CRYPTO-CURRENCIES HARBRINGER
OF DIGITAL CURRENCY AND BLOCKCHAIN REVOLUTION
SUBHASH GARG
Economy, Finance and Fiscal Policy Strategist
and Former Finance Secretary, Government of India
BITCOIN TO OFFICIAL DIGITAL CURRENCY
Metallic and paper currencies are on their way out
‘Anything of value’ acceptable to the buyers and sellers of goods and services for settling the value transferred in the transaction can acquire the status of currency. While the value of a good or service bought and sold may differ in the perception of the buyer and seller, the value of currency which is exchanged to pay for the transfer of value in good or service is same for both. For anything to work as currency for transfer of value (the medium of exchange function of the currency), its own value should remain same or constant to measure the value of every other good or service (the unit of account function of the currency).
There have been three distinct types of currency mankind has used in the last 12,000 years when trade in goods and services started. The first period (most of the pre-Christ agriculture revolution period), live things like cattle or collected things of value (cowrie shells etc.) worked as currency. In the second period (a few hundred years BC and much of the period until 18th century), precious metals like gold and silver served as the currency for higher value trades and other low value metallic coins served for settling transactions of lower traded values. Thereafter gradually, the widespread use of metallic currencies has been replaced with paper currencies, backed by precious metals in reserves or by the fiat of the Government. In present times, in all the countries of the world, the paper currency issued by central banks and expressly or implicitly guaranteed by the sovereigns works as currency to settle the transactions.
Money is a broader concept. Money is currency plus the deposits in banks. Both the currency (which is the bank notes and coins also usually referred as cash) and bank deposits (all deposits are usable for payments though current and saving accounts have more moneyness) can be used to make payments i.e. settling the trade and other transactions. With the banking system becoming digitalised, the deposits in bank accounts have become quite nimble, in fact increasingly instantaneous at least in making domestic payments. With the bank accounts becoming digital and integrated into single databases, digital payments have massively increased everywhere in the world. The use of other bank accounts based instruments like cheques and bank drafts is fast diminishing. In India, as per RBI annual report 2020-21, more than 98.5% of non-cash transactions by value took place by way of digital payments enabled through multiple channels like UPI, IMPS, RTGS, NEFT etc. The use of physical currency/cash is getting increasingly restricted to small and local trade and transfers. Such transactions remain high in numbers, but in terms of value, these transactions are small. In some countries like China even small transactions are also getting increasingly effected through digital modes. Paper and metallic currencies are on their way out.
Bitcoin unleashes prototype digital currency
Bitcoin was created as a currency. It used coin in its name on the lines of metallic currencies. It is a coin created out of the fundamental element of digital/data world- the bits like gold coin created out of the one of the most precious good- gold element (au). The creator of the bitcoin currency announced to the world that it is a better mode of currency as it can be held by the all the owners/holders of the bitcoins amongst themselves without the necessity of a central bank. The elimination of the central bank from creation and circulation of currency was intended to ensure that the central banks cannot erode the value of currency by over-supplying it, which has been one of biggest root cause responsible for inflation in the world. The creator of bitcoins fixed the amount of bitcoins which could ever be minted/mined at 21 million to eliminate the possibility of over-supply of the currency. It was further promised that bitcoins would facilitate making of payments and settling of transactions, especially those transactions which are carried out involving the parties from different countries instantaneously, effectively and without any cost and friction.
Bitcoins use a digital technology now commonly known as blockchain or distributed ledger technology to create, hold and transact bitcoin currency. Bitcoins also use complex cryptography technology extensively to create this platform and to keep it secure from hacking and other sabotage.
Bitcoins are meant to serve the function of currency and have been more commonly described as cryptocurrencies underlying the immense role cryptography technology plays in its functioning. Bitcoins are also described as virtual currency highlighting its true nature that it exists in the virtual world and not the real world to contrast its nature from metallic and paper currencies.
Following bitcoin, hundreds of crypto-currencies have mushroomed in the world. Very few of these are pure currencies like bitcoin.
Bitcoin is a prototype and would metamorphose into official digital currency.
Crypto-currencies are imperfect currencies
The most important feature of a money or a currency (metallic coin, paper currency or digital currency) is that its’ own value should be stable and be so perceived by everyone using it to make payments. Inflation is the obverse of currency’s stable value. If there is no inflation or there is only a stable and low reduction in the real value of money vis-à-vis its nominal value, the currency is stable. Currencies/money are also assets and its intrinsic or nominal value is its value as asset.
