tocurrencies meet a similar fate?
The North Block and Mumbai’s Mint Street have effectively banned cryptocurrencies, but have kept a window open on their future here. Pushing the envelope, the Reserve Bank of India (RBI) last week ordered that banks and financial institutions regulated by it unwind their business relationships with cryptocurrency firms and exchanges. Instead of allowing private cryptocurrencies that are beyond the control of the central bank, Mint Street said it is considering a ‘fiat digital currency’ that will constitute its liability, and circulation of such money will be in addition to the paper currency that it now issues.
“It was a new challenge that central banks were facing. They lost their monopoly over the creation of money,” says Indira Rajaraman, a former member on the board of RBI and the 13th Finance Commission. “And when this monopoly was lost, it took a long time for central banks to realise what was going on and what to do about it. This (move by RBI) basically amounts to restoration of the central bank’s monopoly. So, it’s a good thing.”
To be sure, India’s banking regulator has been quite literally at war with virtual currencies from the word ‘go’. It has so far issued more than three warnings against dealing with cryptocurrencies and has emphatically stated that it does not license any crypto entity. But is its monopoly at risk? Former RBI insiders don’t think so.
“Central banks won’t lose monopoly over currency for the simple reason that ultimately even if a virtual currency becomes popular at some point in time, the holders would like to convert it into normal currency,” says R Gandhi, former deputy governor, RBI.
“Nobody will ever remain within the system of virtual currency entirely. At some point in time, people will exit and convert it into normal currency. So, the monopoly of a central bank cannot be questioned.”
The other debate is whether the growth in the parallel economy of Bitcoin or virtual currencies would impinge upon the smoother transmission of monetary policy. Some people believe that a fiat digital currency could help the central bank deal directly with citizens and reduce its dependence on the banking system for the execution of its policies.
While most people say no, because digital cash has not yet reached critical mass and size, others say that a hands-off approach with currency is not in public interest.
“Laissez-faire is not a good approach in banking or in the issuance of money,” said Agustín Carstens, general manager, Bank for International Settlements, in a recent lecture. “Indeed, the paradigm of strict bank regulation and supervision and central banks overseeing the financial and monetary system that has emerged over the last century or so has proven to be the most effective way to avoid the instability and high economic costs associated with the proliferation of private and public monies.”
Critics argue that the central bank’s approach reflects India’s broader lack of understanding of cryptocurrencies in respect of certain other markets. “Maybe, five years later, India will warm up to the idea but the world would have gone somewhere else by then,” rued Gautam Chhugani, director at global finance company Alliance Bernstein.
The value of top four global payment networks aggregates to about $550 billion; the world’s gold supply is worth roughly $7 trillion, in comparison Bitcoin’s market cap is about $100 billion. Further, the Bitcoin blockchain is so designed that the supply is capped at 21 million, with the maximum supply reached in the year 2140. There are currently 16 million Bitcoins with an exponentially decreasing inflation rate. The big question, therefore, is that if cryptos haven’t reached the critical size, are regulators shying away from the instrument due to the transparency it brings? “RBI’s move is not well-studied, they are just trying to protect themselves as cryptocurrencies are any central bank’s biggest enemy because when cryptocurrency gains critical size, governments lose control,” says Sidharth Sogani, founder, Block Next Solutions LLP.
“Right now, we don’t know how much money was collected during demonetisation. RBI has this information, but it doesn’t give it to the public. But when it comes to Bitcoins, RBI cannot manipulate information as it is all public. The magic money that banks are giving and these scams are happening, all those will disappear.”
RBI said during the policy review last week that it plans to come up with its version of cryptocurrency. “These are issued by central banks; they constitute the liability of the central bank and will be in circulation in addition to paper currency. It also holds the promise of reducing the cost of printing of the notes,” RBI deputy governor BP Kanungo had said.
Recently, Venezuela became the first country to issue its own cryptocurrency Petro, which is backed by yet-to-be drilled oil. But US President Donald Trump has already issued a prohibition order banning American citizens from going anywhere near the South American country’s first stateissued virtual currency. “In my opinion, a fiat digital currency won’t work,” says Gandhi. “NEFT or RTGS is nothing but virtual currency. The very purpose of currency is its anonymity and the moment you use any form of digital, it is traceable, so it loses its status as a currency and it will only be a payment instrument. Currency means absolute anonymity.” The argument that it could be costeffective remains to be tested as mining virtual currencies requires huge amount of electricity. RBI spent `7,965 crore in 2016-17 in printing currencies, the highest in 17 years, since it involved replacing 85% of currencies pulled out of circulation due to demonetisation.
According to BIS, electricity used in the process of mining bitcoins is staggering, estimated to be equal to the amount Singapore uses every day to power itself, making the currencies seem socially wasteful and environmentally bad. The majority of Bitcoin mining is, therefore, done in green countries like Iceland and northern China, where one doesn’t need refrigerators and ACs to ensure that the machines do not overheat. “If you mine it in India, you need to put an air-conditioning system as well,’’ says Sogani of Block Next.
“Your electricity costs go up substantially; so it does not make sense to mine it in India. Even if the government wants to do so, it will have to put the servers outside India to make it cost-effective. That again will be in contrast with the regulation of keeping all the data in India. So I don’t know what they are trying to achieve.”
After waxing eloquent with warnings on cryptocurrencies, forming a panel to see whether it can come up with its own may appear to be Janus-faced.