There is a n
interesting article on crypto currencies authored by V Ananta Nageswaran (VAN)
in the Mint. The article is available here.
It seeks to locate the rise of privately circulated crypto currencies, the
government reactions and probable challenges of sovereignty. Crypto currencies
are seemingly once again the flavour the season. Elon Musk has announced Tesla
would accept Bitcoin as a medium of exchange. There are banks in the US which
are in the process of accepting custodianship of crypto currencies. Crypto
currencies are privately circulated, highly volatile and do not have the
backing of the government. Instead many governments including India are
contemplating banning privately circulated crypto currencies like Bitcoin. There
are others who view the crypto currencies through the prism of speculative
instruments thus a potential lead indicator of the emergent bubble.
The author
locates the suspicion of the sovereign to the anonymity provided by the crypto currencies.
Cash was advantageous since it was anonymous. Yet with passage of time, the
money laundering legislation have made it difficult to bypass banks in
transactions even in those involving cash. Crypto currencies bypassing the
banking system enable the anonymity thus the eyes and ears of the sovereign and
the central bank. The advantage for cash further lies in its preferred use in
the retail transactions. Moreover, cash was backed by the sovereign. These thus
served as a lifeline for the unbanked in many regions that were poor,
underbanked and little access to formal credit. The author further notes that
the crypto currencies neither have sovereign backing nor serve underbanked
population. He distinguishes crypto currencies privately issued or government
backed from the digital currency transactions that happen electronically.
Electronic
financial transactions take place through the banking system yet the crypto
currencies even if government backed would bypass the banking system. This would
transform the monetary policy. The central banks use commercial banks as tools
of transmission of monetary policy. In absence of banks passing on the benefits
let us say of lower interest rates downstream, the monetary policy hits the
limitation. The digital currencies would be issued directly by the Central Bank
and thus create transmission effect directly without recourse to any
intermediaries. Furthermore, the Central Bank in whichever country it might
exist in would be in a position to track the digital currency from its inception.
The surveillance of the Central Bank and thus the government over the citizens
would increase manifold eliminating anonymity in financial transactions. This would
be achieved even in the case of substantial transactions taking place through
digital means not that all transactions would have to take place through
digital mode.
The monetary
policy is all about exercising exclusive choices between money stability or
interest rate stability. Digital currencies would ensure stability in money
supply. Currently if interest rates are reduced, the money supply or demand
could operate independently in theory. If the objective is to induce
consumption through a negative interest rate policy, the people can simply
withdraw money from the bank and keep it in their home. This would mean, the
deposits or money supply would go down yet, there would be no increase in
consumption. Currency in hand is not a multiplier, only deposit in banks are. In
case of state backed crypto currencies, this floor for monetary policy would
not exist. The central bank would be in a position wherein it could reduce
money holdings by the amount it desires the households do not engage in
consumption. If the central banks desires consumption to increase, all it can
do is to levy interest rate on money holdings. People do not have the right to withdraw
money and keep it in their homes. If they do not consume, their money holdings
would automatically come down. For instance if someone is holding Rs. 1000,
they can withdraw on demand if kept in a bank because of negative interest
rate, yet in digital currency mode, they do not have independence. All the
central bank needs to do is deduct let us say 1% that would Rs. 10 from the
account to reduce the holdings. Therefore, the key concept of independence to
do whatsoever with the money one has is lost. All the individuals would be
doing is holding the money at the whims and fancies of the central bank which
would be direct contradiction with the central tenets of freedom and progress. This
is perhaps a major negative that would go against the crypto currencies backed
by the sovereign. In fact, the crypto currencies backed by the private players
would circumvent this.
The author
points out another cause for suspicions about crypto currencies circulated
privately. They can be created out of thin air so as to speak something akin to
bank money thanks to the fractional reserve system. Gold is essentially an
asset mined in earth, so does other bullion items. Yet cryptocurrencies are
mined through computer software. In this aspect they are more like fiat
currency. The central bank creates currency in reserve accounts of banks who
use it to lend further, the lending limit restricted by the reserve ratios the
banks are expected to maintain for various purposes. In absence of reserves to
be held by the banks, every unit of money created leads to infinite multiplier.
The same can happen with private crypto currencies whose quantum is linked to
the amount being mined and created through algorithms.
The power of the
sovereign as the author contends lies in its monopoly to issue currencies. The private
crypto currencies threaten this monopoly. The currency is one domain where the
state seeks to maintain the monopoly with extremely high barriers of entry. The
private crypto currencies are essentially threatening this monopoly converting
into a competition or rather sort of oligopoly. This would hit the sovereign
power more ways than one. The author believes that the current struggle is primarily
one between the elites holding power over money and those who want to disrupt
that power. The money issuance remains one of the last yet critical vestiges of
state monopoly. The competition is knocking at the door. What might however
happen, is the bitcoin as we know it might not survive or might end up as a
bubble or remain a speculative instrument. Yet it is a road opening party for
the competition to emerge in money issuance. The state might not hold monopoly
for long in money issuance. This might transform the sovereign dynamics as we
know. Yet in the current era, as version 1.0 is being played out, the costs of
Schumpeterian forces as they play out would perhaps be high for everybody in
the game.
Comments
Post a Comment