Sovereigns and central banks maintain the stable value of currency/money by controlling its supply in line with the demand of economy, its velocity of use in the economy and the volume and value of transactions to be effected. Most central banks have inflation control mandate and have succeeded in most parts of the world to tame the inflation. The policy objective in many countries currently is to operate monitory policy in such a manner that there is some inflation- around 2%- in the economy.
The cryptocurrencies issued under privately/commonly owned crypto platforms, including bitcoin, have no relation with the needs of economy. It is no wonder that their values fluctuate violently. The dollar price of bitcoin have fluctuated massively as well. Even during the current calendar year, the bitcoin prices have fluctuated between $30,000 to $70,000 per bitcoin. For other cryptocurrencies less said the better.
Such imperfect crypto-currency cannot serve as a currency.
Digital currency is the future of currency
Digitalisation of the customer account data and operations of banks and non-banks, emergence of new financial technology (fintech) operators in the banking and financial services and massive enlargement of reach of smart phones and other digital media to the people and businesses have made the payments using the money in bank accounts and wallets as easy as using cash. This is the march of digital payments all over the world.
There is, however, a difference between digital payments using balances in bank accounts or wallets and digital payments using digital currency. Digital payments necessarily involve making transaction entry in both the accounts and/or wallets affected. There should therefore be a technological and regulatory solution which allows one bank/wallet account to be debited and another credited. If the payment is made using digital currency, there is no involvement of the accounts in the banks or wallets. The payment made would directly move from a digital currency wallet to another digital currency wallet.
The National Payments Council of India (NPCI) in India has created a technological platform which has literally brought all the bank accounts in all the banks operating in India in one single digital platform. The applications like Unified Payment Interface (UPI) allows instantaneous transfer of funds from one bank account to another. UPI was used to carry out 22.3 billion transactions in 2020-21 for Rs. 41 trillion. There are some other retail payment platforms like NEFT, IMPS, AEPS etc. Digital transactions effected through these medium was about 70% of the UPI transactions though in value terms it was about 8 times of the value of UPI transactions. For large value transactions, there is RTGS platform, which RBI operates, which was used to make digital payments/settlements of Rs. 1055 trillion.
Digital payments are fast solving the domestic payment problem. The bitcoin crypto-currency model for domestic payments seem to have no distinct advantage over the digital payments technologies currently in use and development. This explains why cryptocurrencies like bitcoin are coveted more as assets than as currencies.
Some countries are experimenting with crypto-currencies (using blockchain technology and cryptography) for use as currencies. The cryptocurrencies under development in these experimentations have been broadly described as Central Bank Digital Currencies or CBDT. The CBDTs are of broadly two major streams- retail CBDT and wholesale CBDT. Retail CBDTs are expected to serve retail or small value transactions whereas the wholesale CBDTs are meant to be for large value payment transactions.
The computing power and energy required for enabling trillions of small value retail transactions, sheer lack of ease in making these transactions by millions of people and no real value addition or competitive advantage over simple and easy applications like UPI make retail CBDT a complete non-starter. For wholesale transactions, the crypto-currencies based CBDT platforms may have some efficiency advantage but if these wholesale CBDT platforms are to be controlled and supervised by the central banks, there does not seem to be any great advantage over the platforms like RTGS.
Digital wallets function without involvement of bank accounts except when money is transferred from or to the bank account. The transactions within the wallets of same payment system operator and in many cases across the wallets of other payment system operators do not go through the bank accounts. In this, these transactions are closer to digital currency transactions. If the central bank were to create a single overarching digital wallet system using central bank currency (including if necessary by dematerialising bank notes and coins), the country concerned can have digital currency for making payments.
That seems to be the destination we are heading towards. Digital currency is inevitable in the fast developing world of digital economy.
Non-official cryptocurrencies will die out as currencies
The official digital payment systems, enabled by fintech solutions, work well for the domestic payments but not for international payments. This is because International payments involve two major problems. First, absence of digital platforms for bringing the bank accounts in different countries under one digital network like what NCPI has done for banks in India. Present international payment system, particularly for low value transfers, works very inefficiently and slowly. It is also quite costly. Second, there are no objective methods of determining inter-se value of the currencies involved in the payment at the two ends.
