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The New Currency at the End of the World. Will Iceland’s Bitcoin Succeed?

Presented by Unlimited: The chances of the Auroracoin’s success seem high. Yet, it’s not clear what success will achieve. Will it merely be old capital’s new clothes?
Photography by Christian Belgaux

Photography by Christian BelgauxWritten by Heathcoate Ruthven

With a population of only 350,000 Iceland produces some very impressive statistics. The BBC reports, for example, that 10% of all Icelanders are published authors. It is also said that per capita the island boasts the most musicians, lowest murder rates, most happiness, most Nobel Prize winners (well, they've only had one, but still), most internet usage, and highest Coca-Cola consumption of any country in the world. Some might say all this fosters a national sense of hubris.


View of Reykjavik skyline from the tower of Hallgrímskirkja church (Photograph: Christian Belgaux)

A sense that was made painfully clear by the 2008 financial crash. Between 2003 and 2007 the entire value of the Icelandic stock market multiplied nine times. Then, quite suddenly in 2008, the banks found they were worth six times Iceland's GDP in debt, and the kroner fell by two-thirds in value. The economy crashed so hard and so fast that what this meant on the ground was not always clear. Statistically, Iceland was one of the worst effected countries in the world. Mortgages were junked and money became worthless abroad, but the Icelandic people were more confused than starving. I asked somebody at the time what was the most visible effect of the crash. "The libraries are full", they replied.

'Wealth' became a nervous buzzword. Previous notions of the stuff were shown to be illusory. One philosophy student expressed a common sentiment: "we are like the people who win the lottery and really overestimate their wealth and in the end lose everything". In response, optimistic new models of wealth were proposed. Heiða Kristín Helgadóttir, general secretary of a party of artists that won the 2010 mayoral elections, suggested that "artists are always wealthy, even if they never have any money. They run on some other fuel. Shouldn't we learn from this?"

People were reading about what was going on elsewhere too – social movements from Occupy Wall Street to the indignados in Spain, new feminist approaches to the internet, the rise of cryptocurrencies – and they were making plans. The Auroracoin was born.


After the crash, the government initiated currency controls in order to stop everyone converting their Icelandic assets into more stable foreign currencies. In part to circumnavigate these restrictions, an anonymous coder released something called Auroracoin (AUR): a nation-based cryptocurrency designed so Icelanders could trade using cryptography to validate their transactions, rather than banks, and, therefore, circumvent pesky government controls. This works in a similar way to peer-to-peer downloading technology – the kind people use when they torrent movies – with all transactions being agreed upon in a giant public ledger called the block chain, a sort of great big account book in the sky. Having a decentralised yet omnipotent system like this means, in theory, that no bank need extract rent for transactions and no government monitor who is doing them.

Auroracoin is an offshoot of the controversial original cryptocurrency, Bitcoin, launched in 2008 by the nom de plume Satoshi Nakamoto – either a person or group of people with great technical literacy. It has been hailed by London Review Of Books' John Lanchester as potentially the most important development in the history of money since the Medici bank popularised and centralised the use of the balance sheet in 16th century Florence.Nobel Prize winning Keynesian economist Paul Krugman is far more sceptical – condemning it as "evil".


It is tricky to navigate the debate not simply because of the highly partisan rhetoric. It is actually genuinely very difficult to tell if Bitcoin is: (a) a right-libertarian fad designed for tax evasion and shady crime markets that has made a few nerds and venture capitalists millionaires, or (b) a technological revolution, to some degree separate from the ethics of its proponents, that will seriously undermine a financial oligarchy fat on the profits reared from an out-dated system of exchange.

The fact of the matter is this: money is the basis of any society, and it is never a neutral system. It carries with it hidden values, biases, and histories that shape and are shaped by our most intimate social relations. Ours is in a crisis of value production that many believe to be terminal. Nobody knows what will fill the vacuum, only that it will be in some way digital. The nature of how we produce, exchange, and create things is changing, and cryptocurrency innovations have a chance to play some role in this epochal shift.

