India should embrace and not ban cryptocurrencies (crypto networks)
Recently, the Indian inter-ministerial panel recommended a ban of all private cryptocurrencies. It also recommended encouraging the usage of distributed ledger technology (DLT) as it sees value in the underlying technology.
Hypothetically, it’s like in the 1990s, a panel recommending a ban on Internet as it may be used for illicit activities. And encourage only the usage of the intranet within corporations. If such ban would have implemented, it would have been huge setback to Indian economy.
To understand this phenomenon, we need to look through the lens of new technology innovation and its broader impact on the advancement of society
Technology Platforms — Paradigm shifts
Each paradigm shift in the technology platforms delivers a set of primitive capabilities that open up new possibilities to solve human problems. E.g., International network (Internet) democratized information and content. This paradigm shift enabled the key primitive capabilities that were not possible before the Internet.
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These core capabilities enabled the transformation and democratization of the media, entertainment, communication, & retail industries. The development of smartphones and 3G/4G network was another paradigm shift. After ~25 years, the Internet economy is accounted for 6.9% of GDP growth and providing 5.1 million jobs just within the US.
Bitcoin crypto network (or cryptonet) — One more paradigm shift
In 2008, Satoshi Nakomoto publishing a Bitcoin whitepaper was further advancement & breakthrough in the technology platform. First time in human history, distant people can transfer value without any intermediaries like a bank or any other service provider. It provides a solution to the unsolved problem of computer science known as — Byzantine General’s Problem. Nakomoto built the system (aka cyrptonet) that uses cryptographic proof instead of trust to confirm the transactions and game-theory based incentive to maintain the distributed ledger. Anyone can participate in maintaining the ledger. The system rewards a token — bitcoin to whoever maintains the ledger. The bitcoin tokens are generated & distributed roughly every 10 mins to the ledger keeper (miner), who solves the mathematical puzzle.
This paradigm shift has enabled key primitive capabilities that were not possible before Bitcoin cryptonet.
Digital scarcity: Internet brought us digital abundance. Anyone can copy of the content and it’s hard to stop it. Cryptonet gives us the capability to create digital scarce objects similar to real-world objects e.g. silver and gold.
Trust minimization: For any two parties to transact, needs trust and have used intermediaries to build trust — banks, organizations, regulations, etc. The cryptonet uses cryptographic proofs and game-theory based incentives to minimize the trust in the intermediaries. Why minimizing trust is important? It reduces the transaction cost as well as any abuse of trust with power centralization.
Programmable contracts: A tamper-proof, self-executing and self-enforcing digital contracts enable parties to transact with no human involvement in a trust minimized environment. This reduces the inefficiencies and administrative cost by order of the magnitude.
These primitive capabilities are going to transform & democratize the money, banking, and financial services soon. But similar to the Internet, it will unimaginably transform every industry. E.g. — No one imagined the existence of Uber that will change the transportation industry.
Proliferation of cryptonets
Nakamoto provided a template to solve the Byzantine General’s Problem — cryptographic proof + game theory-based incentive. This template impacts every industry as they are all built on trust intermediaries. The entrepreneurial spirit across the world has kicked-in, and various experiments going on to solve different use cases using this template. Tokens are an integral part of these solutions. So, we see a proliferation of cryptonets & tokens that solving diverse use cases. They are either clone of Bitcoin cyrptonet with few tweaks or some built from grounds up inspired by Bitcoin. Based on designs, these tokens can function as commodities, currencies, payment tokens, loyalty points (or airline miles) or combination of above functions. 7000+ developers are working on these experiments.
On the Internet timeline, we are still in the early 1990s. Similar to 1990s Internet experiments, most of these experiments are going to fail. But we are going to see a few winners coming out of these — similar to Amazon, Google, Facebook, Netflix, Uber, etc. from an Internet paradigm shift.
Banning cryptonets (or cryptocurrencies) at this stage is like throwing the baby out with the bathwater. It’s denying the Indian entrepreneurs to participate in experiments and wealth creation. Indian Govt. should allow these experiments with a right regulatory framework and at the same time provide right consumer protection with laws, transparency, and education.