The cryptocurrency system like bitcoin solve the first problem. Traditional methods involve multiple intermediaries (sending and receiving banks, intermediating international banks, messaging system like swift etc. across two different jurisdictions). The Cryptocurrencies, because of its digital nature and shared ledger architecture, create an integrated and simpler payment transfer system. As multiple intermediaries are eliminated in this system, the cost of transfer also comes down drastically.
The Cryptocurrencies, however, don’t solve the value problem satisfactorily. In fact, on account of their own volatile nature, the cryptocurrencies complicate it further making payment transactions quite uncertain in terms of value sought to be transferred and value actually received. That is the reason, very few people and real economy organisations use cryptocurrencies as currencies for making global payments. Some organisations have sometimes expressed willingness to receive payments in bitcoins. That also seems to be more motivated by the consideration that bitcoins, being limited in supply, are generally expected to appreciate in value. However, precisely for the same reason, buyers become unwilling to offer payments in bitcoins.
Some innovators have tried to find a solution for value volatility by offering stable-coins. These stable coins carry guarantee of fixed rate conversion with a sovereign currency. Stable coin Tether, for example, is pegged to US$ at 1:1 ratio. There are always controversies around the stable coins and suspicions about the reserves they keep for backing up the currency. Until 1971, US$ dollar was the stable coin for the world with US guaranteeing conversion of 35 US$ for one ounce of gold. The US found it impossible to keep this promise and the system which commenced in 1945 was dumped in 1971. How can a private cryptocurrency like Tether could honour the pledge of converting it in US$ in the promised ratio of 1:1? It will collapse sooner or later. Other 40 odd stable coins would also collapse.
The private cryptocurrencies are simply not viable and competitive in domestic payment market. The private cryptocurrencies, despite offering excellent technological solution for making easy, instantaneous and less costly solution international payments, suffer from birth defects on valuation front.
The private cryptocurrencies have no future as digital currencies.
Crypto-currencies as assets in India
Most visible assets on the blockchain platforms are still the crypto-currencies. For principally currency platforms like bitcoin, the bitcoins issued and in circulation are crypto-currency assets. Most other blockchain technology using platforms also create some type of cryptocurrency for effecting business and other transactions on those platforms. Ethereum has created Ether as cryptocurrency for this very purpose. The world treats Ether as a valuable cryptocurrency asset.
There are three types of crypto currencies/assets- a. which are designed/evolved primarily as currencies like bitcoin, b. which serve as valuable technology platform to provide services like Ethereum where you can use smart contracts to run financial services like decentralised finance or land registry system or whatever and third, which store digital assets or provide services.
The cryptocurrencies have acquired the character of asset- crypto-asset, though in its nominal avatar, these are posited as cryptocurrencies. There is enormous difference between the perceived reality and the actual reality of the nature of cryptocurrencies.
More than 15 million people- mostly millennials, have invested in crypto-currencies. They have invested in many cryptocurrencies though the largest investments are in bitcoins. All of them have invested in cryptocurrencies with the expectation that their capital values would rise in future. Almost none in India has bought crypto-currencies or in their derivatives for using as currencies. As buying even one bitcoin is quite a costly ($50000 price amounts to 375000 Indian rupees, more than 2.5 times annual average income), most people invest smaller amounts (Rs. 1000 to Rs. 10,000) to buy fractions in one bitcoin.
RBI is the regulator of currency and not of assets – most assets, especially the assets which can be traded in the form of securities like equity, bonds, derivatives etc, are in the domain of SEBI. Indian regulators and policy makers- RBI and the Government- were concerned both for use of cryptocurrencies as currencies and cryptocurrencies as assets.
RBI and Government issued a number of press releases to caution the people about investing in cryptocurrencies (with underlying assumption being cryptocurrencies as store of value or assets) underlying the lack of intrinsic value in cryptocurrencies, their volatile prices and calling cryptocurrencies as ponzi kind of schemes. RBI also issued regulatory instructions to banks not to allow the use of payment system for any transaction or business connected with cryptocurrencies.
These regulatory measures were taken under the Payment and Settlement Act, which allows RBI to regulate currency and money. This measure forced exchanges which provided purchase, sale and storage services relating to cryptocurrencies out of business. Eventually, this regulation was held ultra vires of the fundamental right to do business as long as cryptocurrencies related businesses are not unlawful in India.
