The advent of Bitcoin as a functionally superior ‘store of value’ seems to have taken the shine away from gold.
Luck is what happens when preparation meets opportunity.
India’s favourable demographics has long been an envy for the aging developed world. Launched in 2015, Prime Minister Narendra Modi’s “Digital India” initiative has installed this world’s largest tech-savvy Generation Z with technical skills in preparation for the digital age to come. Then Covid-19 happened—the black swan pandemic changed how societies operate and fast tracked the dematerialization global economy into a digitized metaverse, where the Indian IT sector has begun to reap the benefits.
Crypto is one of the prominent game-changing technologies that holds the promise to boost economies and propel new levels of innovation across industries. Three years after the Reserve Bank of India’s attempt to ban crypto that was later rescinded, the asset that is popular with younger generations may finally be given regulatory clarity as a commodity in the newly drafted crypto bill, thus removing policy obstacles for India under PM Modi to lead the world in this revolutionary technology.
It is well covered in the media why India can be a natural capital for crypto for reasons stated above, but the development will have profound economic and geopolitical implications, beyond the first derivative impacts of employment growth or financial inclusion of the masses. Using Bitcoin, the longest-running apex crypto network as an example, this columnist would like to explore some of the less discussed reasons why India would be a global leader in crypto. This is why policymakers must design the upcoming crypto bill with utmost diligence in congruence with the potential significance crypto carries.
After five decades of money printing without constraints of the gold standard, and finally catalysed by Covid-19/geopolitical driven supply chain realignments, the world has evidently entered a prolonged period of high inflation. However, unlike the 1970s when central banks successfully tamed inflation by raising interest rates, the high debt load of governments in developed countries today has left central banks no room to manoeuvre. Rates must be kept at zero-bound or else risk government defaults. This leaves the ordinary working class around the world to fend for themselves.
India has the largest private stock of gold globally, hence the savings of Indians stored in gold over a millennium should be well protected from inflation even without help from the government. However, the advent of Bitcoin as a functionally superior “store of value” seems to have taken the shine away from gold. In 2021, when CPI continued to break out of expectations, gold was down over the same period—the traditional inflation protection has not worked as intended. If this trend continues, what used to be India’s best advantage in gold could turn out to be a liability—India urgently needs to divert its savings from gold to Bitcoin to preserve its purchasing power.
One country has foreseen and positioned itself well for the said macro risks. El Salvador made Bitcoin its national currency in September, and its President articulated the rationale to Bitcoinize the nation: the US Federal Reserve has printed trillions of dollars to stimulate the economy. However, countries like El Salvador have not received any stimulus checks but still must shoulder the inflationary burden of a debased USD. In India’s experience, it is reflected in the rapidly rising costs of imported energy without subsidy from the US Fed. The most direct way out is to rebase the economy on an inflation-proof asset.
There are other benefits to a Bitcoinized society to which India can relate. Remittance takes up 24% of El Salvador’s GDP, but now gone are the heavy fees used to be charged by global banks and rent-seeking middlemen of international wires when money is sent via the Bitcoin network. India in 2020 received over $83 billion remittance from abroad, making it the largest recipient country of remittance globally—billions of dollars of savings could go directly to the society if India were to ramp up crypto as the primary remittance channel.
Conflict between authoritarianism and liberal democracies will be the central geopolitical risk for decades to come. The Chinese Communist Party’s (CCP’s) territorial aggression at the Indian borders and beyond has put the stability of the whole world at risk. Fortunately, democracies have come to acknowledge this threat. New alliances such as the Quad and AUKUS have been formed to suppress the probability of a kinetic conflict. However, in the digital realm, the CCP’s advancement remains unchecked and poorly understood.
For example, DCEP, CCP’s digital currency that is the first technological upgrade to cash in 400 years, is a critical component of a comprehensive strategy by the CCP to disrupt the USD hegemony—the source of power of the United States. If the currency war were to be lost against the CCP, most other battlefronts would not matter.
What have been the responses by democracies so far to such threats?
Central banks around the world are scrambling to create copy-cat central bank digital currencies in which the CCP has at least a five-year technological lead—an endeavour that will turn out to be a lost cause and a waste of resources for democracies. Furthermore, the design of DCEP that incorporates CCP’s philosophy, such as the complete see-through capability of all economic activities in the name of big-data analytics, or state surveillance for the purpose of counterterrorism with a very broad definition, are temptations other governments will find hard to resist but might ultimately corrode the founding principles of democracies.
To counter CCP’s digital currency, a better solution for democracies such as the US and India is to embrace and adapt existing crypto networks of the free world and build on those that have proven to be robust enough to resist nation-state attacks, something Bitcoin, for example, has demonstrated. The CCP in early summer shut down half of Bitcoin’s computational capacity and implemented a draconian ban of the crypto asset. However, the Bitcoin network continued to operate without skipping a beat, and the price has more than doubled since. This antifragile asset is the key to victory for democracies in the currency war against the CCP.
It is a timely development the Indian government has moved past common misconceptions about crypto, such as it being used for money laundering. This when so much of that is taking place even through elements of the banking system. As policy directions shift from ban to regulation, much thought needs to be put into the careful design of the upcoming crypto bill to ensure that a fertile ground is laid for innovation that would benefit the people and democracies globally, while reducing the lead the PRC has in digital currency.
For example, the current proposal to tax crypto transactions and profits might prove to be counterproductive. The traditional territorial based tax system is obsolete when dealing with an inherently borderless asset that is crypto. When other countries make Bitcoin a legal tender without tax implications, this strategically important asset can also flow out of India with little friction. As opposed to fitting an old tax framework on a never-seen-before technology, policymakers must create a new revenue model that will work in the crypto age.
The one-size-fits-all approach to regulate all crypto assets as commodities might also become a problem. For example, many crypto assets’ design of centralization is similar to that of CCP’s digital currency, but completely opposite to the decentralized architecture of Bitcoin, where no countries or organisations can exercise control. The Chair of the US SEC, Gary Gensler, is also correct to point out some crypto assets are clearly investment securities and must be regulated as such to protect investors. It will be beneficial for Indian regulators to develop capabilities to distinguish crypto assets on a case-by-case basis down the road. India must lead the transformation that Crypto is causing in global finance.
James Lee is a consultant at Mimesis Capital.