The push towards cryptocurrency is gaining ground on an international level, but is it sufficient to be used alongside, or instead of, legal tender?
Bitcoin was the original cryptocurrency when it was created by its pseudonymous developer Satoshi Nakamoto in 2009. More than a decade later, with almost 5,500 cryptocurrencies in existence, the controversy around its usage as a fiat currency rages on.
The Reserve Bank of India banned trading in cryptocurrency in 2018 to curb the "ring-fencing" of the Indian financial system. Its argument was based on the virtual form of Bitcoin and other cryptocurrencies and the fact that the government had not "stamped" them. Giving its judgment on a petition filed by assorted interest groups, including the Internet and Mobile Association of India, in March this year, the Supreme Court overturned the RBI ruling. Since then, the crypto market has gathered momentum. But throwing a spanner in the works is a proposed Bill (that is now under inter-ministerial consultations) that could kill the market and may make dealing in cryptocurrencies a criminal offence.
There is ambiguity with respect to cryptocurrencies in the U.S. Laws governing transactions in cryptocurrencies varies from state to state as also the very definition. The Financial Crimes Enforcement Network, while permitting their exchange as money transmitters, does consider them as legal tenders. For the Internal Revenue Service (IRS), cryptocurrencies are property to be separately taxed. The Commodities Futures Trading Commission allows them to be traded publicly as “a commodity". Bitcoin is legal in Japan, the U.K., Canada, and most other developed countries.
Countries are considering the use of Central Bank Digital Currencies (CBDCs) to fine-tune the usage of digitised money. These digital forms of fiat money are fundamentally different from cryptocurrencies as they are centralised and can be regulated. The central bank of Sweden is the closest to consider its implementation and has started testing technical solutions for its e-krona this year. China has also stepped up its development of the e-RMB, which is going to be its digital currency. CBDCs are simply digitised forms of currencies, thereby not as volatile as cryptocurrencies.
WHY THE RESISTANCE?
Pindar Wong (former chairman of ICANN), speaking at a Synergia Foundation webinar said the decentralisation of cryptocurrencies is what draws the suspicion of established state-controlled central banks. The fact that it is steered by all those who are participating in it, and the lack of authority of the central bank to regulate it, the way fiat money is, has inhibited central banks from giving their approval. The central banks are concerned, naturally enough, that if it becomes impossible to track currency ownership and transactions, the entire currency system of a nation could be jeopardised.
SOVEREIGN CURRENCIES VS CRYPTOCURRENCIES
Bruno Le Maire (former diplomat and now France's Minister of the Economy and Finance) questioned the overrated emphasis on the concept of sovereignty while dealing with cryptocurrences. He wrote in the Financial Times: “When 11 countries in Europe joined the Euro in 1999, they freely relinquished their national currencies. They didn’t just say yes to a new currency as a medium of exchange; they consciously decided to transfer part of their sovereignty to the European level.” However, the U.K. refused to toe the line and hung on to the venerable pound.
Currencies often serve as a medium of national communication in many ways. Before the advent of national currency, there was an assortment of mediums of exchange for business transactions. One country had multiple circulating currencies in different towns and regions. National currencies joined erstwhile geographic and social barriers to create a combined experience of trade and economy. François Gianviti, the former General Counsel with the IMF, in one of his many publications, highlights that the central bank’s right to issue currency allows it to conduct the country’s monetary policy. Nations have continuously monopolised currency through the 19th and 20th centuries (the European Monetary System and the Central African Monetary Unions) and they have had the chance to use the currency as a way to achieve state goals, both economic and political.
Legal tender, or fiat money, rests heavily on the trust that being the sovereign legal tender, its usage will be backed by the modern state and its laws.
Academics Unwin and Hewitt, referenced in Currency, Identity, and Nation-Building: National Currency Choices in the Post-Soviet States, sum up the case for currency as a sovereign identity. “Paper money is therefore not only a way of reinforcing internal cohesion and identity, but it is also a way of depicting that identity to the outside world in a very tangible and often beautiful form.”
With cryptocurrencies, however, this is not the case. Mr. Pindar Wong opined that the meaning of money was getting unbundled, which was bound to put a few people on guard. Cryptocurrencies fail to generate a national identity – they lack the tinge of nationalism and ownership and a sense of participating in the national economy. Cryptocurrencies are a means for wealth accumulation without any geographical or sovereign limitations. This dissonance, however, does not have to be a bad thing.
Since cryptocurrencies are network-centric rather than geographical, it is bound to change the way people access money. It would allow anyone on the network to perform transactions with another, irrespective of their respective locations. This is what Facebook plans to do with its Libra project.
According to an article by WIRED, roughly 2.7 billion people use Facebook, along with its products WhatsApp and Instagram. If all these people are to adopt Libra as their primary medium of exchange, it would then be used by almost a third of the world’s population, which is a whole country by itself. There would then be a new financial system, overseen by no government.
What the future holds for cryptocurrencies is yet to be seen, but it could change the way monetary policies function. What is certain is that cryptocurrencies are going to be around for a while, illegally or legally.
The world is still far from its Utopian dream of being one large global village. Whatever may be the advantages of using blockchain to resolve day-to-day issues, government control over central currency remains critical to the financial well-being of a state. Cryptocurrencies would operate with very little state supervision. The question arises, during times of financial hardship, who will take the decision to print more currency to tide over the situation?
Vesting the power of monetary policy in a private player has never been experimented with, and would perhaps change the way countries form their policies.