Interior of coin mining facility at old army base near Keflavik (Photograph: Christian Belgaux)

Regardless, Bitcoin has had an intense and fascinating eight years (a long time in internet land). There are two scandals that define the coin –Silk Road and Mt. Gox– that have become the stuff of legend. Silk Road was a Bitcoin-only, anonymous marketplace founded by a nutty libertarian 23-year-old Texan who went by the name of Dread Pirate Roberts. Dread's operation sold mostly drugs and weapons –but assassinations also were advertised. Pirate Roberts himself hired several assassins to the tune of $730,000 in a desperate bid to hid his identity. So popular was the service that its estimated value was at one stage in excess of $1 billion. The FBI eventually seized the site, literally snatching Pirate Roberts' laptop from his hands while he was watching an interview with the creators of Breaking Bad. Ross Ulbricht, the man behind Pirate Roberts, is now serving life in prison without the possibility of parole.


The Mt. Gox scandal illustrates two significant obstacles to the widespread adoption of any cryptocurrency: security and a relatively constant value. Mt. Gox was launched in 2010 as a Bitcoin exchange service run almost solely by Mark Karpelès, a Tokyo-based French hermit unhealthily obsessed with his cat. By 2013, 70% of all Bitcoin transactions – hundreds of millions of dollars – were going through Mt. Gox. Then in February 2014 the exchange was mysteriously and suddenly shut down. Nobody really knows what happened. It seems Karpelès lost all the Bitcoin. Perhaps it was hackers, perhaps he embezzled it, or maybe he simply lost his key. Nobody knows. But it was one hell of a fudge.

That the mistake of a single enigmatic individual could have such devastating economic consequences did a lot of damage to the already shaky reputation of Bitcoin. It caused its value to fluctuate wildly, something that happens with worrying frequency. Its worth soars up and down so regularly and with such velocity that the currency in practice can only attract risk-hungry gambling stockbrokers. For everyone else it's too dangerous to touch.

Auroracoin was not immune to these problems either, and had its own equivalent scandal upon launching. To try and solve the issue of distribution – and do so with a headline-grabbing gimmick – in March 2014 all Icelandic citizens were given roughly $380 of free digital money via an 'airdrop' of Auroracoin. In theory. People had problems collecting their coins, the site crashed, and before long the value of Auroracoin plummeted to almost nothing. A few people managed to make a pretty penny collecting the airdropped coins of others and converting them all to Bitcoin within hours of the drop, but these canny rogues were few and far between.


As with Bitcoin's creator(s), Auroracoin's designer remained anonymous. The project was as mysterious as it was promising — a chance to escape the infernal krona without embracing the imperial Euro. Unfortunately, hype around Auroracoin was so great prior to its release that it was, in typical Icelandic style, significantly overvalued. A crash was practically ensured.

Pétur Árnason in front of Ásmundur Sveinsson sculpture museum (Photograph: Christian Belgaux)

Two years on there is an attempt by a new team of developers to re-launch the coin. I spoke with one of Auroracoin's core developers, Pétur Árnason. From the very start he was in regular online contact with the mysterious Baldur, the moniker of the creator or creators of Auroracoin, who ceased communication shortly after the airdrop. "The anonymity was a bit of a problem, people didn't trust it, but in the end he did everything that he said he would." Pétur tells me, a little rankled by the well worn criticisms and suspicions of the project. "He pre-mined a large amount of coins, about 5 or 6 million, to be airdropped. I think it was a success. About 10% of the Icelandic population claimed their coins. Okay, there were a few false claims, but that's a huge amount of people prepared to use a cryptocurrency."

As for Baldur: "after he distributed all the coins, he burned all the pre-mined coins." To understand what this means it is necessary to know the bare basics of how crypto-currencies are produced. Computers solve increasingly complex equations (in a process called 'mining') that unlock more units of value ('coins'). There are a finite amount of these, and they get more and more difficult to mine over time, costing more computer power. A bit like increasingly difficult games of Sudoku; the work is tricky, but once done it is easy to see if the equation is correct or not. The fact there can be such clear, verifiable proof-of-work is what makes the system so appealingly functional. In this instance, Baldur mined a large amount of the coins him/them/itself before releasing Auroracoin in order to 'airdrop' them to the Icelandic people and stimulate the emergent crypto-market. Inevitably, most of these were never claimed. "He was holding massive value in his hands. Nobody knows who he is or what his intentions are, so that risk factor had to be eliminated. Burning them was the only logical thing to do."


