“The afternoon knows what the morning never suspected.”―Robert Frost
In the past few years, cryptocurrencies (especially Bitcoin) have gained material importance in the global financial system. Though the character of Bitcoin (or cryptocurrencies for that matter) is still evolving and it is not certain if it will assume the character of a currency; end up just being a collectible asset like art, wine, vintage vehicles, old coins, etc.; or just end like a bad dream. I feel, it is a debate that will continue for many more years and no one will remain unaffected by it. Almost everyone who transacts in money or is part of the global economic system will need to deal with it at some point in time.
To give this debate a context, the present value of all cryptocurrencies in circulation is over $1.6 trillion; out of which bitcoin alone accounts for about $750 billion. This compares with $5.8 trillion of monetary base (M0) of the US). The average daily trading value of bitcoins alone is over US$23 bn. It is clear that Bitcoin is emerging as a serious challenger to Gold as an alternative currency or medium for exchange of value. Two large global corporations Tesla (again!) and Amazon have expressed the intent to accept Bitcoin as valid payment for transactions.
The Indian context:
In the Indian context, the money market regulator (The Reserve Bank of India or RBI) has taken a guarded view of cryptocurrencies. It has refrained from terming it as illegal. However, some attempts have been made to discourage the use and ownership of cryptocurrencies. The Supreme Court of India has disagreed with some of these measures, and paved the way for legal ownership of cryptocurrencies. However, the regulatory and taxation regime is still evolving and may take some time to get established.
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RBI vs Supreme Court:
The RBI issued a circular in 2018 directing all entities regulated by it (Banks and NBFCs) not to deal virtual currencies or provide services for facilitating any person or entity in dealing with or settling those; thus virtually banning the use of cryptocurrencies in India.
The Supreme Court quashed the said RBI circular in March 2020, on the appeal of the Internet and Mobile Association of India, representing various cryptocurrency exchanges. The SC accepted the argument of the appellant that in the absence of any specific law banning cryptocurrencies, dealing in these is a “legitimate” activity; hence RBI’s circular banning these is untenable.
In August 2020 various media reports suggested that a “note” had been forwarded to the concerned ministries for inter-ministerial consultation to promulgate legislation banning the use of cryptocurrencies in India. Reportedly, the inter-ministerial committee headed by the former Finance and Department of Economic Affairs (DEA) secretary, Subhash Chandra Garg (who has been in news recently for criticising the government for backtracking on reforms) had drafted the Bill of the law to ban the cryptocurrencies. In the meantime, as per various media reports, since March 2020 SC order quashing the 2018 RBI circular, the local crypto exchanges have reported as much as 20x trading volume growth and a significant increase in the number of signups.
The aggressive marketing campaigns by these ventures however are focusing on promoting Bitcoin ownership for vanity purposes, palpably as a substitute for gold.
NITI Aayog initiative on blockchain recognising its importance:
In January 2020, NITI Aayog (the think tank of the government of India on policy matters), had released part 1 of the discussion paper on “Blockchain: The India Strategy”. The well-researched and well-presented paper unambiguously stated that the government recognizes the opportunity, importance and need for blockchain-based cryptocurrencies.
The paper recognised that “‘Blockchain’ has emerged to become a potentially transformative force in multiple aspects of government and private sector operations. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies.”
It is admitted that “Blockchain is a frontier technology that continues to evolve. In order to ensure that India remains ahead of the learning curve, it is important to understand the opportunities it presents, steps to leverage its full potential and such necessary steps that are required to help develop the requisite ecosystem.” And “Blockchain technology has the potential to revolutionize interactions between governments, businesses and citizens in a manner that was unfathomable just a decade ago.”
The paper candidly admits that “Blockchain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030.”
Bitcoin ticks most boxes:
Given the nascent stage of the evolution of blockchain technology and cryptocurrencies based on it, the cautious approach is understandable. However, the caution must be pragmatic and should not transgress to typical dogmatic paradigm.
In my view, the real debate is whether the world needs an independent reserve currency for cross border transactions; given that the unmindful printing of fiat currency by the respective large central banks in the past two decades has perhaps diminished the credibility of the popular global currencies USD and EUR.
