“Betting on crytpocurrencies gaining widespread use is a bet on dystopia — a breakdown of governments worldwide,” the economist, who is also a chess grandmaster, tells Shailesh Menon in an email interview. Edited excerpts:
What is the future of cryptocurrencies?
Outside dysfunctional and war-torn states, cryptocurrencies are likely to remain on the fringes of the digital payments’ space. Governments cannot and will not allow a significant quantity of transactions to take place anonymously.
But why are cryptos upsetting governments and central banks the world over?
If an economy ran entirely on cryptocurrencies, the government concerned would have an extremely difficult time collecting taxes, enforcing regulations and limiting criminal activity. Admittedly, we have to distinguish between transactions in regulated exchanges and peer-to-peer transactions that are more difficult to trace. But once the allure of anonymity is stripped away from cryptos, there are really no other advantages that cannot be duplicated — in principle — by other kinds of digital payment mechanisms, once payments infrastructures are upgraded.
Detractors say cryptocurrencies have no value.
It is wrong to say cryptos have no worth simply because they don’t have backing. If a cryptocurrency were to prove uniquely valuable in making certain classes of transactions — and if its supply were limited — it can have value as a transaction medium. And if it has value as a transaction medium, it can be a store of value. But there are several important caveats. First, if there’s no anticipated transaction use, cryptos are not a good store of value either. Second, because it is always possible to create new versions of cryptocurrencies, there is really no limit to the quantity that can be created, and thus no scarcity and no value. I don’t want to overstate this limitation, though, because it can take years to adequately stress-test a new security protocol. So older generations of crypto that have proved to be durable are more valuable for that reason — but only up to a point.
Crypto investments are touted to be a natural hedge against poor economic growth and weak currencies.
Very low interest rates around the world have raised the demand for art, houses, stocks, precious metals, etc, and crytpocurrencies have also greatly benefited.
Does India need cryptocurrencies?
All major countries are continually rethinking their payments mechanisms as technologies evolve. In direct answer to your question, it is not at all clear that blockchain will ever be an important part of the payments system. But it is too soon to know. One reason why regulators have been slow to act in this space is that they want to see whether ideas from cryptocurrencies might help them see how to better protect the existing payments structures on which the global economy depends.
Decentralised finance is becoming popular along with cryptos. Is it not a great idea?
This libertarian view is rather naïve, at least outside failed states. My sense is that most of the crypto community has completely abandoned the view that cryptos are a long-term strategy for avoiding governments. One only has to look at the recent experience of Seattle’s police-free autonomous zone to get a glimpse into such a future. And governments will always prevail when it comes to controlling the medium of exchange. As I emphasise in my 2016 book The Curse of Cash, a government can always shape the rules of currency competition to ensure it wins.
What does this trend of countries, including India and China, having their own digital currency signify?
Central banks around the world are looking hard at instituting retail digital currencies that allow ordinary people to hold claims directly on the central bank. It is too soon to tell what model will work best. Both China and India are far ahead of the US in digital payments, and although there is no possibility whatsoever of challenging the dollar’s supremacy in the near term, the fact that the USA has been so slow to move in the space could ultimately be problematic. The India Stack has been a huge innovation, and allowed it to have, by some measures, broader financial inclusion than the US. China’s nascent digital currency framework is designed to be very gradual, in the first instance replacing most cash. But they do not intend to replace bank accounts.
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