Pétur denies knowing Baldur's identity. Given that Iceland is such a tight knit community, surely he must have some guesses about who it could be? "No, actually. Whoever it was has covered their tracks very well."

"The real reason it didn't get proper usage here, I believe, is the lack of infrastructure." There was no simple way of converting Auroracoin into krona, something that discouraged merchants from adopting the coin. People who spent their coins didn't know how to get new coins. Basic structure was missing. To amend this, one year after the airdrop, Pétur and three friends (one banker, two programmers, and the owner of a small IT company) set up The Auroracoin Foundation. A legal entity formed to represent the coin, eliminate legal uncertainties around it, and educate people not only about cryptocurrencies, but also about Iceland's current financial system in general —"you need to see how things work now to understand how much it needs to change".

Pétur is indignant about how the fickle decisions of banks and governments robs the general public of their own wealth. "The banks create money, create inflation, and devalue our currency. If you take a 20 year average in Iceland, the inflation in Iceland is around 6%. Some years inflation will be 15-20%." Despite the bank's meagre interest rates, peoples' purchasing power still decreases. Cryptocurrencies evade such folly through two unique features: being decentralised and in finite supply. As with bitcoin, there will only be a certain amount of Auroracoins in the world. "We are not against the government. We are glad to work with any government. We are simply trying to change the monetary system, which is the base of any society. Ours is fundamentally flawed."


The question is: can an Icelandic cryptocurrency succeed?

Close up of Pétur Árnason (Photograph: Christian Belgaux)

Ideas conceived around the world have often found this wayward former Danish colony to be an explosive nursery. Cold War conflicts found some of their most peculiar expressions here, ironed out at their most atomic scale in the legendary 1972 World Chess Championship between Bobby Fisher and Garry Kasparov. The spirit of DIY anarchy too, via the influence of the British punk collective Crass, found a strange reincarnation in both the figure of pop star Björk, who made Iceland an international household name, and later in the 'anarcho-surrealist' Jon Gnarr, the former major of Reykjavik.

And in the early 1990s, the Hydra of neoliberal economics reared its most flamboyant head to date in the figure of prime minister Davíð Oddsson – a plump Norse riff on Thatcho-Reaganism. Corporation tax was reduced from 45 to 18%; the three main banks were privatised (sold to Oddsson's close circle of friends); and there was a complex process of fishing privatisation that produced an instant class of 'quota millionaires'. The mysterious groupuscule of the 'Octopus' families –a few dozen mafioso-like industrialists, traditionally the key to political power on the island– became increasingly confident. Many of their ranks soon grew bored of fishing, and bred an aggressive new generation of bankers celebrated as the "New Vikings".

It became fashionable to flaunt crass wealth. Wealth that, in the main, turned out to be entirely fantastical. Fantasies that have nevertheless left many marks still visible today, like the €164 million Harpa opera house, made of intricate geometric glass patterns, that towers over Reykjavik. Rumour has it that at the time of the financial crash designers were planning an entirely gold-plated private members' bar for its upstairs. Today half-built luxury apartments, complete with helipads, lie mostly empty. The city's denizens are embarrassed about these excesses. In rhetoric typical of such a boozy culture, this contemporary period is frequently referred to as a "hangover".


Construction of Reykjavik from the tower of Hallgrímskirkja church (Photograph: Christian Belgaux)

This story can be told as the 2008 global financial crash writ small. The Times financial journalist Roger Boyes wrote that Iceland's "size actually makes it easier to understand some of the forces that are upsetting the planet". Indeed many of the plotlines found here are the same – deregulation, cronyism, ballooning property prices and household credit: crash. What happened next, however, was less typical.

There was an intense period of soul searching. In 2009 the 'pots and pans revolution' ousted the centre-right government amid daily mass demonstrations. The state was less than willing to bail out the banks (in part because they were unable to – the debts were simply too great). 29 financiers were jailed for a combined sentence of a little under 100 years. The Best Party, a group of comedians, artists, and musicians, were elected in the Reykjavik city elections. And the Pirate Party emerged with 3 seats in parliament as a powerful voice for an alternative politics.

