that represents the value of this exchange.

Transparency, Privacy, and Proximity

Transactions can be different if the parties know and live close to one another.  This may be good or not, but at least there is some type of accountability.  An LC needs to have sufficient transparency so that people at the local level can easily follow any of  the local transactions of their LC. Individuals and families at the local level can still use dollars in addition to the LC and BTC.

Points on privacy and strengths of each currency:

With crypto currency the integrity of the currency transaction is essentially built in.  But in some cases the quality of the goods or services being bought may not be worth the currency spent.  With crypto currency there is often no arbitrage or middle-man unless a third party is brought in.  Courts can be very slow and may not recognize the value of local goods and services.  This keeps people from trying anything new or being productive.

LC is for people who know and see each other on a regular basis.  BTC as an intermediary currency or currency eXchange (LCX) can be used for larger transactions between Town A and Town B in which the parties are strangers.   US Dollars (USD) offer a more private transaction.  With USD no one outside the merchants or the bank needs to know details of the transaction.  LC, on the other hand, should be transparent if only for some type of accountability that is not written into law.

One way to find a good starting level for an LC is to give a number (maybe 100) of ‘inactivated’ LC tokens (coins or paper notes matched to a local ledger) to everyone in the community. The only way that they can be ‘activated’ and put into general circulation is for the original owner to buy a local good or service.  High demand for goods and services will bring many tokens into the local economy quickly and a low demand will keep the number of tokens at a level needed to resist inflation.  Printing more tokens should only happen when there are more real G&S being created.  In that way, the growth of the local economy ties in with the growth of the money supply,. This is usually the case in a healthy economy.

Multiplying Factor for the Variability of BTC helps to stabilize the currency. 

OutsidePuerto Rico the value of BTC is measured against other currencies and influenced by political pressure.  This may continue to lead to wide swings in the dollar value of the BTC.  To some extent this can be compensated within a local region by assigning a factor, a multiplier to each BTC that reflects its dollar value on the day that it is used for a transaction.  It is measured relative to a hypothetical standard BTC value of $10K/ bitcoin and only for BTC transactions within Puerto Rico.   For example, if today’s price is $6K, then the factor would be 6/10.  If tomorrow the value of one BTC goes to $7K on the world market, then the factor of all bitcoins used for a transaction tomorrow in PR tomorrow would be 7/10.   Foreign exchange dynamics then would have less of an effect on the local PR-BTC market. Two BTC’s purchased with a factor of 0.5 (when one BTC is worth $5K) would be worth the same in the PR market as one BTC when the factor is 1.0.  This would tend to keep the value of local currencies stable and maintain the real value of G&S produced there.  What effect this would have on the world’s BTC market is unknown but may help to stabilize other markets also

Couldn’t the USD play the same role as a backup in a multi-tiered currency system? In theory one could either start with either a LT-BTC or the USD, but LT-BTC allows the trading of real value G&S among LC’s who don’t have USD.  BTC can play a role in getting LC ‘s off the ground by helping to stabilize and tie together the LC’s.  A somewhat similar system has been created at the national and international level where a two-tier system called SDR’s (Special Drawing Rights) helps to stabilize and maintain national currencies.  SDR’s are not available to individuals but only to central banks and large institutions when country has an unstable currency.

Maturing a local economy from the ground up. 

With a LC-BTC system there will be fewer but larger transactions for the BTC.  However this adds another role for BTC.  Initiatives by owners of BTC can help start LC’s and educate others on the role of BTC in town-to-town transactions.  Local economies linked to a larger Puerto Rican economy can grow from the ground up but links from the local currency to larger economies are needed.  With healthy local economies in Puerto Rico, they can build schools, clinics, hurricane shelters and homes that are more hurricane resistant.  It is in the interest of BTC owners to help create these links.