The moment cryptos are understood and recognized only as assets and trade as asset and not as a currency, RBI might probably not have any major issue. There would however still be peripheral issues which RBI remains concerned with- e.g. whether purchase and sale of cryptocurrencies, which are almost invariably created out of India; an Indian cryptocurrency is still to emerge; involves a capital account transaction with the rest of the world. RBI has regulatory jurisdiction over both foreign exchange/currencies and current/capital account transactions with the non-residents.
There are some public policy concerns relating to cryptocurrencies as assets
Financial assets are quite fragile and fraud prone. Volatility in and collapse of the value of financial assets have created large real economy crises and impacted millions of people, including the poor and gullible.
Financial assets and institutions can be misbranded which might mislead people. Therefore, there is legitimate sensitivity in the governments world about use of descriptions like ‘bank’ or ‘currency’ to be used only for the financial institutions which are in fact banks or for modes of exchanging value for only lawfully declared currencies.
It is for this why that use of description ‘bank’ in the name of any business is not allowed to be used by any financial or non-financial institution which is not licenced as a bank. Likewise, use of nomenclatures like ‘bank-notes’ or ‘currency’ by anyone other than central banks/other institution authorised by law for issuing bank notes or currency, is misleading and has to be avoided.
It is therefore quite necessary that crypto assets are not described as currencies given the fact that use of cryptocurrencies has not evolved as currencies but more as assets. If these misnomers are eliminated much of the apprehension of the governments and central banks would be gone.
Acceptance of cryptos as asset, however, will not mean that there is no serious public policy concerns left. People tend to blame the government in times of asset bubble bursts, for example, the tulip bubble or in the case of India, the plantation companies or ponzi schemes of the mid-1990s. Even when recognised and allowed as an asset, governments will look to regulate cryptos appropriately so that bystanders, and uninformed people are not harmed.
Appropriate legal frameworks would be needed to regulate crypto assets. Considering the amorphous nature of crypto-assets, some innovative solution would have to be found as it has been done in the case of derivatives as ‘securities’ or regulation of trading in gold by transferring underlying value of gold as financial assets in gold contracts or gold securities.
India’s evolving policy for cryptocurrencies
Most people in the cryptocurrency world are familiar with the Report by the committee (Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies) which I chaired. This Report released by the Government in Feb 2019 for public comment also had a comprehensive draft of cryptocurrencies regulation law (Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019).
There were two big public policy concerns at that time. Crypto-currencies were widely seen as currency, which was susceptible to misuse by money launders and secondly, a lot of uninformed people were getting lured into investing in it motivated by the greed to make quick money.
The Report made clear distinction between three key facets of the world of cryptocurrencies- private cryptocurrencies, blockchain technology and official digital currency. The Report visualised evolution and development of digital currency as the future currency signalling transition from paper currency to digital currency. The Report recommended a framework for the digital currency as the legal tender.
The Report also spoke highly positively and proactively for encouraging development of blockchain technology and its increasing use in delivering financial services. Like fintech has developed largely in the private sector, use of blockchain technology for delivering financial services and products was also expected to take place in private sector. The Government was expected to provide only a conducive and enabling policy framework for its development in India. No regulation was proposed by the Committee for blockchain technology based solutions.
The Report had rightly recognised that cryptocurrencies issued by private platforms, which had massive risks for monetary stability, financial stability and for payment system should be completely. In order to ensure that there was sufficient deterrence for people and businesses against dealing in cryptocurrencies as currencies, the Bill proposed punishment to its holders, miners and traders. This proposal was inspired by the way the law deals with use and holding of counterfeit currencies.
Two extremely important facets of cryptocurrencies which the Committee failed to take note and make appropriate recommendations are- cryptocurrencies as assets and use of cryptocurrencies within the eco-system of cryptocurrency platform to pay for and receive payments for consuming and selling blockchain programming based services on these platforms. The Committee should have recommended an appropriate framework for regulating the cryptocurrencies and other crypto-assets as digital assets. The Committee should have also found a way of cordoning of the transactions within the platform probably on the lines of what happens in casino or clubs where the currency of transactions within the casino or club might be different than the legal tender applicable and used in that country.
Let central banks create domestic digital currencies
Currency has been for ages a key attribute of sovereignty. All currencies were conferred legal tender status and were thus legitimised for use by the businesses and public for settling trade and other transactions by promulgating appropriate legislations.
In India, the Coinage Act of 1870 (there were earlier laws as well) specifically defined the gold, silver and copper coins and laid down their standard specifications and appearances. The last major Coinage Act was that of 1906. These laws conferred legal tender status on the defined coins. The Coinage Act of 2011 is the last of the laws and regulates minting and circulation of coins, which are of upto Rs. 50 denomination now.