Bitcoin cryptonet — most successful so far
Bitcoin cryptonet is running for more than 10+ years, and it’s recording transactions, generating & distributing bitcoin tokens every 10 mins, non-stop & no downtime. It’s processing around 300K-400K transactions per day. The value of the bitcoin token has grown by more than 7000% in 10 years.
So, what is the bitcoin token? Is it money or something else? It’s not money yet but has the potential to become global, non-sovereign digital money, similar to gold that we once used as money.
At the core, the bitcoin token is a scarce digital object (aka digital collectible) that can be sent & received in near real-time. By design, only 21 million bitcoin will be produced forever, and already 17.8 million are in existence. Every four years, the number of bitcoins created every 10 mins is reduced in half, and by 2140, all bitcoin production will be completed.
So, how scarce is the bitcoin? The measurement of the scarcity is stock-to-flow (SF) ratio. The bitcoin SF ratio is at 25 above sliver, and by 2020, it will get close to gold, and by 2024, it will cross gold. So, in 5 years, bitcoin will be the most scarce object.
Humans have always valued scarce objects over the centuries. Scarcity drives the most value of the precious metals, i.e. silver & gold, and mere <15% from its utility — jewelry & industrial use. The market cap of sliver is ~$300 B, and gold is at ~$8T. The bitcoin market cap is ~$180B — $200B.
History taught us that money objects like seashells, sliver, gold, etc. move through functional states. Collectibles → Store of value → Medium of exchange → Unit of account, before becoming fully functional money. Read more here — “The bullish case for bitcoin” by Vijay Boyapati
It’s early, and the bitcoin is on its journey to becoming the store of value(store of wealth) asset. There are a few missing elements —
Reduce the volatility of the bitcoin prices especially in a negative direction.
There are an estimated 30–40 million people hold bitcoin. As the network grows and more people hold bitcoin, the volatility will go down. Secondly, there is a lack of valuation framework and most the retail customers are buying & selling on speculation. Someone who goes with deeper understanding, value bitcoin for the scarcity + trust minimization (difficult to shut down the network) + limited utility in near future. Once the valuation framework are built and widespread available, people will make informed trading decisions & that will drive the volatility down.Lack of tools & services (and accessibility) to buy, store, sell, transfer wealth to next generation. The tools & services for Instituational invetors are getting close to be rolled out with custody solutions, insurance, lending, reporting, etc. For retail investors, there is still lot of work need to be done on usability and capabilities. Few companies working on the solution and in next few years we will see these apps available in the market to address retail investor needs.
An early glimpse of the alternative global financial infrastructure
We are still early — in Internet timeline — on dial-up. The Bitcoin cryptonet can process only 7–8 transactions per seconds. But significant progress is made with 2nd layer solutions like lightning network and sidechains that will increase the transaction speed exponentially in the next couple of years. It’s challenging to keep track of all initiatives but here are few representative ones
- BitPesa: is providing services to the African businesses to trade between them much cheaper, faster by 90–95% and increase trade volume using Bitcoin as a settlement network. E.g., A Nigerian company wants to trade with the Kenyan company. The company will convert Nigerian Nira → bitcoin → Kenyan shilling instead using USD or Euro, which is a costly and time-consuming process. They have processed millions of transactions and helped thousands of businesses on the African continent.
- Abra: Leverages divisible, programmability properties of bitcoin for real-time collateralization of US stocks. E.g., Tesla, Apple, and other stocks are available for investment with <$1 for people around the world. It’s available in 150 countries. It’s a global first company.
- The credit & futures market around bitcoin is developing. Few startups developed applications that allow lending & borrowing against the bitcoin. In 2018/2019, these apps processed a few billion dollars of transactions.
Banning cryptocurrencies is denying an opportunity for Indian investors to participate & gain from possibly biggest transfer of wealth in human history. Similarly, it will denial for Indian entrepreneurs to participate in building the alternate global financial infrastructure and capturing the value & employment generation.
