Scotcoin… I don’t get it?

As Minsky said “everyone can create money, the problem is getting it accepted”. I think I get Bitcoin, not the technology, but the broad idea. I think it suits people who buy stuff in the Dark Web and don’t want the government to see what they are doing, particularly tax wise. Because Bitcoin is an anonymous, and stateless, issuer of currency, it really can’t be taxed; and because its a fringe currency I don’t think governments worry about what is closing essentially a loophole.

But I don’t get Scotcoin that I just discovered the in the FT. Scotland has a tradition of free banking and note issue quite distinct from England and maybe this follows on. But while RBS and Clydesdale note issues make interesting historical relics they sit within the tax system and each note is fully cash collateralised at the Bank of England (hence the difference between legal tender and legal currency).  The old Scottish Free Banking system had no central bank and a number of historical anomalies that I don’t think would be accepted as most people in Scotland seem to be pushing the Euro (again why a small nation with an economy completely divorced from the German economy would want this is beyond me, but it seems so far fetched at the moment I’ll park it). Free banking also had its own credit crisis with the collapse of Ayr Bank in 1772 (Douglas, Heron & Co) which influenced Adam Smith and arguably had a huge effect on modern central banking. Even if you accept the economic logic of non-monopoly issue of free money (and I don’t think I do) it’s dead on arrival at the ECB. So this relies on an independent Scotland and an independent currency (which I think would be the right answer in terms of economic flexibility).

From what I can gather they have limited the issue to 1bn coins permanently and the company seems to make its money from the exchange and over time processing fees. Scotcoin seems to sit somewhere between the Bitcoin and state money and thus I give it a zero chance of success.

The seignorage has been privatised and actually seemingly limited to the initial issue and the processing which negates one of the key advantages of issuing private money, and by necessity this has been done when the currency was at its weakest. I won’t even get into the fact that as with the gold standard replacing fluctuations in the price of goods with fluctuations in the currency is not ideal (a point Ben Bernanke makes here while arguing for the logic of central banking) and this will also have a link to a monetary unit of account which will really confuse people.

Most importantly if it ever became economically important the government would worry about tax leakage. Taxes drive money. Its the most important prerogative of a modern state and the requirement that tax liabilities are settled in the (monopoly issue) currency of the state is vital. Unlike Scotcoin all the government has to do is demand all taxes are paid in its own currency and not accept Scotcoin and this project looks fatally flawed.

But I like innovation and new start-ups so I wish them every success. Apart from the concerns above it looks like a great idea.

 

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