The Paper Currency Act (1862, followed by several other legislations later) – conferred the legal tender status on bank notes issued by the central bank/government and created the structure of fiat currency in India. The paper notes were initially printed by the Government presses. Finally, after the RBI Act was enacted in 1935 and RBI was nationalised in 1949, the authority to print and issue paper notes (called bank notes) has been conferred on RBI.
All currencies, whether metallic or paper, have been issued and circulate under the authority of law. It is time now come for bringing a legislation for creating a national digital currency and conferring status of legal tender thereon.
As digital currency can function only on devices which can transfer and receive data, the digital currency for a country like India would need to be designed to work even on feature phones. Alternatively, the digital currency can be designed to work on smart phones and other computing devices. Such a digital currency would bring most of the economic, financial and payment system within the reach of a majority of Indians given that India now boasts of more than 650 million smart phones. The rest of people might still need to work with paper currency.
With the digital currency, payments could be made directly from one digital currency wallet to another digital currency wallet. There will be no compulsion of making payments only via the bank accounts. RBI has announced that it would be conducting some pilots for CBDT from December 2021 onwards. There is not much information about the design of the digital currency which RBI has in mind. If it turns out that these pilots test the oft-repeated retail and wholesale models of CBDT, this would be wasting the opportunity.
Dematerialised paper currency presents the easiest and most convenient model of digital currency. The users will also witness only one change. Instead of banknotes in their wallets being in physical form, the banknotes would be in digital form. These digital bank notes could be designed to be transferred from digital wallet to another digital wallets as easily as making a phone call or forwarding a message on your phone.
It is difficult to build smart contract based solutions in the centralised database based digital currency which the dematerialised currency would be. Smart contracts have not been built into crypto-currencies like bitcoins as well. However, it is possible to think of making currency wallets work with smart contracts. In that case, such a currency system would probably need to be developed on blockchain based system. The RBI can try development of wholesale CBDT with smart contract features. Such a digital currency could be used to make large payments and settle numerous types of transactions like trading in stock exchanges.
Issuing currency is also a very valuable source of seigniorage for the central government (via the central bank). If any private party issues currencies, it will have fiscal implications for the government and commercial viability of central banks. For this reason as well, it is necessary that the governments and central banks don’t allow private crypto-currencies to work as currencies. Whenever, the Government of India brings the law for creating digital currency, it would need to provide for outlawing the private digital currencies whether crypto currencies or other types of digital currencies.
Governments or multilaterals can create a global digital currency
Trade has been conducted over different peoples, regions and countries over last 4000 to 5000 years. Most of the trade got usually settled by exchange of goods. The difference in value of gross traded goods was settled by paying gold or silver. British paid for imports of cotton and spices from India by transferring gold and silver for many years in 17th and 18th century. The paper currencies in the 19thand first part of the 20th century were backed by the gold or silver. India had accumulated good balances of pound sterling at the time of independence as India still had positive trade balance with UK in much of its colonial history.
After the Bretton woods conference, a modified gold backed international currency system came into operation to settle international transactions. Value of US$ was pegged to gold (35 US$ for one ounce of gold) and every other currency was pegged to US$. For more than 25 years after the IMF came into existence, this system operated to settle international trades.
Keynes, the British economist, had proposed an international currency- Bancor - for recording the international trades. His was, however, a half solution. He wanted Bancor to be only a unit of account and a limited medium of exchange (only to the extent of trade transactions recorded). He did not envisage Bancor as an international currency to be paid or received for settlement of trade balances. He, instead, wanted the balances, if these became larger than the permissible limits, to be cleared by appreciation or depreciation of national currencies vis-à-vis Bancor to make the balances wither away.
IMF created in 1966 special drawing rights (SDRs), another unit of account, and allocated the same by and large in the ratio of the quotas which member countries had in the IMF. Recently, IMF has created and will be allocating 650 billion SDRs- about twice the existing number of SDRs. These SDRs count as international reserves and can be borrowed or lent by the member countries to each other for a small interest. IMF and World Bank denominate some of their loans in SDRs but actual transactions take place in the international currencies- mostly in US$ or Euro or Japanese Yen.
