Tanvi Ratna, Founder and CEO, Policy 4.0, discussed the future of money, there being no one blanket identity for cryptocurrency and why banks are staying away from it.
In this explained.Live session, researcher and advisor Tanvi Ratna, Founder & CEO, Policy 4.0, discussed the future of money, there being no one blanket identity for cryptocurrency and why banks are staying away from it
On cryptocurrency’s journey from a decentralised tender to an asset class
Imagine Pranav and Aashish are living 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? That’s essentially the trust deficit and to fill this trust deficit in all transactions we have intermediaries. Banks are essentially doing the same thing in financial transactions, you don’t know if the other person is good for the money and if you enter into anything with them you need some kind of guarantor saying that this person is good for the money.
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So when the Lehman Brothers went bust and all these different financial institutions started collapsing in so many parts of the world, it was a domino effect. This started from one intermediary, which sort of traded, bundled and traded out an asset which was not worth anything and because of the action of that intermediary a lot of the interconnected financial system went bust. Instead of actually checking that moral hazard problem, in the end they got bailed out with taxpayers’ money.
So this is the premise of the whole thing, you need to understand this because bitcoin is as much a political movement as it is a technological movement… there is a mixture of all these dynamics of belief, philosophy and tech and new models, new systems, all of this that comes. That’s the first generation of crypto, which was bitcoin. It’s a system which was able to self-incentivise people, so this whole intermediary function is decentralised.
So it starts off as an alternative system of finance. It started off with just one use case, which was payment. Bitcoin, till date, only performs one use case. Of course now that they are looking at bitcoin-based DeFi, there will be other things. This other developer came along, some years later, and said, “Well, why can I only do payments, why can’t I add conditionality to these payments. Why can’t I say that if these conditions are met, then a transaction executes. That’s essentially what is called smart contracts. And that was ethereum, and that’s why bitcoin and ethereum are sort of like the grandfathers of this whole system. But they are bringing different levels of functionality into this money. Each coin is bringing 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 it has been from the start, all kinds of crates, whether it is a currency, or it is a commodity, or it’s a security. I think there is really no blanket identity that can be given to crypto.
Just calling it one thing or the other doesn’t solve the problem. What it is, is simultaneously all these things. It is simultaneously a currency and an equity in the network.
On what exactly is one investing in
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When you buy a token, you essentially own a piece of the network. What that gives you depends on the design of the network. So sometimes when you own tokens, what a network gives you is it allows you to stake those tokens and you earn an interest on it. And then what everybody knows is that the price appreciates and you can earn things with the crypto that you have.
On why banks in India are hesitant to allow crypto transactions
It’s actually not so much to do with the trust deficit, the issues of the banks are different. There are many countries where crypto is perfectly legal and there is no objection from the bank, but the banks still don’t bank crypto. Even in Singapore and in places very progressive on crypto, it is quite a difficult task to get a bank account. That is simply because of the calculations of banks themselves.
Banks are basically providing you financial services based on the kind of assets you have and there are people in the chat who get worried looking at the volatility of crypto, so what do you do with a customer who is only holding onto these assets? He might come to you with an asset value of some two million or something and maybe by the time you have issued him his bank account, that goes down by one-fourth or changes in a day or two days or in one cycle. So how do you manage operational risk in a scenario like that? It is very difficult. For those reasons, the banks are a bit worried and honestly if you see banks, crypto is really competing with banks.
On whether there is a global consensus on regulating crypto
To some degree there is already a global consensus on the KYC side, which is the final guidance of the FATF (Financial Action Task Force) that has been issued. It came out in 2019 and now every country 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 in. Now when it comes to the other aspects, it’s very difficult to blanket set it, because there is no agency that has that kind of authority over anyone’s economy. There is no agency that can mandate that you shouldn’t have capital controls or you should have capital controls or your securities market needs to have this sort of a law or it shouldn’t have that. There is no binding kind of institution like this.
On the role of the 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 is issuing it own cryptocurrency. For day-to-day functions, I think the CBDC
will probably be the more dominant tool. What crypto enables, the CBDC can’t enable. But crypto might never have the legitimacy of a CBDC, so I feel they will sort of work on different tracks.
Audience Questions
On whether the government will be able to regulate financial problems
This is a common misconception. Crypto is not inscrutable, it is actually completely public ledger, the only thing that is not known on 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 effectively because of basically two elements of clustering and identification.
On how the common man can benefit from cryptocurrency and its adverse impact on the environment
So bitcoin has a very energy intensive mechanism, which is called proof of work and the trade-off there is that it’s seen as the most robust one also. It’s the one that is the most decentralised, nobody can capture it, it’s the most rigorous, so people can’t cheat. The bitcoin maximalists will tell you that it is less expensive than running a multi-layer financial system. For example, seven percent of US GDP goes into delivering financial services. That’s a huge charge as well, that’s a huge amount of money. Some people will say that’s the cost we are bypassing with this proof of work chain. This was earlier the rationale. This is the proof of work consensus, it is energy intensive, it’s computation intensive, and that’s why there are all these environmental impacts of it. I think a couple of innovations are happening there in terms of the chips that will be used for mining, can this whole thing move to renewable energy. A lot of bitcoin mining actually happens on renewable energy.
