Frozen Savings Meet Bitcoin's Explosive Rally
Cyprus was on the brink of economic collapse in March 2013 when its banking system froze, leaving depositors without access to their money. The country's banks were closed, transfers were frozen, and cash was rationed. The situation was dire, with ATMs running out of cash and protesters filling the streets.
The crisis was sparked by the island's banking assets growing to several times its economy size, with major lenders carrying heavy exposure to Greek government debt. Losses on those bonds, alongside a slide in domestic bank asset quality, eroded the capital of the biggest lenders.
To contain deposit outflows, authorities imposed temporary restrictions on domestic and cross-border transfers and payments. But it was too little, too late. A proposed levy would have imposed a 6.75% charge on deposits below 100,000 euros and 9.9% above that threshold. Parliament flatly rejected it.
When the dust settled, the banking system had been rescued, but at a great cost to investors and others who had deposited uninsured funds. Bank of Cyprus survived, but 47.5% of its uninsured deposits were converted into shares. Laiki Bank was gone, with its insured accounts transferred and its uninsured deposits left in liquidation.
Just as it seemed like things couldn't get any worse, Bitcoin's price began to climb. From around $47 on March 15, it surged to a peak near $265 in April. Its market value crossed $1 billion on March 28, the day Cypriot banks reopened behind capital controls.
The timing was extraordinary, and not just because of the dramatic contrast between the frozen bank accounts and the rising Bitcoin price. The University of Nicosia had already begun accepting Bitcoin for tuition in November 2013, eight months after the crisis. This gave Cyprus a role that has outlived the price surge.