Cryptocurrency has desirable benefits given its mechanisms are set by immutable and predictable math, the polar opposite of monetary policies as set by humans.
In December 2018, Chairman Powell of the US Federal Reserve (Fed) famously gave the market-shattering comment about the Fed balance sheet reduction being on “autopilot”, in an attempt to unwind the unconventional monetary policy of Quantitative Easing since the Global Financial Crisis. Only one month later, the most trusted monetary institution in the world reversed course, and since September 2019 the Fed has printed more than US $400 billion, same size as India’s full-year union budget, in complete opposite direction of Powell’s original guidance. If the past ten years was the decade of Central Banks (CBs) wielding the widest power since the founding of the US Fed in 1913, the next ten could very well be the age when the limits of CBs are challenged and more credible alternatives are considered.
The essence of money, along with its issuing parties, has changed throughout history. Such changes are frequent and evident by the fact that no present currency is more than 100 years old. Even the US dollar as we know it today arguably was only born in 1971, when the gold standard was abandoned during the Nixon Shock. Economists have attributed this radial change of the monetary regime as one primary cause for the stagnant middle-class income since the 70s in western countries, despite GDP continued to rise and asset values soared. After half a century of contentious widening wealth disparity, the resulting social pressure manifested into populist movements in global democracies in recent years. Monetary policies have direct impacts on society, as India experienced first-hand after the 2016 demonetization drive.
Today, global economies are showing signs of weakness due to normal economic cycles and geopolitical risks, but with monetary policies already stretched to the extreme, CBs have no choice but to go even further in their unconventional policies in the next downturn, which certainly will come in the 2020s. Just exactly how unconventional have monetary policies become? The Fed is now effectively footing all the deficit spending by the US government, and the world is still learning about the $16 billion negative yielding bonds never seen before in history (I borrow $100 from you and promise to pay $95 back in maturity). History doesn’t repeat itself, but it often rhymes—past experiences suggest currency debasement (inflation) after prolonged periods of money printing similar to that of today. As society starts to question the sustainability of a currency, the system will reset and be replaced by a new one issued by the government. However, this time is different from history—people, through cryptocurrency as a potential safe haven, have a choice to “opt-out” of the monetary Samsara of going from one discredited fiat currency to the next reboot.
Cryptocurrency has desirable benefits given its mechanisms are set by immutable and predictable math, the polar opposite of monetary policies as set by humans (think Powell’s example of policy flip-flopping or RBI’s surprise demonetization drive). There are also other important drivers of the inevitable rise of cryptocurrency. As alluded to in the previous column (India should rethink the crypto ban, November 16, 2019), the most successful cryptocurrency Bitcoin has become censor-proof, unbannable, and even indestructible within the realm of realistic outcomes. Aside from the constitutional protection of recording, expressing, and exchanging letters (essentially what cryptocurrencies are), there are true technological factors that contribute to the robustness of Bitcoin. Let’s walk through one core trait that is its “decentralized” architecture.
The technology that powers Bitcoin and other cryptocurrencies is called blockchain, a techy word for accounting ledgers. There is only one such accounting book (blockchain) of Bitcoin in the world with all the transaction records since its founding in 2009, and most importantly this single consistent accounting book is distributed and synchronized among computers around the world. To change the transaction record, one needs to simultaneously hack more than 50% of all computers in the network—an extremely difficult task. Not to mention this Bitcoin computer network is by far the most powerful computational machine in the world, 100,000 times more powerful than the top 500 supercomputers combined—once again unhackable. The anti-fragile trait of a decentralized structure is evident in areas outside of crypto, such as the prolonged protests in Hong Kong with decentralized organizations. Without a single point of attack or a single point of communication, the difficulty for authority to quell such movements increases notably.
Bitcoin’s mechanism is significantly more predictable than the prevailing monetary policy, which likely will venture further into the uncharted radical path; it is also indestructible at this point in comparison to conventional fiat or computational systems. These are two important factors that drive the strength for cryptocurrency, but it is worth noting the value of cryptocurrency comes from its dynamism. Cryptocurrency means different things to different people: to the unbanked villagers in remote areas, cryptocurrency presents a gateway to modern financial services; to merchants who have been excluded from local banks due to religious or value preferences, cryptocurrency is unbiased money inclusive to all; to dissidents, cryptocurrency is a safety insurance to preserve wealth across the border; to law enforcements, cryptocurrency (specifically Bitcoin) provides a more efficient way to capture criminals while preserving the privacy of the common people. Like a plane with multiple engines, cryptocurrency ascends on many unrelated but impactful drivers.
2020 is likely to be the year when the public sector pays significant attention to developments in the crypto space, driven by the impending launch of the Chinese digital currency (DCEP) and the Facebook Libra stablecoin (note both are not exactly cryptocurrencies). In the inevitable world of cryptocurrency, there will likely be four types of countries: ones who take active roles in shaping the technology to its objectives, such as China; ones who follow the free market principle and let cryptocurrency develop freely, meanwhile attracting talents and capital—Singapore and Japan are taking the charge in this category; ones who due to the desire of preserving the legacy system, futilely fight the crypto tidal wave that practically cannot be reversed; and finally ones that are hit by the seismic change after the fact, unaware and unprepared. To which group will India belong?
After rounds of interest rate cuts and significant reform in the tax system, India is still seeing the slowest growth since 2013, which presents a challenge to keep the young and educated population employed. On the other hand, a recent survey indicates significant shortage of blockchain related programmers in the US, and with China starting the national march toward blockchain, global demand for crypto talents will only rise further. For the long term, the very fabric that enables commerce is evolving with the advent of cryptocurrency—this would have implications to the fortunes of a nation, hence India should choose wisely; but even for the short term, the government should embrace crypto to ride the demand increase for talents, where the educated Indian young are exceptionally well positioned in the global arena.
James Lee is the founder of New World Research and Analysis Institute