In the last 10 years, we have seen several kinds of bitcoins being launched. Not surprisingly, it has divided the monetary economics community.
On October 31, 2008, Satoshi Nakamoto published a paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ that started the cryptocurrency revolution. A decade later, bitcoin and Nakomoto’s paper deserve attention for at least two reasons.
One, the idea of bitcoin followed a more communitarian approach to human inventions (or ideas). Unlike most other inventions which are accredited to one or two humans, we do not know who Nakamoto is – the name is a pseudonym. The spirit of bitcoin is not just one person but several others who have contributed towards the idea. Perhaps, this is the way forward on how we should accredit inventions/ideas so that cutting edge innovation happens.
Two, bitcoin made the world think about taking a free-spirited approach to money. A world in which the authority to govern money does not rest with one central authority but rests on each of us. While bitcoin is about two aspects — technology and monetary economics — this article focuses on the latter.
The history of monetary economics is primarily divided into two halves. The first is the pre-gold standard era where currencies were backed by gold. Then, money supply could be expanded only if gold reserves were added or if there were new gold discoveries. This was abandoned in 1930s during the Great Depression as economies needed a monetary stimulus and the gold standard acted as a constraint.
Post the Bretton Woods conference in 1945, economies moved towards fiat currency where there was no constraint and one could expand money supply by merely buying bonds issued by domestic or foreign governments. The gold standard was instrumental in keeping inflation low but was ineffective during financial crises. Fiat currency was just the opposite. It is prone to bouts of inflation but better at resolving financial crises. However, financial crises were resolved by monetary stimulus, it led to moral hazard and as a result such crises have become more frequent over the years.
This is where bitcoin comes in, perhaps frustrated by the frequent crises and interventions by government authorities in monetary economy. The bitcoin idea was to take away money powers away from a centralised authority to a decentralised network (called blockchain). Bitcoin would be virtual currency managed by people on the blockchain network. The concept took a cue from the gold standard era and capped coin mining at a maximum of 21 million to constrain wilful creation of money.
In the last 10 years, we have seen several kinds of bitcoins being launched. Not surprisingly, it has divided the monetary economics community. The likes of Agustín Carstens of Bank for International Settlements (BIS) call it fake money. Nouriel Roubini has dubbed it shitcoin. They say crytocurrencies do not serve any of the three purposes of money: unit of account, medium of exchange and store of value.
On the other side, we have Mojmír Hampl, vice-governor of the Czech Republic’s central bank who is more favorable to the idea because of the intellectual stimulus it has provided to monetary economics. “I will stress…the positive philosophical influence of bitcoin on the conservative world of central banking. True, it is far from clear that anytime soon a full-fledged digital currency (be it blockchain-based or not) will be created by a central bank…but the last three years have seen an explosion of research on this idea in many central banks... When so many professors at the most esteemed universities of the developed world are not thinking about potential reforms of the current monetary order, we have received a stimulus from the libertarian IT guys instead,” he said in a February 27, 2018 speech.
While the merits of cryptocurrencies will continue to be debated, one thing is clear: the idea has clearly shaken the world of central banking. Cryptocurrencies started as being issued by private players but now central banks are thinking about whether to issue their own cryptocurrencies. Sweden could be the first country to issue a central bank digital currency as usage of physical cash has slipped dramatically. Others central banks such as Australia, Denmark Canada, European, Israel have ruled out issuing digital currency, for now.
Bitcoin has also led to some exciting research in the space as scholars have explored introduction of a central bank digital currency from both historical and futuristic lens. In a very insightful paper, Charles Kahn of St Louis Fed has argued that in the future central banks will have to provide privacy protection as usage of cash declines and electronic cash rises in economies. As central banks do not have comparative advantage in privacy provision, it will lead to emergence of variety of platforms to serve these needs.
In India, the authorities are pro-digital on most activities but not in currency. The Union Budget for 2018-19 declared that cryptocurrencies are not legal tender. RBI in its April-2018 Monetary Policy asked regulated entities not to deal in digital currencies. It had also set up a study group for central bank digital currency whose report, submitted nearly five months ago, is not public yet.
All in all, it has been quite an eventful journey for bitcoin. Though it is just 10 years old, by looking at the events it looks several decades old. Having said that, its future looks bleak as most governments have taken a negative view on cryptocurrencies . It is unlikely to celebrate its 20th birthday and most likely die in its teens.
(Amol Agrawal is faculty at Ahmedabad University. Views are personal)For more opinion pieces, click here.