Crypto – Another outlaw

India forgoes a great opportunity.

• The Indian state’s desire to control its currency is so great that it is willing to forgo the huge opportunity granted to it when China outlawed cryptocurrency.
• India is reintroducing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which creates a framework by which to create a Central Bank Digital Currency (CBDC) and bans all private cryptocurrencies in India.
• This issue did raise its head earlier this year, but it was uncertain whether or not it would see the light of day.
• That uncertainty has now passed, and the Indian state hopes to pass this into law during its next session which runs from November 29^th to December 23^rd.
• This time the excuse is that cryptocurrency is a danger to the country’s youth but India’s real reasons for banning cryptocurrency are exactly the same as China’s.
  • First, control: Cryptocurrencies run on the blockchain which is a decentralised ledger-keeping system that no one controls.
  • Hence, if Bitcoin and other cryptocurrencies become a widely accepted medium of monetary exchange, then governments and central banks will have lost control of the money used within their domains.
  • The ability to print money and control interest rates is fundamental to the state’s ability to finance deficit spending through money printing and quantitative easing.
  • If it cannot print money, then its ability to borrow money is greatly curtailed as its lender of last resort, the central bank, can’t create the money to lend to the government.
  • This is especially the case when the interest rates are so low (like they are now) that no rational investor wants to lend the government money.
  • Hence, any cryptocurrency is deeply threatening to centralised control which is why this was always going to happen, it was just a question of when.
  • El Salvador is only backing cryptocurrencies because it (and many other economies in Latin America) have long been effectively based on the dollar having completely debased their own currencies through excessive spending and money printing.
  • All government and central banks, not just emerging markets, fear cryptocurrencies for this reason and while emerging markets will neuter them by outlawing them, developed market countries will do it through excessive regulation.
  • Second, digital Rupee: A CBDC offers the Indian government more control over financial transactions and its participants than it has ever had or could have ever dreamed of in the past.
  • The digital Rupee will be completely under the control of the central bank and will provide the central government with complete transparency on all transactions that use it.
  • It will be able to tell where each Rupee has gone and where it came from making money laundering and other criminal enterprises very difficult.
  • The digital Rupee will also provide the government with the ability to cancel Rupees held by any person or entity that it does not approve of.
  • This is the equivalent of having US$10,000 in banknotes in one’s safe where the Federal Reserve knows the serial numbers and can set fire to them remotely should it so desire.
  • This means that if the Indian government decides that a certain person or entity owes it tax revenue, then it can confiscate the digital rupees or simply cancel them and worry about the legality later.
  • This is why I think that no one both inside and outside of India will use it unless they are forced to do so.
  • There will be some who are compelled to use it but beyond that, no rational person or company is going to want to use this currency.
• I think that India is passing up a huge opportunity here.
• Instead of banning cryptocurrencies, it should be embracing them and welcoming all of the entrepreneurs and innovators who just got booted out of China onto its shores.
• Failure to do this means that these entrepreneurs and innovations will go elsewhere meaning that India, like China, becomes an also-ran in financial innovation.
• This, along with automotive, is the next big sector to be disrupted by digitisation, and outlawing it will mean slower economic development and ultimately lower tax revenues for the Indian state.
• Like China, this is a self-defeating exercise in the long term.