“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.
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 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.
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 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.
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.)
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.
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 USA. Aluminium, Gold, Silver, Slaves, cows, etc.,
have all reigned as widely accepted currencies in history.
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.
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.
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.
