RBI DG R Gandhi has a speech on two upcoming opportunities/threats in finacial industry – fintech and virtual currency (VC).
On VCs (there was a time when VC meant Venture Capital) he says this idea that VC will lead to death of currency is hardly new. These ideas have been there for a while:
I want to discuss a little more about the Blockchain or the distributed ledger technology and its professed capabilities to usher in virtual currency.
As regards death of currency, it is not a new subject. It has been predicted right from early 1950s. As you will recall, Isaac Asimov’s Robot Series (1950s-80s) imagined a future where cash didn’t exist; instead people earned “credits” that were traded electronically. In June 1991, the writers for Omni Magazine claimed “…cash and credit will soon be obsolete.” In 1994, Joel Kurtzman in his book titled ‘The death of Money’ said “Few people realize that money, in the traditional sense, has met its demise. Fewer still have paused to reflect on the implications of that fact.”
It was fashionable then to talk about the death of currency. People said “By 2020 most people will have embraced and fully adopted the use of smart-device swiping for purchases they make, nearly eliminating the need for cash or credit cards.”
Has currency died? Is it dying? Or at least will it die? In all these years, you will find that currency has actually increased in absolute terms, not just in developing and emerging economies where penetration of banking and finance is not yet complete, but also in the developed economies where the penetration of banking and finance has been far larger. Countries are printing more and more of currency. Perhaps the Nordic countries are the exceptions.
Now cometh the Crypto Currency. People say, this time around currency will die. Some others say, it will be a close call; at least currency will be replaced by Virtual Currency.
The quest for anonymous and independent Digital Currency has been in the minds of researchers for quite some time. The Cypherpunks, as they were called, led by Timothy May of Intel and Eric Hughes in 1992 tried to develop privacy thru crypto logic. They endorsed a mistrust on the prevalent system of currency and boasted of an anarchist philosophy to find the anonymous and independent digital currency. Wei Dai in 1998 attempted to create what was called the B-Money, a money that could not be taxed or tracked. Nick Szabo attempted to create Bit-Gold which will be difficult to solve (mine) and so will have value; he tried to create a puzzle of solving cryptographic equation which was further refined by the hands of Satoshi Nakamoto in Bitcoins.
Voila! You now have a digital currency; not created by authorities; more and more people have accepted it. Bitcoins have acquired value; they are being used for settling varieties of economic transactions; people are using them as investments and store of value. So ‘currency’ is being eliminated.
Blockchain, the foundation for Bitcoins like innovations, is touted to be the death knell of currency. I believe its potential is being overstated. We can see that in these types of solutions for Virtual Currency, there is no central bank or monetary authority. They pose potential financial, operational, legal, customer protection and security related risks. VCs being in digital form are stored in digital / electronic media; are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack, etc. Payments by VCs are on a peer-to-peer basis. No established framework for recourse to customer problems / disputes / charge backs, etc. is feasible. There is underlying or backing of any asset for VCs. Value seems to be a matter of speculation. Legal status is definitely not there. While this is a purported objective of a VC, it puts a natural limit for its progression as I will explain in a moment. And finally, the usage of VCs for illicit and illegal activities has been reported as uncomfortably large.
My arguments against these VCs stem from two key elements viz., Confidence and Anonymity. A ‘currency’ should be able to sustain these two elements for ever; it will impair its exalted status once, either of these elements gets affected. The ‘confidence’ in BitCoins or for that matter any virtual currency based on blockchain or any other technology is also limited to its initial rounds and circles only; the initial rounds are always filled with adventurists and risk seekers; the moment masses get in, the risk-avoiders get in, they will need greater ‘confidence’ for acceptance and that can come only if an ‘authority’ issues it. As regards ‘anonymity’, the blockchain technology apologists say it can be made very difficult to track; they say ‘difficult to track’, and that is not ‘anonymity’. Therefore, it may remain a pipedream that blockchain will eliminate ‘currency’, by ushering in ‘virtual currency’.
Hmm. So what is different this time?
The biggest difference is central banks and governments have themselves eroded confidence in their own currency. Right from the unconventional random monetary policies followed by developed countries to demonetisation drive in India, there is less and less confidence with the existing currency system. Infact, it is ironical to read such stuff from Indian central bank. The way it has joined hands with Indian government on cash-less or less-cash economy, one should be welcoming all kinds of ways to push Indian economy towards the so called digital world. The issues cited with VC like “confidence and anoynmity” are there with most digital payments. Infact this is the entire fight between those who oppose war on cash saying it takes away people’s privacy.
Actually, all this while governments and central banks have prevented these ideas to develop. Whether we like it or not, it is the government which people trust in monetary matters. Or atlesast that is how the history has been shaped of money. So unless governments allow payment of taxes etc in other currencies, no currency can really take off. Thus Mr Gandhi also says:
There is a movement to make use of Blockchain technology for Virtual Currency by the central banks themselves. Of course, this calls for lot of research. I am glad that IDRBT brought out a white paper on applications of Blockchain Technology for the banking and financial sectors in India. There are several such endeavours in the world. Hopefully, these will lead to usable solutions.
This could perhaps be the most likely thing to happen. Just like it has been, government could once again ensure that these measures do not take off and use the technology for its own gains.