A broad evaluation of Bitcoin (or any other widely accepted cryptocurrency for that matter) highlights that Bitcoin may meet all prerequisites of a good currency – e.g., medium of exchange, store of value and unit of measurement.
As evident from the following evaluation table, the advantages of Bitcoin, as an evolved independent digital currency, outscore gold on some parameters. It also outweighs any fiat currency that is not backed by real assets. Insofar as the criticism of Bitcoin for its volatility and opaqueness is concerned, I note that 100yrs ago, USD was not much-coveted asset outside the USA. Aluminium, Gold, Silver, Slaves, cows, etc., have all reigned as widely accepted currencies in history.
Gold vs Bitcoin:
For many centuries, Gold was the most popular currency – store of value, medium of exchange and unit of measurement. However, with evolution of paper currencies and metric system, the usage of gold as a medium of exchange and unit of measurement declined significantly.
The demand for gold as a store of value is a deeply complex matter. In the past gold had been a preferred asset to store value both during economic (especially hyperinflation) as well as political (including geopolitical) crises.
In 1970s the world faced serious stagflation as the demand generated by post-WWII reconstruction activities faded and the Iranian revolution created a worldwide energy crisis. Gold jumped 10x in real terms during the decade of 1970-1980), to give back most of the gains in the following two decades.
Again in the decade of 2000s, as the dotcom bubble hit the global economy, interest rates crashed leading to sub-prime crisis that culminated in a major global financial crisis. The gold jumped 5x in real terms during this decade (2001-2011).
Presently, the gold prices are only marginally higher than the highs recorded in 2011. Whereas Bitcoin has risen almost 1000 percent since 2011. Like gold in 2001-2011, Bitcoin has risen 5x since the outbreak of the Covid-19 pandemic, whereas gold is higher by about 5 percent in this period.
The question is whether unconsciously markets are replacing Gold with Bitcoin.
Is Bitcoin replacing Gold:
It is a natural instinct of human beings to look up to the skies for guidance when all our efforts fail. Religion has therefore been an inextricable part of human life since the beginning of civilisation. Most ancient cultures, China, Egypt, Mesopotamia, Indus Valley etc. have believed in continuation of life after death. Gold being an indestructible (and therefore sacred) object had always been an important part of their religion, culture, traditions and beliefs. It naturally evolved as a symbol of power and prestige over time. The church & temples, kings & feudal lords hoarded and displayed gold to assert their power and status.
In past one century, especially the past three decades, the factors like popularity and spread of technology in common man's life; rising fascist and communist tendencies due to worsening socio-economic disparities; rise in electronic transactions (personal, social and commercial) thus lower risk (less travel, less physical transactions and deliveries); emergence of new articles of luxury to serve the vanity needs of the affluent; stronger and deeper social security programs; demise of monarchy and feudalism; popularity of spiritualism over rituals; dissipation of church & temples, etc., have all led to sustainable decline in traditional demand and pre-eminence of gold.
In the modern context, technologically challenging things, e.g., Bitcoins, find greater favour with common people as compared to gold.
Conclusion:
To conclude, I would say that the ultra-loose monetary policy prevalent in most developed countries shall have to end at some point in time in the foreseeable future. This suppression of savers and the poor cannot continue into perpetuity. However, ending this tiger ride may not be easy and would require some innovative measures.
One of the plausible scenarios could be that the US Government and Fed decide to correct the fiscal and monetary indulgences of the past couple of decades, by material devaluation of USD and letting USD retire as global reserve currency; settle trade and currency dispute with China agreeing to restore the global trade balance. Global commodities are no longer priced predominantly in USD. The share of neutral currencies (cryptocurrencies) increases substantially in global trade.
There could be many similar or different solutions to end this tiger ride of quantitative easing, negative rates, and suppression of the poor (people, economies and regions).
Outrightly rejecting the need and importance of an independent currency at this stage could prove to be fatal. The question, whether Bitcoin would emerge as the independent global currency would best be answered by time. I would though not reject the probability.
Nonetheless, Bitcoin (cryptocurrencies in general) has assumed the status of a popular alternate asset and there is no reason to despise it, just because its price in USD terms is highly volatile presently.
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