Is crypto mania more a symptom than a cause?

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The draft leg­is­la­tion on cryp­to cur­ren­cy being intro­duced in Par­lia­ment and the stance of the RBI sug­gest that con­sid­er­a­tion is being giv­en to ban­ning cryp­to cur­ren­cies in India. More adept tech­ni­cal heads can dis­cuss the pros and cons of such a ban. But the heat­ed debate that has ensued is a reminder that mon­ey is not just a tech­ni­cal subject.

It is at the con­flu­ence of faith, pol­i­tics, and psy­cho­log­i­cal mania. It is about faith in that val­ue is large­ly a mat­ter of belief; about pol­i­tics because mon­ey is always about the allo­ca­tion of pow­er; and mania because the alche­my of con­jur­ing some­thing out of noth­ing is always deeply allur­ing. The fas­ci­na­tion with cryp­to is what it reveals about our soci­ety, more than about what it can achieve.

Cryp­to cur­ren­cies are a fas­ci­nat­ing tech­no­log­i­cal inno­va­tion. Part of their ini­tial attrac­tion was that they promised a new gov­er­nance order. As one of the most insight­ful polit­i­cal the­o­rists of mon­ey Ste­fan Eich had point­ed out in a paper, “Old utopias, new tax havens: The pol­i­tics of bit­coin in his­tor­i­cal per­spec­tive,” there was a polit­i­cal back­ground to the inter­est in cryp­to. Faced with the infla­tion of the 1970s, thinkers like Friedrich Hayek the­o­rised about reassert­ing the dom­i­nance of pri­vate cur­ren­cies, pro­tect­ed from the state.

But this project cru­cial­ly depend­ed on solv­ing the prob­lem of “trust” on which every cur­ren­cy depends. Cryp­to seemed to solve that prob­lem, with its decen­tralised archi­tec­ture and com­mu­ni­ty and self-ver­i­fi­ca­tion pro­to­cols. Per­haps a lib­er­tar­i­an utopia could be created.

This was a fan­ta­sy. No state was going to let go of its pow­er to assert con­trol over the mon­e­tary sys­tem. The sus­te­nance of state-spon­sored fiat mon­ey is one of the great achieve­ments of mod­ern state for­ma­tion, and the foun­da­tion of its pow­er and legit­i­ma­cy. Sec­ond, there was a delu­sion, as if cryp­to is con­jured out of thin air: It actu­al­ly requires sub­stan­tial mate­r­i­al infra­struc­ture, which a state could always con­trol. States can shut down min­ing as Chi­na has done.

The mon­ey itself may not be mate­r­i­al, but it is still embed­ded in a mate­ri­al­i­ty. The fact that mon­ey is sub­ject to pol­i­tics is actu­al­ly the advan­tage of mon­ey. It allows a mod­icum of col­lec­tive con­trol over our future, and allows dis­trib­u­tive ques­tions to be posed.

As Easwar Prasad’s brac­ing­ly com­pre­hen­sive book, The Future of Mon­ey, points out, the ambi­tions of the cryp­to rev­o­lu­tion have not been met even on their own terms. As he puts it, “while each cryp­to cur­ren­cy might have spe­cif­ic strengths, nei­ther Bit­coin, nor any oth­er cryp­to cur­ren­cy can boast the blend of sta­bil­i­ty, effi­cien­cy, pri­va­cy and safe­ty that would allow it to dom­i­nate cen­tral bank mon­ey.” The rev­o­lu­tion her­ald­ed by digi­ti­sa­tion will con­tin­ue in dif­fer­ent forms, iron­i­cal­ly facil­i­tat­ing even more cen­tralised and hier­ar­chi­cal mon­e­tary architectures.

The ide­o­log­i­cal claims of cryp­to have been deflat­ed. It is now con­sid­ered more like an asset. Some finan­cial prod­ucts bring gen­uine gains for the econ­o­my or devel­op­ment, oth­ers pose a risk. In the lit­er­a­ture, a con­vinc­ing case has not been made for the con­crete devel­op­ment ben­e­fits cryp­to brings.

