On June 9, El Salvador became the first country in the world to accept the cryptocurrency Bitcoin as legal tender. While in itself this will not create economic ripples that will shake global markets, it is a sign that governments, political leaders, economists and investors are increasingly recognising the potential of a blockchain-based decentralised financial system.
Cryptocurrencies in general, and Bitcoin in particular, have come a long way since their inception in 2009. From being a buzzword among tech junkies to gaining mainstream coverage, it has evolved faster than any financial ecosystem ever has. This has had a tremendous positive effect on its prices as well as use cases. But, how does one classify them in the current global infrastructure? What would make cryptocurrencies, or crypto assets as they are increasingly being identified, a definitive lifestyle product in the future?
Challenge Monetary Order
The fundamentals and, hence, the reason behind blockchain-enabled cryptocurrency has been envisaged as an alternative to the traditional monetary systems and associated currencies. However, there is an inherent resistance among centralised State bodies to this change. Cryptocurrencies will have to undergo a natural evolution to become what they promise — a decentralised, open and public financial system that works with 100 percent accuracy and zero percent downtime.
This evolution will take place in two parts. One, cryptocurrencies will have to find better solutions to issues such as increasing number of transactions per minute and reducing transaction costs, among other similar concerns. Two, centralised State bodies become open to the idea of being a part of a decentralised ecosystem with some necessary regulations and consumer protection.
While there has been resistance from traditional monetary systems, as an asset class the crypto market has been making significant strides in the last one year. The market capitalisation of the industry has grown six-fold during the same time, with Bitcoin and Ethereum leading this growth. The two cryptocurrencies have outperformed all traditional assets including gold and silver in the last five years.
There is a risk factor with the high volatility associated with the market, but longer-term fundamentals are strong. Increasing institutional adoption globally is expected to drive more investors to park some share of their investments in cryptocurrencies. The ease of conversion to fiat and direct exposure to a global investor base in this 24x7 market is appealing to new age investors. This open platform access is definitely an attractive option that could soon see the number of investors in cryptocurrencies sore higher than those who’ve invested in stock markets.
Bumpy Ride In India
Developed nations like the United States, the United Kingdom, Japan and Australia have regulated the cryptocurrency market with enough safeguards for its people. In India, we have witnessed a mini revolution with more than 10 million investors having an exposure to cryptocurrencies via registered exchanges. The journey hasn’t been smooth. The ecosystem hasn’t always enjoyed support from banks. The lack of regulations and consumer protection has led to a state of uncertainty even among the enthusiasts. Even though the exchanges are self-complaint with KYC and anti-money laundering norms, it is ideal if a central body gives direction in the best interests of the consumer.
For the common investor, cryptocurrencies serve as a great alternative investment given the underperformance of traditional assets in recent past. Historically, the US-based stocks and derivative products haven’t been made easily available to the Indian investors. Cryptocurrencies offer a level global playing field to invest and grow wealth, irrespective of country of origin.
Innovation & Trade
The lack of clarity and regulations in India is not only hindering the adoption of the best-performing asset class in India, it is also inhibiting innovation and leadership in the field of blockchain technology by Indians. For long, we have been guilty of importing ideas and business models from the West. They may not always suit the Indian populace though we adapt well.
We may miss out on a local DeFi (decentralized finance) solutions that will complement traditional finance, force it to do better, and allow for financial inclusion of India’s 191 million unbanked adults.
India’s dependence on the US Dollar can eventually be softened if global trade eventually moves to a decentralized (crypto)currency. The country and its export-oriented companies can have better predictability with respect to trade and payments.
Future innovations in the cryptocurrency/blockchain space can come from India, and with the right set of regulations it can also be a new avenue for job-creation and economic growth. Multiple blockchain projects with global implications are currently being developed in-house. For example, India’s Polygon (Matic Network) is building a protocol and framework to connect blockchain-based networks and is considered as a strong contender for overcoming network issues faced by Ethereum.Cryptocurrencies and blockchain has the potential to fuel India’s goal of becoming aatmanirbhar.