The Bitcoin Sovereign Wealth Fund

The crypto-currency boom is in full swing. The explosion in price and quantity of new digital tokens is so bonkers even its evangelists are calling the market a ticking time-bomb.

It’s also tempting the establishment to get in on the act. For the Republic of Estonia, it’s being touted as a way to raise a sovereign wealth fund — an imaginative leap for a country with a population one-sixth the size of New York City’s and one of the highest levels of mobile broadband penetration in the world.

A Bitcoin-Ready Nation?

Wireless mobile broadband subscriptions per 100 inhabitants, Q2 2016

Source: OECD

A proposal by Estonia’s agency in charge of “e-residency” applications (more on this later) has suggested raising money by selling “estcoins” to the public.

The wealth could then be managed via a public-private partnership; a chunk might be poured into venture capital to support domestic start-ups. Holders of estcoins would have a stake in the fund and a say in how it is run. The tokens might then become a viable currency, so the thinking goes, paying for goods and services in a euro-zone country.

This seems like a bid to add financial firepower to a tiny economy whose capital markets are under-developed and eclipsed by loans from foreign banks. More than 90% of the Estonian market is controlled by foreign firms like Swedbank, SEB and Nordea, according to investment bank Redgate Capital.

A Gap To Fill

Estonia’s banking market is highly concentrated and dwarfs under-developed capital markets

Source: Redgate Capital

Estonia lacks the natural resources of Norway or Qatar, but has reinvented itself as digitally savvy economy that’s open for business: corporate and income tax rates are less than the OECD average, it ranks twelfth globally in terms of ease of doing business and allows anyone in the world to become an “e-resident” and start a company. With Estonia’s e-population apparently growing faster than the domestic birth rate, tapping this group for funds must be a temptation.

Hot Market, Burnt Fingers

Bitcoin trackers reflect the crypto-currency boom, where daily price swings can be huge

Source: Bloomberg

But there are huge risks here. The price of crypto-currencies is incredibly volatile: Bitcoin has jumped 340 percent year-to-date, and in 2013 it once fell 50 percent overnight.

In theory, an estcoin would be backed by hard assets like infrastructure projects or cash flows from investments, so might be easier to value.

In practice, there’s no telling how these coins would trade and how they might destabilize Estonia’s economy and politics. Would this new coin create two classes of citizens, depending on whether their savings were in euros or estcoins? Would Estonia repay debts in either currency, or both? Any outsized influence of foreigners who are also e-residents might lead to extra friction — imagine a deep-pocketed overseas investor owning more than half of the republic’s flag-waving token.

A sovereign crypto-currency backed by people whose personal details are stored online would also surely be a juicy magnet for hackers and criminals.

The estcoin proposal seems to be leaning towards Ethereum as technology of choice and has received feedback from its founder, Vitalik Buterin — who has also been in contact with Vladimir Putin about Russia’s own crypto ambitions.

Ethereum has a choppy history of community-managed investment funds: One such experiment, the DAO, was hacked in a $55 million digital heist. Estonia also has a history of being targeted by cyber-attacks. In 2007, banks, media outlets and government bodies were forced offline. Estonia blamed Russia, which denied involvement. People might also target estcoins to bypass the regulated banking system.

A $120 Billion Market

Market capitalization of the top five crypto-currencies

Source: Coincap

This is a proposal that’s still at the conceptual stage, and the agency involved acknowledges there are risks that need to be addressed before taking any step forward. There’s little doubt that in the current mood of crypto-enthusiasm, where millions are being thrown at dubious business propositions, an estcoin would succeed in raising money. The long-term cost could well be volatility, insecurity and poverty.


This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Lionel Laurent in London at

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Edward Evans at