In last few decades, not only has the trade in goods and services expanded, there is considerable movement of capital between residents and non-residents of almost every country of the world. There has also been notable migration of people for work and residence, which has also created enormous requirement of funds transfers across nations. US$ has been serving the purpose of international transactions, trade, capital or personal. At its peak, over 85% of international trade transactions were settled in US$. There is some moderation now but still more than half of trade is settled in US$.
There is still no international currency.
As the world moves away from the unipolar power and with many questioning the continued dominance of the US$ as the predominant reserve currency, there is a big felt need for developing a global currency. With bitcoin showing the potential of cryptocurrencies, however imperfect, the global currency should be a digital currency.
Time for global digital currency has arrived. The alternative to private cryptocurrencies is a commonly agreed official cryptocurrency.
There are two big options. Either arrive at an international agreement to create an International Currency Union (ICU), building on the concept of Euro and other smaller initiatives and create a new global currency or convert the special drawing rights (SDRs) of the International Monetary Fund (IMF) into an international currency.
Whenever an international currency is agreed upon, it would require an appropriate institutional architecture, maintenance of its value, how to settle the imbalances in imports and exports of goods and services, and so on. The countries could continue with their national currencies for domestic transactions or even adopt the international currency for domestic payments as well. The official international currency would work like official stable coin.
Social media companies and multinationals can establish networks of stable coins to facilitate international transactions
There are proposals from omnipresent social media powerhouses like Facebook to created and operate a system of private stable crypto-currencies (taking care of the volatility in pricing of cryptocurrencies like bitcoin). To contrast these from other cryptocurrencies, such proposed currency arrangements have been termed as stable-coins.
The exchange bureaus are ubiquitous all over the world- exchanging one currency for another for a charge in the form of commission or the difference in buy and sell rate of the currency pair or both. Stable coins are a kind of global exchange bureau posing the stable coin in between to transfer funds or settle transactions between two parties operating under two different currency system.
Unfortunately, the stable coins cannot provide fixed exchange rates for all the currencies. It might offer fixed exchange rate vis-à-vis one currency at best. If it offers fixed exchange rates with respect to more than one currency, it would be impossible for it to maintain it as the two currencies would fluctuate against each other on account of all the real economy factors.
The stable coins can work best only with respect to an international currency. Until an international currency comes into being, the stable coins can mimic SDR value and for a charge allow international transactions to be settled in pseudo SDRs with the parties at both the ends tendering or receiving the currency of their choice out of the five currencies of SDR basket.
Such a stable coin- based on SDR valuation- avoids the enterprise or social media company concerned to get into messy issue of numerous relative currency valuations.
Can bitcoin be turned into global official currency?
Bitcoin has placed a hard limit of 21 million bitcoins to be ever issued under the system. This limit is an important marker for its upward valuation in terms of sovereign currencies like US$ as bitcoins supply is limited when demand is exploding.
There are three different scenarios for bitcoin prices for times to come. One, if we assume that the mania of demand for bitcoins will last for ever, there is no stopping its valuation going up continuously. Second, if we assume that a realisation dawns on most people that bitcoin has no intrinsic value and it is a bubble, suddenly all the demand would evaporate and everyone would rush to sell, crashing its price to almost nothing. Third, if we assume that by some quirk of fate or operation of some invisible hand, the demand and supply of bitcoins always match. In such a situation, bitcoin might see its value being maintained at stable level for long. Whatever be the future of bitcoins, it would stop growing beyond 21 million bitcoins at some point of time.
Can Bitcoin assume the role of global currency? I don’t think it would happen for at least five reasons.
First, Barring a few enthusiasts, millions of economic agents doing trillions of trade, capital account and remittances transactions are not going to accept Bitcoins in payment and settlement of their claims. Unless a currency is acceptable universally, it cannot act as currency.
Second, the Governments and central banks are not going to allow the seigniorage revenues to be taken away from them. They would use their credibility and common acceptance to ensure that they continue to be issuer of the currency.
Third, operation of macro-economic system and conduct of monetary policy decide the stability of the value of currency and control of inflation. The Bitcoin cryptocurrency system has no control of macro-economic and monetary policy of any country; nor can it bring about coordination amongst nations. It makes Bitcoins a stranger to the operation of economic system.
Fourth, no medium of exchange, which remains static in quantity of coins or notes, can avoid depressions. One of the deficiency of the gold currency system was also its limited quantity. If the currency cannot grow to keep pace, the economy cannot grow either. At fixed 21 million Bitcoins, even if bitcoins were to be a single operating currency of the world, it would cause economic growth to stop.
