Money, Money, Money, Is no longer funny, in the cryptoman’s world. Cryptocurrencies’ market capitalization has shrunk by $2 trillion, or 70%, since last November. Will cryptocurrencies other than those that would be issued by central banks survive? Or do we enter Crypto as another chapter in the history of bubbles and manias, alongside Tulips, South Sea and Dotcom?
The species is endangered but does not face extinction. It will embrace regulation and adopt well-publicized norms, deviations from which would be declared and self-disciplined. It will survive because there is a crying need for a global currency that is not subject to control by a single national government — a global currency that is not the dollar.
During the negotiations that set up the International Monetary Fund (IMF), Britain’s representative, the legendary economist, John Maynard Keynes, had suggested creating a new unit of account called the bancor, to settle the balance of payment surpluses and deficits. The Americans pooh-poohed the suggestion, and the dollar emerged as the dominant world currency. Today, two-thirds of merchandise exports, including oil, for the most part, are invoiced in the dollar. The dollar is the predominant safe-haven currency, in which the world’s foreign exchange reserves are held.
The US can settle its international obligations by printing the dollar. It is the chosen destination where the world’s savings glut finds deployment. The dollar’s ubiquity gives the US government the opportunity to weaponise it. It can impose sanctions on countries that defy its writ, simply by denying those countries’ financial institutions access to the dollar networks of New York. The threat of secondary sanctions — sanctions on entities that do business with sanctioned entities — kept European firms from doing business with Iranian entities, although the US alone withdrew from the Iran nuclear deal, even as major European powers remained committed to the deal.
If international payments could be settled in a currency other than the dollar, the dollar would lose its power of life and death over other economies and economic agents. Such a currency probably would be a cryptocurrency backed either by a body like the Bank for International Settlements or the IMF (although not as likely since US is its largest financial contributor) or by a consortium floated by the G20 group of nations.
Facebook hoped that its proposed stablecoin, the Libra, would serve as a global currency. But truly transnational corporations exist only in the world of James Bond. In the real world, companies, even big-tech giants, are subject to regulation by some national government or the other.
China’s central bank digital currency (CBDC), the digital yuan, is more evolved than that of any western power. China is a major trading partner for more countries today than the US is. China could hope to persuade its trading partners to settle payments in the digital yuan. The US might be tempted to accept a non-dollar, non-yuan digital currency to deny the digital yuan an early-mover advantage.
JPMorgan Chase already uses a stablecoin of its own for internal use by clients who need to move funds across borders. The Swift messaging system for cross-border payments is riddled with delays arising from time-zone differences and holidays that differ from nation to nation. If a multinational company wanted to move funds from its US operations to Europe or Asia, JPMorgan Chase’s stablecoin would do that job instantaneously and far cheaper than the Swift system would. So, use cases for the cryptocurrency continue to exist.
But cryptocurrencies as a speculative asset are, in all probability, dead, alongside non-fungible tokens for works without durable artistic merit. The non-CBDC cryptos will welcome regulation, rather than celebrate their libertarian freedom from state control of any kind. Blockchain, the cryptocurrency infrastructure will, of course, thrive. The mBridge experiment last September of a cross-border transaction involving the central banks of China, Hong Kong, Thailand and the UAE used the Ethereum blockchain.
The term digital payment conflates the electronic transfer of funds from one account to another, transacted by, for example, India’s Unified Payment Interface, UPI, and payment by means of digital currencies such as cryptos. Cryptocurrencies have certain advantages over digital transfers from one account to another. One, they are capable of smart contracts, contracts automatically triggered by the blockchain when certain, pre-set conditions are met. Further, in conditions where a bank goes down, whether because of mismanagement or war, the funds kept in its accounts are at risk, and digital payments cannot be carried out when one or more of the accounts in the transaction are no longer operational. Cryptocurrencies can be downloaded onto a pen-drive and carried in the pocket of a refugee fleeing war.
Therefore, cryptocurrencies are more than likely to survive the present carnage. The bitcoin craze is probably now meat for the historian rather than a temptation for digital goldseekers. Elon Musk will lose his power to increase the value of a cryptocurrency named after a dog merely by tweeting its name. Even as cryptocurrency loses its perceived value as a speculative asset, its use as a means of payment is likely to gather added salience.
Which currency will gain prominence, you might ask. There is a reason why it is called what it is called. Greek Kryptos, from which Latin Crypticus is derived, means hidden.
Source: livemint.com
