The cryptocurrency bill presented to Parliament and the RBI’s position suggest that consideration is being given to banning cryptocurrencies in India. More skilled technical leaders can discuss the pros and cons of such a ban. But the heated debate that ensued reminds us that money is not just a technical subject.
It is at the confluence of faith, politics and psychological mania. It is about faith in that value is largely a matter of belief; on politics because money is always a question of the distribution of power; and mania because the alchemy of conjuring something out of nothing is always deeply alluring. The fascination with crypto is what it reveals about our society, more than what it can achieve.
Cryptocurrencies are a fascinating technological innovation. Part of their initial appeal was that they promised a new order of governance. As one of the most perceptive money political theorists, Stefan Eich, pointed out in an article titled “Old Utopias, New Tax Havens: Bitcoin Politics in Historical Perspective”, there was a political backdrop. interest in cryptography. Faced with the inflation of the 1970s, thinkers like Friedrich Hayek theorized the reaffirmation of the domination of private currencies, protected by the state.
But this project was crucially dependent on solving the problem of “confidence” upon which all currency depends. Crypto seemed to solve this problem, with its decentralized architecture and community and self-verification protocols. Perhaps we could create a libertarian utopia.
It was a fantasy. No state was going to give up its power to exercise control over the monetary system. The maintenance of state-sponsored fiat currency is one of the great achievements of modern state formation and the foundation of its power and legitimacy. Second, there was an illusion, as if cryptography was created out of thin air: it actually requires substantial physical infrastructure, which a state could always control. States can stop mining like China did.
Money itself may not be material, but it is always anchored in materiality. The fact that money is subject to politics is actually the benefit of money. It allows a minimum of collective control over our future, and allows us to ask distributive questions.
As Easwar Prasad’s comprehensive book The Future of Money points out, the ambitions of the crypto revolution have not been met, even on their own terms. As he puts it, “Although each cryptocurrency may have specific strengths, neither Bitcoin, nor any other cryptocurrency can boast a blend of stability, efficiency, privacy and security that would allow it to dominate the currency of the central bank “. The revolution heralded by digitization will continue in different forms, ironically facilitating even more centralized and hierarchical monetary architectures.
Crypto’s ideological claims have been deflated. He is now seen more as an asset. Some financial products bring real gains for the economy or development, others present a risk. In the literature, no convincing argument has been presented for the concrete development benefits of cryptography.
The underlying technology can be exploited for potential benefits even without crypto. From a developmental point of view, no one should lose sleep if it is forbidden. The argument then passes to the value of choice. We allow people to invest in all kinds of things. Why ban this, especially now that there are so many investors? The answer to this question depends on the risk that the existence of crypto assets poses to the stability of the rest of the financial system.
One answer is, if you can insulate the financial system from the crazy gyrations of the crypto markets, there is little systemic risk. This is why it was a good idea for the RBI to prohibit the entanglement of financial institutions with this market. You want to be in a position where if the crypto markets collapse, they don’t affect anything else. So the risk of crypto is purely private: if people want to speculate, so be it. There are fraud issues. Some of these items can be regulated. But it can be part of the risk assessment.
But in practice, isolating crypto markets will be difficult to achieve. The first reason is political economy. Once you have a large number of investors, and some of them influential, they will be a personal interest in their own right, potentially requiring socialization or loss mitigation. We are already seeing it. The RBI should have been more aggressive to discourage the growth of this industry.
Today it faces lobbying from investors as an interest group. The second reason is that it is difficult to argue that a major new asset class, especially if volumes increase, does not have systemic effects on the rest of the economy. In the event of a crisis, if stable coin buybacks increase, should the RBI not intervene? What are the opportunity costs of investments entering crypto over the prices of other monetary assets and instruments? What are the implications of a lot of money flowing into an industry whose appeal seems to be that there is no underlying logic to assessing risk. Instead of focusing solely on issues of fraud, money laundering and private risk, the RBI’s case would be strengthened if it explained the systemic risks that crypto could present to the stability of the real economy.
There may also be no house halfway through this story. For reasons of political economy, the RBI should avoid a scenario in which it prohibits, but then provides for exceptions. The second thing is that if he somehow allows Indians to invest, then he has to make sure that the trade does not go overseas. Not banning it completely and allowing it offshore will be the worst of both worlds. But the central point remains: The Chinese may be motivated by considerations of control and oversight to ban crypto. But they are not wrong to think that the financial system must be at the service of the real economy. But then many would argue that crypto-mania is more of a symptom than a cause.
The world economy is inundated with cheap money. In an Indian context, small savers are desperate for a return. In this context, it is easy for the powerful to misallocate money and small savers to express their desperation through speculation. As the RBI advocates for a crypto ban, we also have to ask ourselves why it is attractive in the first place. What does this mania reveal about our politics and our economy?
The writer is editor-in-chief of the Indian Express