Five, any system of currencies like Bitcoin, are too easy to copy and proliferate. There are already hundreds of other cryptocurrencies in the market. There is nothing exclusive about bitcoin. When hundreds of cryptocurrency system compete and have unrestrained supply at their command, there value have to race down to bottom at some point of time.
BLOCKCHAIN IS THE TECHNOLOGY OF FUTURE
Blockchain is not digital currency; it is a technology
There is a very widespread misconception that blockchain is same as crypto-currency. Blockchain is a digital technology which uses chain of blocks to store all the creation and transaction data of the cryptocurrency. The special feature of the blockchain technology that allows the same data/blocks to be stored at all the interface points/node (nonce) makes it a unique digital technology and allows the digital currency framework to be created in distributed mode in place of present centralised mode. As every node has exactly same copy of the blockchain database, the need for a central authority or umpire also gets done away with.
Blockchain technology can also be used to create many other applications, products and services. Likewise, there can be other digital technologies which can be used to create digital technologies.
At the very fundamental level in the context of blockchain technology, the digital technologies are of two types- centralised database technologies and decentralised database technologies. If a central bank or for that matter any other entity were to use centralised database technologies like dematerialisation of currencies, on the lines of dematerialisation of securities, the currency so created would also be digital. Likewise, if a central bank or sovereign were to use the blockchain technology, with appropriate cryptography, it can create an official cryptocurrency, which would also be a digital currency.
The conclusion is obvious. Blockchain technology with cryptography can create cryptocurrency but is not same as cryptocurrency. The same can be used to do many more things. Blockchain technology is not exclusive digital technology to turn out the digital currency system in any country.
Blockchain technology is essentially an alternate database technology
In the digital world and economies, data are the building blocks of every raw material, fuel and final product or service, which are all stored and acted upon as databases. The database technology of the world thus far has primarily been what we now describe as centralised database technologies. The centralised databases are created, managed and regulated by central authorities. The bank accounts data are all stored in digital databases established by the banks and any operations using these data take place with the active or passive permission of the bank concerned. These central authorities are trusted to hold all the account data in trust and operate it for the benefit of its owners- the account holders. The central registry of land records is created, maintained and controlled by a government authority almost everywhere. That is the case with almost every service we use today- from our birth records to death records. The businesses, including social media, also create lot of databases, which operate under their control.
The blockchain technology has brought an entirely new way of creating and operating databases. In concept and construction, it is almost opposite of the centralised database technology. The blockchain technology creates databases in the virtual world of digital technology and databases are stored with every primary participant therewith- everyone keeping literally the same copy of the database. As a complete contrast to the centralised databases which are kept by one single central authority, the blockchain technology databases are kept by everyone there being no central authority. Blockchain technology is also called decentralised database technology for this reason.
The centralised database technology and decentralised database technology are two entirely different ways of creating, maintaining and operating databases, the real lynchpin of digital economy.
Blockchain technology can create numerous assets and services
Blockchain technology can be used to create almost every application, asset, product and service which the central database technology can create.
Blockchain technology in currencies we have seen. Staying with finance, financing or credit services could be provided in the centralised database system technology. In fact, most of the digital financing and credit being provided by banks, non-banks, peer to peer lending platform and others operate under traditional or centralised database system. The same services can be provided using the decentralised or blockchain technology platforms. The DeFi or decentralised financing platforms have come up using blockchain technology.
Applications can be written using blockchain technology platform. The transaction and mining functionality for the bitcoin platform is written using the application facility created by another well-known blockchain technology platform- Ethereum.
Maintaining and transacting in securities in stock and bond markets could also be conceivably managed by decentralised ledger/ blockchain technology applications with a number of functions in these transactions auto-executed by writing appropriate smart contracts for these depositories. So can be done for land registries, trade transactions, music sharing, storing of NFTs and so on.
Blockchain technology has been used to create many digital assets
Blockchain technology based digital platforms have created many types of assets, which on account of the fact that these are embedded in these platforms, are more commonly understood as crypto-assets. Some people use cryptocurrencies as generic description for all crypto-assets.
The blockchain technology platforms have created digital assets of many types. There are assets like non-fungible tokens (NFTs) which are stored in such a way that these assets could be viewed or used with the permission of the owner. Many businesses have been created in platforms like Ethereum using smart contract technology for financing (defi), for sharing music rights, for providing security and other services and so on. These businesses are valuable. Some industrial age businesses raise new funds for investment by making initial coin offerings on these blockchain platforms which works more like equity issued on stock exchanges.
