06.07.2021 – 10:00
By Robin Wigglesworth, Finacial Times
The alternative finance system once replaced in Albania the sclerotic and technologically backward banking system. But the lessons from its dramatic destruction remain relevant today.
In essence, what was initially described as a success story of enterprises in the post-communist system turned out to be a large-scale pyramid scheme.
Excellent marketing and numerous promises created an informal, decentralized ecosystem that facilitated crime by attracting crowds of people who disregarded warnings or even followed rules.
Sounds like heard or not? The sudden movement of cryptocurrencies certainly has a link between the digital industry and the Ponzi scheme (a scam which is essentially taking money from savers or investors. To entice the latter to “invest” the scheme offers high risk-return rates. low or 0. Then the Ponzi scheme proceeds as follows: To return the money to the old investors she uses the money received from the new investors, to return the money to the latter she receives the money of other investors coming and so on.)
Even skeptics may feel that the comparison is a little unfair. Above all, there are some interesting inventions from crypto fermentation, and it is clear that scheme is still being used today. But there are some subtle lessons from the Albanian fiasco for regulators who have now taken over the world of cryptocurrencies.
The pyramid crisis of the 1990s in Albania is so fascinating that it is worth exploring every detail of it. After the Cold War, the country initially saw economic growth that the International Monetary Fund experienced as impressive.
But its state-owned banks were weak and stuck with multiple loans, limiting their ability to further increase funding. As a result, Albanians increasingly turned into a large gang of foreign exchange traders and informal banks.
Initially, the IMF also thought it was something positive, thanks to remittances from Albanians living abroad. However, more than half of Albania’s 3 million inhabitants were involved in pyramid schemes, reports abcnews.al
At their peak, the face value of pyramid schemes was equal to half of Albania’s annual economic output.
Despite their links to organized crime, they enjoyed respect thanks to advertisements and local politicians. The Albanian central bank warned of the risks, but prosecutors refused to enforce its rules. In early 1997 the schemes collapsed, causing violent unrest and causing 2,000 casualties.
It is very clear that the parallels between the Albanian pyramid schemes and the current cryptocurrency ecosystem are more conceptual than concrete. But both were supported by the constant investment of money.
Investing money was the magic that triggered the pyramid schemes, from the high interest rates promised by Albanian investment schemes to the modern-day digital “production farm”.
Even Nassim Nicholas Taleb, initially a supporter of bitcoin, has come to the conclusion that these schemes are nothing more than a “scam” that works like a Ponzi scheme – with cryptocurrencies widely used to facilitate crime.
However, the main lessons from the Albanian fiasco are that bubbles outside the mainstream financial system can be devastating; when they explode. There is little difference between “good actors” and “Bad actors”; and the cost can be tremendous.
Albanian officials did nothing after the collapse of financial companies. Moreover, while some may have been dubious, there has been a lot of real investment and large amounts of value.
However, when the pyramid schemes collapsed and impoverished most of the population, their collapse destroyed trust in the authorities and plunged Albania into civil strife. In March 1997, a local newspaper wrote: “At the moment, assume that Albania does not exist.”
However, the Albanian experience shows the risks of the regulator not engaging.
