Vijay Kumar Gaba: cryptocurrency

Showing posts with label cryptocurrency. Show all posts

Wednesday, November 4, 2020

Blockchain: The india Strategy

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 crypto currency. 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 crypto currencies based on block chain technology have been gaining popularity. Presently, besides Bitcoin, over 6000 variants of crypto currencies are in vogue. The present value of all bitcoin in circulation is over US$250bn and the average daily trading value of bitcoins id 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.

In India, 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 crypto currency exchanges. The SC accepted the argument of the appellant that in the absence of any specific law banning crypto currencies, dealing in these is a “legitimate” activity, hence RBI’s circular banning these is untenable.

In August 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 crypto currencies. 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 10x trading volume growth and a significant increase in the number of signups.

The question therefore arises are we blind to the opportunity and numb enough to not sense the winds of change blowing across our faces! The answer is a categorical “No”.

In January 2020 itself, 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. For example, note the following excerpts from the discussion paper:

“‘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.”

“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.”

“Blockchain technology has the potential to revolutionize interactions between governments, businesses and citizens in a manner that was unfathomable just a decade ago.”

“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 recognizes the potential, opportunity, need and importance of crypto currencies. Apparently, however, it wants to tread with extreme caution. For example, the following excerpts from the discussion paper highlight the cautious stance of the government.

“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’.”

“Despite the fact that the technology is still in a nascent stage of its development and adoption as it continues to evolve, it is important for stakeholders such as policy makers, regulators, industry and citizens to understand the functional definition of the entire suite of blockchain or distributed ledger technologies along with legal and regulatory issues and other implementation prerequisites. Equally important is the fact that this technology may not be universally more efficient and thus specific use cases need to be identified where it adds value and those where it does not.”

“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.”

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 bureaucratic paradigm. We may avoid rushing to capture a still uncertain opportunity; but we should not arrive too late either.

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

Friday, May 8, 2020

Gold is not the end game

Continuing from Wednesday (see here)

Not long back in the global history, aluminum was thought to be more precious than gold. Most powerful kings were served food in aluminum utensils while the lesser knights had to do with gold flatware. The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, it was disposable – as in aluminum foil or cola cans. In no time it transformed from most expensive thing in the world to garbage. Similarly, in African continent for long common salt remained a more prominent store of value and medium of exchange than gold. For past two centuries though gold has been globally preferred as a store of value over another commodity, primarily for its limited supply and physical traits that make it indestructible. However, in past four decades, the demand of gold for storage of value, vanity, social & financial security, and religiously important object shall has diminished. In my view, there is no reason to believe that this trend will reverse in foreseeable future.

Gold phasing out of cultures

I strongly believe that when economics fails in providing solution to the problem of livelihood and sustainability, philosophy 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 and has grown with the growth and expansion of the global trade and commerce.

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.

However, 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; spread of spiritualism; dissipation of church & temples, etc., have resulted in diminution of traditional demand and pre-eminence of gold.

In the modern context, technologically challenging things, e.g., Crypto Currencies, have more potential to attract peoples’ fancy as compared to gold, I feel.

The spread of radical Islamic forces is the only factor that somewhat weakens my conviction in decline of gold. But the way, the global war on radicals is progressing I am sure that in next decade or so we shall see this concern easing materially and then gold may decline rather precipitously in value.

Gold relevant today...

However, 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 as well as political (including geo-political) crises.

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/or 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. In post Berlin Wall (1989) era the strategic supremacy of USA, and consequently USD, has remained mostly unchallenged.

In past five decades post Breton Wood, there have been two instances of global financial crisis. 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).

Gold is still down about 10% from its 2011 high. But given the negative rates in large economies like EU & Japan and near zero in US; persistent deflationary pressures despite unprecedented and obscene amount of money printed by Central Bankers; poor economic growth outlook; and war like situation in global currency markets – the gold is reemerging as a favorite asset to store value.

...but not the endgame

The socio-economic disparities are rising in the developed world at a pace unprecedented in the economic history. The situation in my view is likely to materially worsen in coming years. Inarguably, the so-called unconventional monetary policies followed by the central bankers own the primary responsibility for this phenomenon. With an overwhelming US$15-17trillion worth of bonds, many of which are 10-30year maturity, are yielding negative return at this point in time. Many more promise to return no income to the holders. Poor savers and pensioners who mainly rely on their savings for their livelihood are stressed like never before.

Large economies like Japan and EU have mostly failed in their vigorous efforts raising inflationary expectations in their respective economies. There is therefore little incentive to invest in these economies. The employment opportunities are therefore are not likely to rise in any sustainable manner. We have already seen the unsustainability of one decade of job gains in US. All jobs created in 2009-2019 have evaporated in just one month of lockdown.

There is no dearth of experts who have written about the endgame of the current monetary policy practices. Most of them suffer from historical hindsight and extrapolation of current trends. Being no expert of global economics and monetary system, I can afford to conveniently break from the empirical experience and think freely. I believe the endgame will mark a watershed in global economic history - among other things, many systems will become redundant; many currencies will cease to exist; and monstrous debts will be written off the books. It is difficult to fathom that this task can be achieved under the current democratic system. Communism will therefore make a grand entry sometime in next one decade, may be in a new format.

A large number of analysts have forecasted that gold will be a preferred currency of the world amidst all this chaos. I beg to disagree. In my view, presently the interest in gold appears to be more intuitive rather than analytical. It is being presumed that the end game of the non-conventional monetary policies currently in practice will be prolonged stagflation, complete disintegration (or euphemistically restructuring) of the present monetary systems where USD may longer be the sole reserve currency and near complete erosion of savers’ financial wealth.

I find most of the current analysis suffering from some degree of cognitive dissonance. It is trying to dress a trading opportunity into a secular trend. I do not see any reason why gold should ever touch its 1980 high in real terms and why not go below its 1971 lows (in real terms).