These are all valuable assets though there are no well-developed systems to value these assets.
Smart contracts are the killer application in blockchain technologies
A special feature- writing smart contracts- provides the killer advantage to the blockchain technology. As everything in the blockchain technology ecosystem is digital and there are no central authorities to take permission from for executing transactions, smart contracts can be written and implemented in the decentralised technology platforms quite easily.
Smart contracts are nothing but self-executing contracts. The smart contracts contain self-executing instruction applications like what mRNA in our genes do which execute specific instructions when certain conditions are fulfilled. The smart contract based applications are more quite difficult to write in the traditional central database technologies. In times to come, this feature will provide decisive advantage to the blockchain/crypto technology and might prove the nemesis of the central database technologies.
Smart contracts are, in the end, contracts between the two parties. Somebody lends on DeFi platform and somebody borrows. Whenever two parties contract, there can be disputes. While most of the potential situations of dispute and disagreements can probably be auto-solved by writing smart contracts appropriately and its auto-execution. However, there would still be some situations where the dispute between the two contracting parties would not be resolved either on technological reasons or imperfect contract conditions.
This requires governments to frame laws for smart contracts. Most countries have developed laws for digital signatures and e-commerce and other digital contracts executed on traditional centralised systems, which incidentally mimic in most cases the laws applicable to non-digital/physical trades. There is lot of clamour for regulation of crypto-currencies which are also based on smart contracts, but no good demand to write laws for replacing or augmenting traditional contracts with smart contracts.
This is one of the areas where lot of technical and intellectual capital is required in times to come for mainstreaming blockchain technology.
Improving mining processes will be key to mainstreaming of blockchain
There are some disadvantages of blockchain technology, at least, in its evolution so far. Storing of entire databases across multiple nodes require massive computer storage capacities over so many nodes. Preforming mining operations to find out the relevant legs of the transactions and create new blocks for taking on broad new transactions consume enormous electricity power and also takes time. Creation of new blocks is thus not only power guzzler but also time consuming. As more assets and other databases start shifting to blockchain technology, the problem of power and time consumption would aggravate.
This problem needs to be solved by technologists. Possibly, there can be different kind of algorithms and other solutions which can transform the mining process to make it faster and quicker. The modified mining process should be consuming much less power and take much shorter time.
As the blockchain technologies evolve, such newer technological innovations are likely to emerge which will make mining more efficient. There might also be convergence of good technological features of both central database technology and decentralised database technology to create a super-efficient, less electricity and computer power consuming and faster technologies.
Regulation of Bitcoins and other blockchain cryptocurrency platforms as asset
There is fascination for bitcoins. Everything that fascinates is asset at least for the guys who are fascinated. There are valuable application, databases and services platforms being created using blockchain based technologies. They are valuable for the value they create. There are many blockchain crypto platforms which have enormous potential value. There are many blockchain crypto platforms which are nothing more than gas.
Discriminating between valuable and valueless crypto platforms and assets is as big and cryptic challenge as writing innovative but complex technology programmes to create these platforms/assets. No standard valuation system is fit to value these platforms/assets. An entire new valuation system would need to evolve.
There is no way that these crypto assets could be ignored till the time robust and objective valuation systems are developed. In the absence of understanding about the technology, business models and valuation of these blockchain cum crypto platforms, public regulators would find it difficult to do any good regulation. The industry therefore has to be left to be self-regulated till it matures and objective systems of valuation develop. The Governments would do well to leave regulation of crypto-assets and platforms to self-regulation.
The Government should build regulatory systems only with respect to the investors who are drawn to invest in these assets and platforms. The Government should bind the cryptocurrency and other blockchain assets/ platforms, to do two-way KYC. On one hand, the crypto asset platforms should be bound to allow only those investors to invest who understand the risks involved, do not invest with borrowed money and disclose their investments to tax authorities. On the other, adequate disclosures be developed about what any particular crypto asset or platform does, its revenue model, its beneficial owners, its profit and loss and the like.
The crypto assets and platforms should be made assessable to tax in every national jurisdiction based on the resident users and the investments made by them. The investors should be assessable to tax on the capital gains they make as perhaps no investor shares revenue of any crypto currency or asset platform.
Let the industry evolve and thrive under such a soft touch regulatory system.
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