Sign at entrance of Kviabryggja Prison (Photograph: Christian Belgaux)

All this was underscored by an acute sense of national guilt. Most felt, rightly or wrongly, themselves to be in some sense responsible for the crash. In the face of such a calamity, there has been a deep cultural shift away from capitalism and towards, well, hopefully something a little less alienated.

Seven years on, however, and it's easy to feel like nothing has really changed. Wild accounts of the 'revolution in Reykjavik' appear ridiculous from a hip café in the 101 district. Innovative and vaunted experiments such as the Wikipedia-style 'crowd-sourced constitution' patently failed. After an unremarkable four-year term from the Social Democratic Party, the traditionally dominant right-wing parties were re-elected in 2013. Tourism continues to boom unabated, shutting small shops and pushing poorer Icelanders out of the city. It seemed to be business as usual.


Tourist photographing inside Harpa Opera House (Photograph: Christian Belgaux)

Then came the Panama Papers. Around a quarter of the government was found to have undeclared stakes in offshore companies, which, given that the initial crisis was made possible by similar back-room banking deals, enraged the population. It was revealed too that the wife of the prime minister owns a company based in the British Virgin Islands that is claiming over $4 million in bankruptcy funds from Iceland's three biggest banks. Over 20,000 people took to the streets in the largest demonstration the island has ever seen, forcing the prime minister to resign. The leftist opposition proposed a vote of no confidence, and snap elections may well be held later this year. Today many polls show a clear lead for The Pirate Party - a small, innovative group formed by activists opposing copyright laws who campaign predominantly for governmental transparency and direct democracy. Iceland could soon boast the first Pirate government in the world.

A perfect time for the re-launch of Auroracoin, then. But the project faces many obstacles. The people I spoke with remembered it as a short-lived and ridiculous venture. Hilmar Birgir Ólafsson, an iOS software developer involved with both the internationally successful QuizUp and the nationally popular Appy Hour, was surprised to be asked about Auroracoin. As far as he knew, the consensus in the programming community is that it was a bogus project.


Intrigued despite this, he outlined his three main criticisms: "There was not enough information about the pre-mining of the coins. That made me suspect that someone was storing a large amount of coins to convert just after the launch. Secondly, there were no particularly original design features to distinguish it from other altcoins (alternative bitcoins) – and their website text was weirdly nationalistic in tone. Finally, I don't actually know any of the people working on it. The Icelandic tech community is not so big, so that's a little suspicious."

The Pirate Party's Smári McCarthy goes so far as to question the competence of Auroracoin's development team: "A community with one unstable currency operated by inept people is not a community that is in sore need of another unstable currency operated by inept people." The stakes are too high; there is no room for failure. What the Auroracoin Foundation doesn't seem to understand, he wrote to me, is that "hyping a movie is very different from hyping a technology or an approach to societal governance. One is over in a few hours. The other can leave a mess of toxic madness in the world for centuries". When asked if he thought AUR had a chance of becoming popular he replied: "Hmm. I guess I'm a bit aggressive against this…Maybe it'll be a stunning success. Only time will tell. Until then, I just hope they don't overestimate themselves."


A young man with flag photographing during national day celebrations in downtown Reykjavik (Photograph: Christian Belgaux)

He believes that hype around disorganised projects can be very harmful in the long term. It leads "people to jump on board with little understanding or consideration for implications". What the Auroracoin Foundation doesn't seem to understand, he wrote to me, is that "hyping a movie is very different from hyping a technology or an approach to societal governance. One is over in a few hours. The other can leave a mess of toxic madness in the world for centuries". When asked if he thought AUR had a chance of becoming popular he replied: "Hmm. I guess I'm a bit aggressive against this…Maybe it'll be a stunning success. Only time will tell. Until then, I just hope they don't overestimate themselves."

