Vijay Kumar Gaba

 “The afternoon knows what the morning never suspected.”―Robert Frost

In 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. But as of now, the debate over its relevance, sustainability, desirability, etc., is intense and wide.

In my view, 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 at some point in time.

Majority of experts still skeptical

A large number of prominent personalities in the field of finance, technology and economics, like Warren Buffet, Jamie Dimon, Peter Schiff, Paul Krugman, Bill Gates, et.al., have publically criticized the popularity of Bitcoins. In their wisdom they have chosen the terms like “fraud”, “rat poison”, “scam” etc. to describe Bitcoin. In India, the legendary investor Rakesh Jhunjhunwala publically vowed never to own Bitcoin.

The following statements of the legendry investor Warren Buffet represent the sentiments of the people who are skeptical about the sustainability of cryptocurrencies as a viable currency or asset class”

"It's not a currency. It does not meet the test of a currency. I wouldn't be surprised if it's not around in 10 or 20 years. It is not a durable means of exchange, it's not a store of value. It's been a very speculative kind of Buck Rogers-type thing and people buy and sell them because they hope they go up or down just like they did with tulip bulbs a long time ago." (2014)

"In terms of cryptocurrencies generally, I can say almost with certainty that they will come to a bad ending. If I could buy a five-year put on every one of the cryptocurrencies, I'd be glad to do it, but I would never short a dime's worth." (2018)

It is “probably rat poison squared”. (2018)

“I think the whole damn development is disgusting and contrary to the interests of civilization. Of course, I hate the bitcoin success… I don’t welcome a currency that is so useful to kidnappers and extortionists”. (2020)

 "Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero." (2020)

Later, however, JP Morgan, disregarding the earlier comments of CEO Jamie Dimon, “admitted its mistake” rejecting Bitcoin as a scam and has shown inclination to accept the cryptocurrency as an attractive asset.

Eric Peters, CIO of Hedge Fund One River Asset Management, proclaimed (about Bitcoin) that "There Is A Vague Sense That Something Powerful, Apolitical, Transnational, Is Emerging".

In the meantime, Rakesh Jhunjhunwala, the legendary Indian investors who is often referred as Warren Buffet of India, was heard saying in a TV interview, "I won't buy it for even $5. Only the sovereign has the right to create currency in the world. Tomorrow people will produce 5 lakh bitcoins, then which currency will go? Something which fluctuates 5-10% a day, can it be considered as currency?"

Regardless of the extremely negative expert commentary, Bitcoin has not been termed illegal in any of the major economies in the world; even though some countries like China have imposed severe restrictions on transacting in Bitcoins. El Salvador has become first country in the world to accept Bitcoin as the legal tender.

Despite being most volatile, Bitcoin has remained one of the best performing “assets” in past couple of years.

The historical context

The work on developing as crypto currency started in early 1980s. The idea was to create a medium of exchange that is independent of any central authority, is based on trust and is accepted by distributed consensus. The process was formally commercialized in 2009 with release of Bitcoin, the first decentralized cryptocurrency. May be uncertainty over future of fiat currencies post global financial crisis (which led to printing of unprecedented amount of new money) prompted adoption of an independent currency as medium of exchange. Since then, the cryptocurrencies based on block chain technology have been gaining popularity. Presently, besides Bitcoin, over 6000 variants of crypto currencies are in vogue globally. Many central bankers have also expressed in using digital technologies to supplement the paper currency.

The present value of all cryptocurrencies in circulation is over US$1.6trn; out of which bitcoin alone accounts for about US$750bn. This compares with US$5.8trn of monetary base (M0) of USA). The average daily trading value of bitcoins alone is over US$23bn. 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 Amzon have expressed the intent to accept Bitcoin as valid payment for transactions. This has further intensified the debate and softened some of the critics.

The Indian context

In 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.

