Co-opting the misunderstood: India's cryptocoin moment

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In his  ‘’Le Mythe de Sisyphe’ Albert Camus  describes the tragedy of the  Greek legend Sisyphus who is condemned by  the Gods to repeatedly roll a boulder up a hill despite knowing that it would  tumble down. ''The world evades us and becomes itself again'' says Camus as he summarizes the absurd story.

The struggle of nation states to tame Satoshi Nakamoto’s bitcoins reminds me of the tragic curse that Sisyphus invited upon himself. The more Governments and Central Banks have tried to suppress these cyber coins, the more they have bounced back in the minds of its followers. Indeed this tribe is growing. Today, China, Iceland, Vietnam, Bolivia, Ecuador and our neighbour Bangladesh are having their Sisyphus moment. By contrast, Venezuela, Japan and Russia with their  accommodative policy towards crypto coins  are enjoying a cautious Nakamoto moment.

The argument I advance here is that India should avert a Sisyphus tragedy. We need to co-opt and regulate crypto coins than shunning them altogether.

Some of us have serious misunderstanding about crypto coins. As stories of their inappropriate  use come out, the misunderstanding turns to prejudice. India’s Reserve Bank (RBI) feels that cryptocurrencies raise concerns of consumer protection, market integrity and money laundering. This thinking explains why the RBI has prohibited Crypto - INR swaps.

It is true that bitcoins and other crypto coins have been subjected to the vices of modern economies. Fund managers view price arbitrages associated with these coins as smart profitmaking opportunities. Such  expectations foment  wild speculation in crypto coin markets that cause crypto prices to be excessively volatile.

Just savor the hilarious comedy of the bitcoin - the world’s first crypto coin.  Fable has it that the first recorded transaction involving crypto coins took place when two Papa John Pizzas were purchased for 10,000 Bitcoins in May 2010. Eight years later (by October 2018) 10,000 bitcoins were to command a whopping US $ 64029700 approximately . Indeed 10 months earlier in Dec 2017, 10,000 bitcoins were worth a heavenly figure of   $ 19,7832,100/- an amount (to quote  a US based NRI) that was good enough to buy an iconic Beverly Hills mansion.   

Satoshi Nakamoto had envisaged bitcoins to be a means of payments. They were not conceived as investment assets.  However Nakamoto’s fans were quick to realize that this was precisely the function that States were determined to suffocate and exterminate. Bitcoins have not been permitted to be a unit of account either as this collateral privilege has always belonged to fiat money. Notwithstanding clamp downs, on their use, crypto coins still hold water as an attractive store of value as compared to fiat currencies. More importantly they have turned into speculative resources.

Indeed, in developing and emerging countries, mainstreaming crypto coins can have significant public good impacts since it could  help to  insulate the unorganized sections  of the economy from the clutches of agents of crime. In an environment where switches and reverse switches between fiat and crypto are disallowed, crypto coins tend to find their avenues in the dark webs associated with money laundering, narcotics or terrorist funding.  There is no easy way by which their movements can be tracked down. The dark pools of crime that use crypto coin and operate at the fringes of the economy, find   cash dependent, unbanked people as ideal  avenues to help them switch cryptos for cash and vice versa. Thus mainstreaming crypto coins is an unavoidable social imperative in developing and emerging economies.

Given the inherent supply constraints associated with crypto coins, some economists describe them to be digital gold.  Investment theorists, on the other hand, argue that a bitcoin is an intangible, empty shell that has no underlying asset to anchor its value. While the former refer to bitcoins as a means of payment , the latter see them as investment assets. The former argue that bitcoins are deflation inducing,. The latter consider crypto coins as bubbles prone. Thus over time, crypto coins have been charged with two irreconcilable sins – deflation and bubbles!

Unfortunately, irrespective of State imposed bans, crypto coins looks to be losing favor as means of payment. The astounding rate at which bitcoins and other crypto coins have surged in value vis-a-viz USD and INR is the first major reason for cryptos to be less favored as transactions facilitators. Crypto coins to be have become too valuable to be a means of payment. The only manner in which they can be used for transactions is to render them even more granular and fungible. These virtues do not come about unless crypto coins are allowed by Governments to be utilized for micro transactions.

The second problem with crypto coins arises from the fact that they can be used to speculate against fiat currencies.  A weakening Indian Rupee is a sure recipe for bitcoins to surge in value and a direct inducement for people to shift away from their rupee holdings towards crypto coin holdings. This explains the logic of RBI’s recent diktat to Banks not to support crypto transactions.

The third problem of crypto coins like bitcoins is that the wild speculative atmosphere surrounding it poses risks for buyers and sellers of bitcoins. Crypto coin markets today function as latent price discovery systems. They are unregulated thus creating a ripe environment for unruly speculative behavior.