Outside the geek world there are more earthly concerns. The artist Kolbeinn Hugi is obsessed with the question of energy. "There is a huge data centre in Iceland using 1% of the entire country's energy resources to 'mine' Bitcoin, something that most people consider as completely abstract," he tells me over Skype. "In Iceland, that's using geothermal energy, but in other places they burn fossil fuels to mine Bitcoin. That's why I'm a little suspicious that things like Auroracoin will solve our problems, which are fundamentally environmental." Kolbeinn's perspective on cryptocurrencies is echoed by sci-fi author Charlie Stross, who evocatively wrote in a widely shared blogpost that "Bitcoin has the carbon footprint from hell" because "as they get more computationally expensive to generate, electricity consumption soars".

This is a problem a that all cryptocurrencies will face, and there is no country better equipped than Iceland to deal with such high energy demands. Volcanic activity gives the island an unlimited supply of more or less free power. The combination of high-powered data centres, that are run in a clean and cheap way, in a country with advanced privacy laws and recent transparency reforms all make Iceland an ideal place for cryptocurrencies to develop.

The potential is there, but what is Auroracoin doing differently this time round? For one thing, not an airdrop. A member of the Auroracoin Foundation Hlynur Þór Björnsson emphasised to me that they were focusing on "building infrastructure first and driving adoption second". Just like with the automobile industry – you must build the roads before people start to buy cars. Two years ago the commercial infrastructure was completely neglected. Now they have a city-wide bus stop advertising campaign, a recently opened AUR/Icelandic Krona currency exchange, and a NFC-card-based payment system in the works. Only when the infrastructure is there, he tells me, will they start to focus on trying to get consumers to adopt to it – "it simply doesn't work the other way around."

Hlynar Por Bjornsson in the garden behind the Einar Jónsson Museu (Photograph: Christian Belgaux)

When Auroracoin first launched the financial ministry and tax authority got together and wrote a statement condemning it. Now, they accept the project as legitimate. "Most of that was because of ignorance I suppose" Pétur Árnason tells me, admitting that he's not entirely sure why the change of heart. Icelandic elites are not the only ones cottoning on to the new money system. Prior to 2013 banks and governments more or less uniformly implied that cryptocurrencies were little more than a tool for those operating outside the law. Then, suddenly, they began investing millions in researching the phenomena.

"It was a pretty obvious U-turn!" Pétur explains. Their interest, naturally, is somewhat partial. "Banks are more interested in block chain technology than cryptocurrencies, because block chain doesn't undermine them, whereas cryptocurrencies do." Block chains used separately from a currency are simply a brilliant solution to an old, prosaic problem - trust. They're a distributed ledger that provides a reliable, neutral way of storing contracts. This cryptographic escrow is helpful for banks because digital transactions are so easy to fake. Nobody quite knows how to 'sign' an email. Banks spend a lot of time finding ways to store and enforce commercial contracts between international parties where there is often little trust and unclear jurisdiction. With the advent of block chain, perhaps no more.

Pétur continues: "But they are not idiots. They're investing a lot in cryptocurrencies too. They're keen to cover all bases, to find the most profitable place for them within that world." Given that local banks' revenue is derived from their 'first dibs' on borrowing and lending with the central bank, its clear that a cryptographically authenticated means of exchange that bypasses this unfair advantage might make the banking sector uneasy. Many cryptocurrency enthusiasts believe that this new monetary system - with no central point of authority, and a finite supply of coins - will make bankers all but redundant.

Given Iceland's small size, geothermal energy, and technologically literate population, the chances of AUR's success seem high. Yet, it is not clear what exactly succeeding will achieve. Perhaps in the future Bitcoin will be the new gold standard of the international crypto markets, with altcoins like Auroracoin pegged to it. A realistic idea – but relatively unambitious. How will this meaningfully undermine governments? Will it redistribute wealth? Or redefine it? Or will it merely be old capital's new clothes?

Even if Auroracoin lacks political direction, experiments in new forms of money are to be encouraged, if only to mature debate. As Jerome Roos, editor of ROAR Magazine writes: "the money question finally appears to have been liberated from the suffocating scene of anti-Semitic conspiracy theorists, right-libertarian gold bugs and anarcho-capitalist 'currency cranks' to which it had hitherto largely remained confined."

The rise of the Pirate Party – celebrating up to 43% in election polls – shows that some kind of change is afoot. Now that the crypto cat is out of the bag it's unlikely to be put down anytime soon.

Parade during national day in downtown Reykjavik (Photograph: Christian Belgaux)