0

0

0

0

0

0

0

0

0

Views: Crypto — not for now? Or never?

Mini

Blockchains, Cryptos - let’s look at their interconnections, possibilities and concerns. A look at why we need to understand crypto and not brush it aside is digital finance. Crypto could be much bigger than just the realm of finance.

Views: Crypto — not for now? Or never?
If one had asked our grandparents just 15 years ago, if they would transact without cash, we would have heard a vehement "no". If we had asked them about transacting without seeing/touching the monies or even without writing a cheque, they would have laughed at our idea of financial transactions.
Yet digital payments are a reality now across the length and breadth of India, including those in the economically weaker section of the population and those across the literacy spectrum. All thanks to the JAM trinity.
The speed of technological advances is a delight as well as a worry for the regulators globally. To keep pace with the good and the bad side of emerging technologies, especially those affecting the fiscal and monetary side of the economy, regulators have to be on their toes; including quickly building capacities and capabilities in their institutions.
In this aspect, technological innovation has to be balanced with consumer protection and the larger-social good. The fear of those who support new ideas broadly is that the officialdom would discount the emerging digital monies, for the short term notion of "not wanting it to happen in my watch"!
Of course, all is not well and there are genuine concerns that our stakeholders have about cryptos. Some of them include:
  • It's unregulated. Yes, we need to regulate it to bring in consumer protection and to maintain the stability of the fiscal and monetary systems.
  • Investor protection has been a top priority for our regulators. Crypto assets are seen as high-risk, speculative assets currently. Investor education, guidelines against misselling and other safeguards are needed.
  • It's price volatility and risk of investment erosion: There are more than 10,000 cryptocurrencies in existence currently. Most crypto investors can hardly name 4-5 of them! Many of these cryptos have little or no following or trading volume and hence skew the public view. But if the investor knowingly invests in cryptos and loses monies, the regulator or government cannot be blamed.
  • Anonymous transfers of crypto assets may weaken anti-money laundering efforts, which is a potential national security issue. We must use strict KYC norms. Using blockchain may bring more transparency for financial transfers as all its transactions can be examined. India is a part of the G20 Financial Action Task Force (FATF), and the crypto industry players should adhere to FATF's coverage.
  • Too much advertising by crypto exchanges and other crypto players could be misleading the investors. But treating the category like alcohol or tobacco and banning their advertising may not stop their popularity! For we still have a surrogate form of advertising that's all prevalent in other banned product categories.
  • Tax evasion: By treating crypto investments as a regulated asset class, and allowing crypto investments only from domestic bank accounts and through regulated crypto exchanges, taxability is possible.
  • More importantly, Crypto is based ideologically on the blend of the political philosophies of anarchism and capitalism; that would challenge the supremacy of the state and its functions. It could test the boundaries of regulatory sovereignty. This won't augur well for political systems globally. Despite any governments talking of accepting the free flow of new ideas and evolving technologies, the struggle to hold onto their influence and control of governance is expected to happen, in the guise of fighting the unseen.
    A more bearish view of cryptocurrencies is worth keeping in mind. In the event of catastrophic events like war or climate-related calamities where electricity and Internet connectivity goes down, gold still has value as a medium of exchange. Bitcoin stored in a digital wallet will be useless in this scenario (of no electricity or internet access).
    • The government's stand has to be 21st century one, worthy of its role as a global nation-leader and yet be consumer-friendly. For a nation that is developing and holds the aspirations of half a billion youth within its fold, India cannot afford to take a wrong decision on policy matters without taking a wide range of inputs, not just from a commercial angle, but also from a deeper technological understanding if it can bring potential-social-good.
    • Crypto: Ideology of its genesis
      Anarchism theoretically promotes the notion of stateless societies and no hierarchies in the power structure. While there are no power structures or governments, it doesn’t mean that there is no governance. Anarchism promotes self-governance and the notion of non-aggression and requires all individuals to act as rational actors, where competing self-interests will maintain order.
      Anarcho-capitalists support the idea of a stateless society, but also promote the idea of owning private property and support free markets. All functions of society will be fulfilled by competing private companies and enforced by voluntary contracts! Well, doesn't this might sound far-fetched and Utopian ?!
      Bitcoin's creator Satoshi Nakamoto developed the first cryptocurrency, as a critique of the inefficiency of central banks and monetary authorities which debased currencies and criticised banks as they held people's money but lent indiscriminately with a very little reserve. Bitcoin presented itself as a solution where the limited number of tokens that could be created would limit indiscriminate lending.
      The Blockchain technology solved for moving away from centralised finance by central banks, which controlled the production and issuance of currency. It also solved for trust-issues with transactions in a limited way, as the blockchain was an immutable record of transactions that needed to be authenticated by all nodes in the system. Blockchains are, at their core, databases that have certain characteristics, the most well-known of which is the immutability of what is already recorded in the database. When digital assets are bought, sold, or traded, information about that transfer — including the wallet the asset was transferred from, the wallet it was transferred to, and a timestamp of the transaction — is recorded in a new "block" that is added on to the end of the online "chain"; cryptographic calculations are then conducted by computers around the globe, known as "miners" or "validator pools", to ensure that assets cannot be counterfeited or double-spent. Every transaction is viewable online by the public. Because wallets are a string of numbers and letters, every transaction a wallet makes can be traced.
      CBDC
      Cryptocurrencies have brought changes to the finance world. The fear or worry that it could bring digital currencies into private space has prodded many central banks to design their own digital versions of their currencies. The Bahamas has already rolled out a central bank digital currency, while countries like China, Japan and Sweden are conducting experiments with their own official digital money.
      The Reserve Bank of India is working on building a central bank digital currency (CBDC). It is expected to launch pilot version sometime in 2023. CBDCs are uncharted waters and there are several questions that need to be answered for acceptance, including state overreach and privacy where it could have a complete view of all transactions, the role of banks in this scenario, and if it really needs a decentralised system of money. While the source of money can be a valid data observation by governments in general, it might be a privacy issue in tracking where the citizens spend their earnings/wealth on!
      CBDCs conducting centralised finance operations is at odds with the idea of blockchain which seeks to promote decentralised finance!
      The State will remain supreme
      The State will want to have its influence in society and especially in a socialist democracy like India. It will have to take care of its population, especially the vulnerable segments. Hence the narrative of what’s good for the economy could be the prerogative of the State in its policy formation process.
      However, the relationship between governments and cryptocurrencies need not be so antagonistic. Trying to shoo away newer technologies especially in this age of ever-evolving digital, could only push it underground. Worse off still, in the dark-underground!
      Whatever we as a nation allow, or don't allow, has to give better outcomes to our citizens in the long term. The opportunity is now, to show how much of transparency we can build, as we develop our policies of digital finance, in this century dominated by the 4th Industrial Revolution.
      —Srinath Sridharan is a Corporate Advisor and Independent markets commentator. Views expressed are personal
      next story