The fourth problem with the crypto coin segment arises from the varying quality of Initial Coin Offerings (ICOs) or tokens issued by crypto entrepreneurs for financing new projects involving blockchain applications. By design, ICOs are meant to be investment assets that generate income streams. However it needs to be realized that most of the ICOs have drawn sustenance from unregulated crowd sales. Crowd sales, unlike crowd funding, involve investors who seek returns from their investments.  Many ICOs have proved to be slippery investment options. Some ICOs are associated with ponzi schemes while many others do not make commercial sense.  Additionally, poor quality coin offerings suffer from low liquidity. These limitations open investors to serious risks.

The answer to the above problems is not  ban on crypto coins. The four  limitations can be overcome through sound regulations. Crypto coins can be regulated as means of payment, as commodities and as securities. There are sufficient working examples to this effect.

Japan’s Fund Settlement Law amendments which came into effect in April 2017, place cryptocurrencies in the category of “virtual currencies,” Though not visualized as a replacement for Yen, Japan permits bitcoins as means of payments for specific transactions.

Despite being intangible and not being a raw material, ‘higher end’ crypto coins like Bitcoins, Ethereum and XRP qualify to be treated as regulated commodities since they are amenable to standardization. By listing them as tradable commodities in regulated commodity exchange, countries could put an end to the unruly speculation that has characterized these coins. Indeed the Commodity Futures Trading Commission (CFTC) in the US, lists bitcoins as a ‘’currency that is a commodity’’ and considers them eligible for futures trading.

As  mentioned many ICOs and crypto tokens suffer from dubious credentials as their inherent worth is low. The low inherent worth of ICOs is due to the proof of concept of  ICO related  projects not being rigorously verified. Tokens generated by Ethereum platforms follow a robust procedure of verification as compared to crypto coins generated by random token factories. Consequently, Ethereum platform-based tokens have high inherent worth. By listing tokens and ICOs as securities, it can be ensured that only tokens with high inherent worth are issued to the investing public.

India needs to have a re-think on its crypto coins policy for three reasons. First and foremost  is our recent focus on promoting  digital financial  transactions in the economy. The second rationale for having a new approach towards crypto coins in India is the need to break the illegal nexus between cash economy and the unlawful cryptocurrency economy. The third imperative for having a new crypto coin policy in India is the importance of mainstreaming the 190 million strong, unbanked population of the country.  The possibility of instituting community cryptocurrency wallets on the lines of Kenya’s Bangla pesa would be an effective strategy to reach the informal sector that remains outside the pale of the banking sector. Community crypto wallets that are regulated, can help plug leakages of cash from the unorganized sectors to dark webs operators, thus helping us to bring in the unbanked segments into the digital money space.  It thus makes great sense for India to recognize bitcoins and cryptocurrencies as virtual currencies and permit functioning of community crypto coin wallets.

Given the chaotic speculative atmosphere surrounding bitcoins and cryptocurrencies, India could consider treating crypto coins as commodities and permitting trading in crypto coin forwards contracts through regulated commodity exchanges. Forward contracts that end in delivery of coins can be a healthy price discovery tool for these coins , This can help dampen the forces of unruly speculation in crypto markets. Additionally, forward contracts  do not carry the risks of leveraged trading that goes with futures and options.

As far as crypto tokens and ICOs are concerned, India must take a bold decision to treat them  as securities and lay down healthy norms regarding ICO  design, pricing systems and  investor information. This would induce quality coin offerings from private entrepreneurs, besides ensuring greater investor protection. In the process, digital technology start-ups would succeed in mobilizing capital through crowd sales. Similarly Government crypto tokens based on Ethereum blockchains can be utilised for securitizing Jan Dhan accounts.

After an initial bout of enthusiasm, China is cracking down on trading in crypto coins. The reasons are leakage in tax revenues and possibly the implications of cryptos on Yuan. India, however, needs to tread a different path. We need a bold policy of strategic co-option that allows the use of crypto coins as means of payments in selective sectors of the economy. We need to regulate crypto coins as commodities and crypto tokens as securities in the larger interest of transforming the lives of unbanked communities.  We could boldly experiment with Government tokens and utilize them to securitize and hedge bank deposits of low income households. We could also, through high quality private tokens and ICOs, enable our fledgling start-ups in the digital space to raise capital resources.

It needs to dawn on us in India that with appropriate regulations crypto coins can be turned into an excellent instrument of insurance for the poor. The fact that it is being  misused  should not be held against it. We need to try them out for the positive things they bring in. And there are quite a few of them.

Professor, Economics and Social Sciences, IIM Bangalore. Views expressed here are personal

[This article has been published with permission from IIM Bangalore. www.iimb.ac.in Views expressed are personal.]