In this session Explained.Live, researcher and advisor Tanvi Ratna, Founder and CEO of Policy 4.0, discussed the future of money, there is no global identity for cryptocurrency and why banks stay away.
On the journey of cryptocurrency from a decentralized tender to an asset class
Imagine that Pranav and Aashish live in different parts of India and Pranav has something that Aashish wants to buy and they don’t know each other, they are strangers. So should Pranav send the money first or should Aashish send the goods first? It’s basically the trust gap and to bridge that trust gap in all transactions, we have intermediaries. Banks basically do the same thing in financial transactions you don’t know if the other person is good for the money and if you conclude anything with them you need some kind of guarantor saying that this no one is good for money.
So when Lehman Brothers went bankrupt and all these different financial institutions started collapsing in so many parts of the world, it was a domino effect. It started with an intermediary, who somehow swapped, pooled and traded an asset that was worthless and because of the action of this intermediary, much of the interconnected financial system went bankrupt. Instead of verifying this moral hazard problem, they were eventually bailed out with taxpayers’ money.
So that’s the premise of all of this, you have to understand that because bitcoin is as much a political movement as it is a technology movement… there’s a mixture of all these belief and philosophy and technology dynamics and new patterns , new systems , all this is coming. It is the first generation of crypto, which was bitcoin. It’s a system that was able to self-motivate people, so this whole brokerage function is decentralized.
So it starts as an alternative financing system. It all started with one use case, which is payment. Bitcoin, to date, performs only one use case. Of course, now that they are considering bitcoin-based DeFi, there will be other things. This other developer came along, a few years later, and said, “Well, why can I only make payments, why can’t I add conditionality to those payments. Why can’t I say that if these conditions are met, then a transaction executes. It’s basically what’s called smart contracts. And that was Ethereum, and that’s why Bitcoin and Ethereum are sort of the grandfathers of this whole system. But they bring different levels of functionality into that money. Each piece brings something else.
So just calling it a commodity doesn’t change the nature of crypto. We could call it anything, but crypto is everything and from the beginning, all kinds of funds, be it a currency, a commodity or a security. I think there really is no global identity that can be given to crypto.
Just calling it one thing or the other doesn’t solve the problem. What it is is all of these things. It is both a currency and an equity in the network.
What exactly are we investing in?
When you buy a token, you essentially own part of the network. What this gives you depends on the design of the network. So sometimes when you have tokens, what a network gives you is that they allow you to stake those tokens and you earn interest on them. And then what everyone knows is that the price appreciates and you can earn things with the crypto you have.
Why Indian Banks Are Hesitant To Allow Crypto Transactions
It actually doesn’t have much to do with the confidence deficit, the banks’ problems are different. There are many countries where crypto is perfectly legal and there is no objection from the bank, but banks still do not bank crypto. Even in Singapore and places that are very progressive on crypto, it is quite difficult to get a bank account. It is simply because of the calculations of the banks themselves.
Banks basically provide you with financial services based on the type of assets you own and there are people in the chat who are worried about the volatility of crypto so what do you do with a customer who only holds these assets? He may come to you with an asset value of about two million or something and maybe by the time you issued his bank account to him it goes down a quarter or changes in a day or two or in a cycle. So how do you manage operational risk in a scenario like this? It’s very difficult. For these reasons, banks are a bit worried and honestly, if you see banks, crypto is really competing with banks.
If there is a global consensus on crypto regulation
To some extent, there is already a global consensus on the KYC side, which is the latest FATF (Financial Action Task Force) guidance that has been released. It came out in 2019 and now all countries will start ratifying it. So you will see that on the issue of terrorism, finance, money laundering, there is already a standard that has come into force. Now, in terms of the other aspects, it’s very difficult to establish that comprehensively because there’s no agency that has that kind of authority over anybody’s economy. There is no agency that can prohibit that you have capital controls or that you have capital controls or that your securities market needs to have that kind of law or it shouldn’t have . There is no binding institution like this.
On the role of CBDCs
I think they are completely different things, so the CBDC (Central Bank Digital Currency) only matters if there is a sovereign country and if it issues its own cryptocurrency. For day to day functions I think the CBDC
will probably be the most dominant tool. What cryptography allows, the CBDC cannot. But crypto may never have the legitimacy of a CBDC, so I think they will kind of work on different tracks.
Questions from the audience
On the government’s ability to regulate financial problems
This is a common misconception. Crypto isn’t impenetrable, it’s actually an entirely public ledger, the only thing not known in it is identity. There is already a field called blockchain forensics, which is quite advanced now. It’s even in places that don’t have Aadhaar, don’t have KYC, don’t have anything; they are able to identify these actors quite efficiently thanks to two fundamental elements of clustering and identification.
On how the common man can benefit from cryptocurrency and its negative impact on the environment
So, bitcoin has a very energy-intensive mechanism, called proof-of-work, and the trade-off is that it’s also considered the most robust. It’s the most decentralized, nobody can capture it, it’s the most rigorous, so people can’t cheat. Bitcoin maximalists will tell you that it costs less than running a multi-layered financial system. For example, seven percent of US GDP is spent on providing financial services. It’s also a huge burden, it’s a huge amount of money. Some people will say that’s the cost we’re getting around with this proof-of-work chain. That used to be the raison d’etre. It’s proof of working consensus, it’s power-intensive, it’s computationally intensive, and that’s why there are all these environmental impacts. I think there are a few innovations happening there in terms of chips that will be used for mining, can all of this transition to renewable energy. Much of bitcoin mining actually happens on renewable energy.
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