How to avoid capital controls using Bitcoin
For the first time in history, it can be possible to avoid capital controls using bitcoin for the average citizen.
Athens, 26th of June, 2015.
George turns on the TV and hears the word “corralito” like he had all week before.
Nervous, he decides to investigate what the consequences would be for his family after an eventual grexit.
George is scared.
After doing some research he realizes that in an scenario like this his savings accumulated over a lifetime could inevitably lose over 40% of their value.
It may sound disturbing or even frightening, but this is happening in Greece right now, it has happened before and will probably happen again. But for first time in history, the average citizen can avoid it.
Fortunately, for the first time in history, it´s possible for the average citizen to protect their money in a relatively easy, cheap and safe way.
What is a “Corralito” and how to detect It
A corralito happens when the country’s government limits the capital flows and cash withdrawals.
The term was coined to make reference to the capital controls imposed in Argentina between December 2001 and December 2002 and refers to a kind of handmade cradle where babies are placed.
How can this happen in the XXI century?
It´s a structural problem.
Our banking system is based on a fractional reserve model that makes use of fiat money i.e. not backed by assets such as gold.
In a different way than a system with a 100% cash reserve ratio where customers’s deposits are fully guaranteed or backed by some kind of asset.
In the case of Europe this ratio accounts for just as 1% for deposits since 2012.
This causes banks to be able to handle only a fraction (that´s where the term fractional reserve comes from) of the withdrawals of the customers deposits.
This system can be both positive and a negative:
Positive: It allows significant improvement for customers by reducing barriers to credit access and operational costs.
Negative: Banks would be able to cover only a fraction of the deposit withdrawals due to their lack of liquidity to cover all of them.
In cases where despositors panic and there´s a widespread distrust towards a scenario in which their funds could be frozen.
In the greek case, governments have not only have to deal with institutions like central banks to access emergency funds which could bring some liquidity and solve part of the problem, but also limit the cash withdrawals in order to prevent bank defaults.
This highlights a major problem:
The political and financial powers have absolute control over the wealth you have generated and saved during your entire lifetime.
Overnight, your savings could be frozen or directly, dissappear.
Do you really know what money is and the functions it performs?
Money is a tool which emerges as a response to the need of free, voluntary and mutually beneficial exchanges between individuals and it´s driven by 7 fundamental characteristics defined by Aristotle himself:
- Scarcity: Allows our savings not to lose their value over time or even generate more. Bitcoin, emulating gold, has a limited supply of 21 million units which won´t be fully available until year 2140. The Euro, unlike, Bitcoin, does not have a fixed monetary supply determined by an algorithm or by the limited supply of a resource. Instead of this, its supply is determined by the decision of the ECB depending of the objectives they want to accomplish.
- Durability: Must be able to preserve its usefulness over time. Given the digital nature of Bitcoin it´s not perishable as gold. Fiat money can be short-lived depending on the case, could be because of the fragility of the notes, or by its dependece on political and financial context.
- Uniformity: Required not to alter the subjectivity of its value. Bitcoin as both gold and fiat money have this feature.
- Divisibility: In the case of gold this is a problem, as the process is complex and has a high cost. Bitcoin is divisible into the eighth-tenth (0.00000001), without charge, which is a great advantage especially regarding to micropayments. This unit is known as “Satoshi” to honor its creator.
- Transportability: The transport of gold is complex, risky and expensive. In the case of Bitcoin, transmissions between wallets take place almost instantly and free of charge (you can pay an optional commission to give priority to the operation), regardless of the amount to be transmitted, territorial boundaries, or the operating banking system. In the case of physical fiat money, it would be just as dangerous and complex to carry as gold and if we talk about international transactions or remittances, they will delay several days, be traceable, and have a much higher cost compared to using Bitcoin.
- Storability: Storing gold is very expensive and requires high security standards. In the case of bitcoin, it´s relatively easy to establish strong security measures to avoid an eventual theft of them. Startups like Xapo offers for free their own version of this with its service “Vault”. Fiat money is storable, but due to inflation, its value decreases in an exponential way over time.
- Unfalsifiability: Despite gold´s unique characteristics as its density or color, it´s possible to falsify gold bullion by filling tungsten inside. With Bitcoin this is not possible because the Blockchain is designed to avoid double-spending. Actual currencies are constantly falsified by criminal organizations or enemy governments (as North-Korea, where american dollars are falsified at a big scale)
We can conclude with the fact that money we use under legal tender laws is far from perfection and gold, despite of being a better alternative, it´s not the best option.
Bitcoin is thereby the most perfect money that has ever existed in history
Is there any way to protect your money from the capital controls threat?
At this point, don´t you think it´s just surprising to see that this is still the money we´re using after all?
It is true that Bitcoin is the theoretical “perfect money” but its actual early development stage requires to use it with some caution.
Store your savings in bitcoins may be such a risky option, due to the high volatility and implicit risks that it has as an asset.
Despite of this, Bitcoin qualities as a value transmitter makes possible to move in a fast way the value of our savings in case of threat.
Is there any way to avoid Bitcoins volatility?
Now, there is.
BitReserve allows you to freeze indefinitely the value of your Bitcoins by “pairing” their value with the price of different assets as Gold, Silver, Dollar, Euro, Yuan, Paladium or Platinum, among many others.
This means that you can send a certain amount of bitcoins to your bitreserve account and pair the value of that amount to fluctuate in relation to any of the options offered.
How to avoid capital controls using Bitcoin step by step
Imagine an hypothetical situation where the threat of a “corralito” would be flying over Spain.
How could we ensure part of our savings until the “storm eases”?
1.Exchange your money into Bitcoins
First, you need to create a wallet.
You can do it with Xapo, for example, and add funds by buying Bitcoins in platforms as LocalBitcoins or Bitstamp.
2. Create a Bitreserve account and send there your Bitcoins
It’s free and you can start here.
3. Choose the value you are pairing your money with
Once you’ve done this you must choose the value your funds will be frozen in relation with.
We may use as well, the reference we consider that could bring us more profit, or less risk.
In practice, this would be similar to investing from a traditional bank but without the confiscation risk of deposits.
Your funds will be frozen during the time desired(for example, in Greece, until the capital controls dissapear, or in Spain, until we think there´s no risk anymore).
4. Use Bit2Me to turn your Bitcoins into euros
5. Select. Send. Withdraw.
Choose the amount you want to cash-out, the phone number you want the PIN code to be received and send the Bitcoins to the given adress.
Instantly, you will receive two codes.
One from the app itself and another in a SMS code which you´ll be required to introduce in the chosen cash-out point.
6. Recover your money.
Now you have in your hands the money you previously “protected”.
Despite Bitcoin is a technology still in an early stage, there´s no doubt about how it has meant a precedent in changing the way we understand money.
Think for a second.
If in such an early stage, it´s possible to “hack”an event as trascendental as a “corralito”…
What would it be capable of once it´s fully developed?