Long-term strategic importance for India
In the next 10–20 years, the global reserve currency scenario may change
For a few hundreds of history, the average lifespan of the reserve currency is 95 years. Since 1944, the US dollar is the de-facto reserve currency of the world. But cracks seem to be appearing in this scenario.
1. The internal compulsions and political situations may push US politicians towards “America First” policy, and it will have an impact on devaluing the US dollars.
2. Like other economies, including India targeting $5T + economy, the world is moving toward the multi-polar in the next 10–20 years.
3. World’s dependence of the oil will reduce in the next 10–20 years and move towards renewable energy resources. Most of the oil transactions are in dollars, and with reduced trade, the importance of USD will further decrease.
There is a non-zero probability that the world moves away from USD and towards a global currency like IMF SDR. And if the bitcoin follows its trajectory on money journey, it may find its place in SDR.
There is a non-zero probability of the above scenario. Banning cryptocurrencies, India may miss the boat if this scenario comes to fruition.
In the 1860s, India missed the boat on going to a gold standard and remained on sliver standard. In the 1700s, India contributed 24.4% of World GDP. But by Independence, it was 4.2% contribution to World GDP. Along with British Raj economic policies, the other major factor was the debasing of the sliver standard currency and wealth decline for Indians. India should learn from it.
Contribution to alternative global financial infrastructure A cheaper, faster, accessible that will democratize global financial services.
It’s very early days of alternative global financial infrastructure and will be built & mature over the next 20–25 years. The Indian entrepreneurs can contribute to building out this global infrastructure, particularly in two areas — digital identity and privacy.
On digital identity, with expertise in Aadhaar, Indian entrepreneurs can not only contribute to technology but also provide the expertise on services — enrolling, onboarding & usage.
On Privacy, the world is struggling on balance between privacy and stopping the harmful usage. India’s expertise with its solution on Account Aggregator — data ownership and consent-based disclosure architecture will greatly accelerate the built of the more just global financial infrastructure.With cheaper, faster & accessible global infrastructure, it will have a huge impact on the remittance — it bound to increase many fold from today’s $80B/year similar to what happened to messages/communication with free tools like facebook & whatsapp.
A revival of the cooperative movement and reduce wealth inequality within India
Since Independence, India has seen various cooperative movements — E.g., Gujarat’s Amul cooperative, several sugar cooperatives in Maharashtra that brought prosperity to Indian farmers. Over time, most of these cooperatives became defunct due to corruption, mismanagement in the centralized control of the cooperatives with few exceptions.
If the broader technology holds its promise & matures, India can apply this technology to the revival of the cooperative movements by reducing dependency on intermederies and bring prosperity back to Indian farmers.
The glimpse of this type of network can be seen with recent launch of helium — a peer-to-peer wireless network, a last-mile connectivity for sensors and devices. It’s incentive structure is based on cryponet. It will be good to track them and see if they are successful.
As Dr. B.R. Ambedkar, said in his book — History of Indian currency and banking,
“ In 1860s, if Indian authority had shown the courage and adopted the gold standard, we would have been on a different trajectory”
India should not accept the panel’s ban recommendations but embrace this innovation for the advancement of the Indian society. Most of the countries have not banned cryptocurriences but looking to regulate it. India should take similar approach — regulate to protect Indian consumers but at the same time, encourage Indian enterpreneurs to innovate and wealth generation and once again, find its right place in world order.
References
- The Bullish Case for Bitcoin by Vijay Boyapati
- Modeling Bitcoin’s Value with Scarcity by PlanB
- Bitcoin: Stock-to-flow Ratio by Jim Brysland
- The Bitcoin Standard book by Saifdean Ammous
- Money, blockchains and social scalability by Nick Sbazo
- The future of Macro Investing — Interview featuring Dan Tapiero and Raoul Pal
- History of Indian currency and banking book by Dr. B.R Ambedkar
- Money, Prices, and Economic Development in India, 1861–1895 by Adams, John, and Robert Craig West
