The Indian government seems convinced that cryptocurrency is a dangerous proposition. Cryptocurrency allows relatively invisible transactions, with serious implications for crime, terrorism, money laundering, tax evasion, and more. Another worry is that the crypto mania is built on purely speculative investments. The possible bursting of such bubbles will seriously injure people. Additionally, crypto threatens the macroeconomic role of the state. On the other hand, the government wants to avoid any image that is not very favorable to technology. Caught in this dilemma, he proposes that cryptocurrencies be banned but that crypto assets be legalized and heavily regulated. In this way, the problem of invisible value transactions is solved, the interests of investors are protected, and the demand from the technology industry is met halfway.
This ‘solution’, however, is based on a flawed premise, making it impractical in the medium and long term. The distinction between an asset and a currency may not be so legal as it relates to the inherent characteristic of what is considered an asset or a currency. Land, gold and stocks do not lend themselves to becoming common means of exchange because these assets are not easily divisible and transferable. On the flip side, crypto is more divisible and portable than even physical currency. Once legalized, the slide from a crypto asset to a medium of exchange would be unstoppable.
The same argument can also be made in another way. Crypto assets are either “purely speculative assets” or they have an underlying value, in which case such “value” can only consist of their future as a medium of exchange. Either way, they’re very problematic. A purely speculative asset has zero underlying value (unlike assets like land and gold). Regulators pay attention to the purely speculative elements of any asset market, deeming them dangerous. The financial crash of 2008 happened in large part because certain “assets” lost all connection to any kind of underlying asset. When this happens, it is just a bubble waiting to burst, seriously injuring people. If the government legalizes a purely speculative asset, it gives a green signal to investors to invest in it and blow the bubble. When the bubble bursts, there can be a heavy political price to pay for dispensing with power.
Or the crypto has an “underlying value”. This value can only be in terms of expectation that crypto assets will eventually gain wide acceptance as a currency. Such an expectation is indeed based on the fact that crypto is preferred as a currency by many powerful groups because it is very private and less subject to regulatory oversight. It essentially removes the state from its existing status at the heart of monetary systems. The question then is: by legalizing crypto assets, is the government trying to promote this “underlying value” of crypto as a future currency with these “unique characteristics”? Obviously not, since he wants to ban crypto as a medium of exchange precisely because of these characteristics. Thus, by legally recognizing crypto assets, the government is promoting a dangerous “purely speculative asset” which, when the bubble bursts, will cause general harm; or it itself promotes the “underlying value” of crypto assets in terms of their eventual unstoppable conversion into a currency.
Not a technical decision
The argument that crypto assets need to be legalized to promote blockchain technologies and be pro-future is weak, if not bogus. Legalizing cryto assets primarily to support blockchain technology is like signing off on the use of space as a new frontier of war simply because it would favor the Indian space industry. Blockchain has thousands of applications other than crypto. Various innovations and services, including the use of blockchains and those in the field of decentralized finance, are indeed possible on top of a monopoly platform of a central bank digital currency, as an alternative to crypto private currencies.
The real decision the government faces is not to support new technology. Some groups and individuals want the state to be largely outside monetary systems because it serves their interests. Since society is now at a crossroads in deciding whether the future of currency will be public or private, what the government needs to decide is which side it would lean its weight on.
The argument that public and private currencies coexist, leaving ‘the people’s choice’, is also misleading. The powerful resent the distributive potential contained in public monetary systems. They will all immediately launch and push private currencies. Their combined economic weight itself would ensure the overwhelming dominance of private currencies over public money.
Read also | Private cryptocurrencies pose immediate risks to client protection, prone to fraud: RBI
It is true that India’s decision alone would not determine this issue. But with China having already banned crypto, what India decides at this point would matter a lot.
Parminder Jeet Singh works with the NGO IT for Change based in Bangalore