Why Cryptocurrency will NOT be Banned

Banning cryptocurrency is a thoughtless idea being propogated very vociforously by the RBI governor and then there are some muddled thoughts by the Finance ministry and other govt officials about how cryptocurrency is bad but blockchain technology is good.

A. Firstly, we must understand that you can't have a public blockchain without an underlying cryptocurrency. Crypto is essentially and nothing but the code which defines the governance model of the blockchain.

Private blockchains are a misrepresentation of the basic idea of blockchains. At best they are like intranets, effective and relevant within closed systems because:

1. The underlying coded governance model can be changed by a small group of interested parties

2. There is no sanctity of the transaction data stored on the blocks in the blockchain because the data blocks themselves can be altered if required. This is possible because the validators of the blocks could be the very entities who have an interest in changing the transactional data , should there be a "need " to do so.

B. Banning Cryptocurrency

India has been making a lot of noise about banning crypto. At the same time, FM Nirmala Sitaraman is clear that it has to be a co-ordinated global effort. In this context the views of IMF Chief Kristalina Georgieva are worth mulling over:

“We have to differentiate between central bank digital currencies backed by the state and stablecoins, and crypto assets privately issued. Second, there has to be a very strong push for regulation. And third, if regulation fails, if you’re slow to do it, then we should not take off the table or ban those assets, because they may create financial stability risk,” Kristalina Georgieva

Further she adds that crypto assets not backed by the State can't be a legal tender because they are "not money" .

1. So, lets try and decode her arguments by first diffrentiating between CBDC , stable coins backed by the USD and crypto asset like Bitcoin which has been made legal tender in El Salvador.

a) CBDC is the liability of the issuing govt. So, it becomes equivalent to physical cash in terms of liabilty. So, essentially it is just another form (digital) of currency issued by the Central Bank of a country. With over 100 countries in the race to issue their own CBDC at the macro level nothing really changes. If anything , the need for a trustworthy global reserve currency becomes even stronger. Currently, the role of a global reserve currency is the USD.

b) How trust worthy is the US Dollar ??

i) The USD has been systematically been debased against Gold. (detailed argument in my article on Lessons from Historical Gold Prices over the last two centuries) and the issuing country has not hesitated in cheating its own people by confiscating their wealth (Gold) by decree in 1933 and reneging on their global commitments in 1971 with Nixon breaking the Gold peg to the USD (shall we call it "sovereign risk")

ii) For over 50 years, the stated "temporary measure" of delinking gold from USD has not been restored. Instead , what we have today is a global debt based economy. The USD is just a "promisory note" and so are ALL other global "State Backed" fiat currencies.

c) Another thing, which has happened since the 1970's is that with increasing acumen of the global financial pundits the price of Gold itself has been increasingly controlled through the (mis)use of financial digital products. Today there is so much more "paper gold" and gold derivatives that even Gold is failing in its role of being "hard money". Inspite of all that , the machinations of the central bankers in debasement of fiat currencies which they want us to believe is "money" are illustrated by two facts :

i) One ounce of Gold could buy about 23 barrels of oil a hundred years ago. That ratio is nearly the same even today

ii) A barrel of oil cost less than a USD then vs around $80 today.

Moral of the story :

USD, CBDC issued by State or even Stable Coins backed by the USD is " NOT MONEY" as IMF chief would like us to believe.

C. What is "digital money" , the real, hard money whose value can't be manipulated ??

Could it be Bitcoin ??!!!

The hesitation to play along with insecure emerging economies like India are very clear. The developed world, US in particular, could be looking at how best it can use blockchain technology as a wrapper on the USD to fight the challenge of "digital money on a public blockchain" (Bitcoin) and the technological lead taken by China in using CBDC as money and building global financial rails around it posing a long term threat to the "established global world order".

D. Food for thought :

Why is it so important to parrot-like sing the virtues of and join the fight to save the established global financial world order ??