RBI vs Supreme Court

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 use of crypto currencies 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 a legislation banning the use of crypto currencies in India. Reportedly, the inter-ministerial committee headed by the former Finance and Department of Economic Affairs (DEA) secretary, Shri Subhash Chandra Garg (who has been in news recently for criticizing 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 recognizing 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 crypto currencies.

The paper recognized 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.”

Obviously, the government of India recognizes the potential, opportunity, need and importance of cryptocurrencies. However, it wants to tread with extreme caution. The NITI Aayog’s discussion paper notes that —

“Blockchain has been positioned as a revolutionary new technology, the much needed ‘silver bullet’ that can address all business and governance processes. While the promise and potential of blockchain is undoubtedly transformative, what hasn’t helped this technology, that is still in nascence of its evolution, has been the massive hype and the irrational exuberance promulgated by a bevy of ‘Blockchain Evangelists’.”

“Any transformative technology, in its initial stages of development, as it moves out of research / development phase to first few applications to large scale deployment, faces several challenges. Part of the problem is that such technologies are initially intended to solve a specific set of problems. Bitcoin, which has led to the popularity of decentralized trust systems and has powered the blockchain revolution, was intended to develop a peer-to-peer electronic cash system which could solve for double spending problem without being dependent on trusted intermediaries viz. banks. As Bitcoin started gaining prominence, the potential of underlying blockchain technology started getting traction. However, some of the early design features that made Bitcoin popular, primarily limited supply and pseudonymity, have become potential challenges in wide scale implementation of blockchain.”

(The NITI Aayog discussion paper “Blockchain: The India Strategy” could be read here.)

Bitcoin ticks most boxes

Given the nascent stage of evolution of block chain technology and crypto currencies 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 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.

 

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.

In past couple of centuries, Gold has served as reserve currency whenever the paper currencies have lost faith of people due to a variety of reason, particularly high inflation and fiscal profligacy. It has also been used as such during transition periods in global strategic power equilibrium. However since end of Breton Wood agreement in 1971, gold has not been used as reserve currency. Post fall of Berlin Wall in 1989 the strategic supremacy of USA, and consequently USD, has remained mostly unchallenged.

The demand of gold as store of value is a deeply complex matter. In past gold had been a preferred asset to store value both during economic (especially hyperinflation) as well as political (including geo-political) crises.

In 1970s the world faced serious stagflation as the demand generated by post WWII reconstruction activities faded and 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% since 2011. Like gold in 2001-2011, Bitcoin has risen 5x since outbreak of Covid19 pandemic, whereas gold is higher by about 5% in this period. The question is whether unconsciously markets are replacing Gold with Bitcoin.

Is Bitcoin replacing Gold

When economics fails in providing solution to a problem of livelihood and sustainability, philosophy always provides the answer.It is a natural instinct of human being to look up to the skies for guidance when all our efforts fail. (Some even do so without making any effort at all!) Religion has therefore been an inextricable part of human life since beginning of the civilization.

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 symbol of power and prestige over time. The church & temples, kings & feudal lords hoarded and displayed gold to asset their power and status.

In past one century, especially 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 & 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, certainly find greater favour with investors 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 foreseeable future. This suppression of savers and poor cannot continue into perpetuity. However, ending this tiger ride may not be easy and would require some innovative measures.

For example, the following is one of the scenarios that is potentially possible—

·         US Government and Fed decide to correct the fiscal and monetary indulgences of 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.

·         Consumption pattern change materially. The consumption of fossil fuels, steel, chemicals etc. declines structurally.

·         Digital transformation leads to material rise in productivity, further adding to deflationary pressures created by aging demography of the developed world; thus alleviating the fears of hyperinflation and need to resort to gold as reserve currency.

This may sound fanciful but is not totally unlikely.

There could be many similar or different solutions to end this tiger ride of quantitative easing, negative rates, and suppression of poor (people, economies and regions). Out rightly, rejecting the need and importance an independent currency at this stage could prove to be fatal.

The question, whether Bitcoin would be 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.