The under­ly­ing tech­nol­o­gy can be har­nessed for poten­tial ben­e­fits even with­out cryp­to. From a devel­op­ment point of view, no one should lose sleep if it is banned. The argu­ment then shifts to the val­ue of choice. We allow peo­ple to invest in all kinds of things. Why ban this, espe­cial­ly now that so many investors are in it? The answer to this ques­tion depends on how much risk the exis­tence of cryp­to assets pose to the sta­bil­i­ty of the rest of the finan­cial system.

One answer is if you can insu­late the finan­cial sys­tem from the crazy gyra­tions of cryp­to mar­kets there are few sys­temic risks. Which is why it was a good idea of the RBI to pro­hib­it the entan­gle­ment of finan­cial insti­tu­tions with this mar­ket. You want to be in a posi­tion that if cryp­to mar­kets col­lapse they don’t affect any­thing else. So then the risk of cryp­to is pure­ly pri­vate: If peo­ple want to spec­u­late so be it. There are issues about fraud. Some of this can be reg­u­lat­ed. But this can be part of the risk assessment.

But in prac­tice the insu­la­tion of cryp­to mar­kets will be dif­fi­cult to achieve. The first rea­son is polit­i­cal econ­o­my. Once you have a large num­ber of investors, and some influ­en­tial ones, they will be a vest­ed inter­est in their own right, poten­tial­ly demand­ing the social­i­sa­tion or mit­i­ga­tion of loss­es. We are already see­ing this. The RBI should have been more aggres­sive in dis­cour­ag­ing the growth of this industry.

Now it is fac­ing lob­by­ing by investors as an inter­est group. The sec­ond rea­son is that it is dif­fi­cult to pre­tend that a major new class of assets, espe­cial­ly if vol­umes grow, does not have sys­temic effects on the rest of the econ­o­my. In a cri­sis, if sta­ble coin redemp­tions go up, will not the RBI have to step in? What are the oppor­tu­ni­ty costs of invest­ments flow­ing into cryp­to on prices of oth­er assets and mon­e­tary instru­ments? What are the impli­ca­tions of a lot of mon­ey flow­ing to a sec­tor whose attrac­tion seems to be that there is no under­ly­ing log­ic to the val­u­a­tion of risk. Instead of just focussing on issues of fraud, mon­ey laun­der­ing, and pri­vate risks, the RBI’s case would be strength­ened if it spelled out the sys­temic risks that cryp­to might pose to the sta­bil­i­ty of the real economy.

It may also be the case that there is no halfway house in this sto­ry. For polit­i­cal econ­o­my rea­sons, the RBI should avoid a sce­nario where it bans but then carves out excep­tions. The sec­ond thing is that if it some­how allows Indi­ans to invest then it has to ensure that trade does not go off­shore. Not ful­ly ban­ning and allow­ing it off­shore will be the worst of both worlds. But the cen­tral point remains: The Chi­nese may be moti­vat­ed by con­sid­er­a­tions of con­trol and sur­veil­lance to ban cryp­to. But they are not wrong in think­ing that the finan­cial sys­tem should be in the ser­vice of the real econ­o­my. But then many would argue that cryp­to mania is a symp­tom more than a cause.

The glob­al econ­o­my is awash with cheap mon­ey. In an Indi­an con­text small savers are des­per­ate for return. In this con­text it is easy for the pow­er­ful to mis­al­lo­cate mon­ey and the small saver to express des­per­a­tion by spec­u­la­tion. As the RBI makes the case for ban­ning cryp­to, we also need to ask, why it is allur­ing in the first place. What does this mania reveal about our pol­i­tics and economics?

This col­umn first appeared in the print edi­tion on Novem­ber 27, 2021 under the title ‘Cryp­topol­i­tics’. The writer is con­tribut­ing edi­tor at the Indi­an Express

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