New Delhi: Open your wallet. Pull out a Rs 10 note. What does it read? It reads: “I promise to pay the bearer a sum of ten rupees.” On the top right, it says Reserve Bank of India — guaranteed by central government. This is a promissory note. Even if your banks collapse tomorrow, the government takes guarantee of your money.
Now, let’s come to crypto currency. It is not a promissory note. The MVIS Cryptocompare Index has plunged 80% in 2018, shedding $640 billion. That equals to roughly Rs 44,80,000 crore. That also is twice the GDP of Pakistan. Who is responsible for the money lost?
The answer is no one. Who takes the guarantee? The answer is no one takes the guarantee. This 80% crash, according to experts, is one for the record books. This plunge is being compared to the dot com crash — the sell offs that took place in 2000s, bursting the dot com bubble. Only difference is, this one is worse. At least with regulated stock markets, there is a trail, reason and fundamentals that justify losses.
In case of cryptocurrency, it is a computer program. Backed by algorithms and based on blockchain technology, with zero asset reserves backing it to enable one to actually call it currency. When bitcoin was founded, you could buy one bitcoin at 0.008 dollars.
In 2017, there was an unprecedented rise and the same bitcoin cost 19 thousand thereabout dollars — only for it to now plateau at 6500 thereabout dollars a bitcoin. This kind of volatility is not the grain of nature of any currency.
Ask yourself this question. Who is Satoshi Nakomoto — the pseudonymous person or persons who founded bitcoin backed on blockchain technology and why is Satoshi Nakomoto still a mystery? Experts believe he, she or they are the richest people in the world right now. Why doesn’t this person or persons reveal their identity? The answer, according to economists, is not rocket science. It won’t take a Sherlock Holmes to tell you that this is a rebellious currency dominating the dark web.
It can be used for illicit trade of arms and ammunition, terror financing, purchase of drugs without leaving any financial trail for any investigative agencies. Imagine a situation where the makers change the algorithm overnight. What happens to your money and where does your money go? This ‘phenomenon’ is still nascent to the world and most serious investors say be cautious. For now, it is just a speculative gamble where only the demand and supply determine market prices.
Losing $640 billion in a crypto crash for the world is not a joke. There is a reason most governments want it regulated. There is a reason why some governments, including the Indian government, have banned banks from getting involved for the time being.
Your hard earned money, if lost, will have no one answerable for it. If regulated in a systematic fashion, the paradigm may change. But it is not the function of just one nation to do it. You would require governments across the world coming together with coordinated governance and regulating it in chorus. Even that comes with a massive risk as it is just a computer program and that is not the basis for the economics that surrounds currency.
This crash has been a painful reality check for crptocurrency speculators.
In India, banks are banned from getting involved with cryptocurrencies. After a certain limit, it even leads to a FEMA violation and a tool for money laundering depending from case to case. Lawyers say peer-to-peer transaction is still legal but the legality continues to don various shades of grey.
The SC is all set to hear the matter next week where the Finance Ministry, along with the Ministry of Home Affairs and the RBI, has been made respondents. Clarity on this subject is still a far cry for India. And if the crash of 80% in 2018 is anything to go by, your guess is as good as mine on whether this is just a speculative bubble or an actual asset class.
While most digital economists feel blockchain technology in itself has the power to transform the world, cryptocurrency backed by blockchain technology is detrimental to economies and governments.
The pro crypto brigade is the voice of dissent. They believe that they can trust a computer programme over humans. This also comes on the back of the corrupt nexus between banks and governments that have led to recessions in the past. The arguments for and against continue. But one thing is clear —cryptocurrencies making fiat currency of governments obsolete is a far cry from reality.
Jaijit Bhattacharya, a digital economist explains it best. He says, “You need to have fiat currencies that are controlled by the government. You cannot have currencies which are not controlled by the government. Who has given authority to these multiple people globally to create crypto currencies? The people who have got more computing power and have got more energy for computing will be creating the crypto currencies and others will not.”
He further adds, “So you are basically creating a world of compute have's and compute have not’s and the compute have’s will have access to crypto currencies and compute have not’s will not have access to crypto currencies. Under what circumstances and framework, are we giving rights to some to be able to mine crypto currencies and others not to mine them? It is arbitrary.”
Bhattacharya goes on to explain, “People are free to believe in what they want to believe in. They are free to trade on what they want to trade in. Most governments are not really stopping them but to say that the government should stop using fiat currency and start using crypto currency is bizarre.”
“Their view is based on a very small economic argument that crypto currency will not lead to meltdowns. Further they say crypto currency will not be exposed to manipulations. And that is completely incorrect. The fundamentals of crypto currency are on a shaky ground. If you bring one crypto currency which is being used by the world then that contagious will spread world fire and bring the entire economy down,” he adds.
In the end Bhattacharya says, “More importantly, crypto currency is one of the most polluting things in the economy because it consumes so much of electricity that each bitcoin consumes anonymous amount of carbon dioxide. So it’s clearly not something which can be called as the currency paradise. It essentially is a currency from hell because it came from the darkness, it does not bother about the social consequences and it’s basically driven by greed in that sense.”