"a luxury only advanced economies can afford"
Even advanced economies can't afford this nonsense
The deputy governor of the Reserve Bank of India, T Rabi Sankar, has delivered an extremely unflattering assessment of cryptocurrencies – worse than Ponzi schemes, wreckers of economies, and richly deserving of a ban within India. Speaking at the Indian Banks' Association's 17th Annual Banking Technology Conference, Sankar …
That seems contradictory, but Sankar believes that any private currency will displace India's Rupee "to some extent."
This is a slippery slope. Credit cards are effectively private currencies, albeit backed via debt instruments (loans). The issue with these arguments is they try to paint in black & white when the conventional financial markets are full of gray, leveraged & ponzi-ish schemes, like derivatives, call & put options, that have legitimate uses but whose markets are dominated by speculators.
His argument then goes on to say that India doesn't have a well-structured consumer protection system, which most advanced economies do. Therefore they can afford the risk more. Basically if you're going to sell a crypto asset direct to ordinary consumers in the UK, you're liable to a lot of financial laws which limit what you can get away with. At the moment this isn't a systemic risk, because most crypto users are a small number of techies, criminals and people in the finance sector who know they're making risky bets.
If crypto assets became mainstream, then inevitable frauds and company collapses would wreak havoc with peoples' lives and spending habits, and that would cause massive disruption to the economy. At the moment it's still a tiny niche.
That's why important consumer-facing financial institutions need to be massively, and intrusively, regulated. Whereas weird and wonderful niche investment products are not a "systemic risk". Plus if you're making non retail investments, it's assumed you've got some financial and legal advice on hand, or you're risking money you can afford to lose.
It's not just the legislation. It's also the quality and experience of the regulators, the professionalism of companies and their compliance with regs and the public knowledge that regulations exist (and roughly what they are) and that there are places to look to find out who complies and who doesn't.
So basically how developed the financial services market is and how sophisticated the consumers are - and how much financial journalism and information is publicly available.
I assume he knows more about conditions in the Indian markets.
As an example look at that famous pyramid scheme in Albania in the 1990s. It created chaos. Something like a third to half the population lost money in it, and a significant percentage of the population lost their entire life savings. That's had a disastrous systemic effect on their whole economy the effects of which are still being felt now, 20 years later. It's an extreme example, as Albania were the most repressive of the communist dictatorships, so I guess nobody from politicians and regulators down to ordinary investors had any clue what they were doing at all.
A digital Ponzi scam with zero redeeming features.
Ban it from being legal tender, don't accept it for any governmental transaction (like paying your motor vehicle registration, mailing a letter, paying taxes, etc), and say that private companies can issue/accept it if they want to, but can neither require their customers to use it nor penalize those customers that refuse to do so.
"Would you like to pay in StarBuckCoin for a 10% discount?" style crap would be illegal, and you would run the risk of having the government come down on your head like a ton of bricks.
CryptoCurrencies: Just Say No.
"Ban it from being legal tender, don't accept it for any governmental transaction "
No need to 'ban' it, it already isn't legal tender.
"say that private companies can issue/accept it if they want to, but can neither require their customers to use it..."
again, that's already the case.
"...nor penalize those customers that refuse to do so."
Good luck with that! You've effectively banned store cards, membership schemes etc
Good luck with that! You've effectively banned store cards, membership schemes etc
No you haven't. Store cards are fine. You trade a bit of your personal data for some discounts. They're not a currency.
Although admittedly you might argue airmiles have gained some of the features of a currency. In that it's handed out by multiple companies and also accepted by multiple airlines. Plus over-printing of them in the last couple of decades led to hyper-inflation and devaluation of the airmile - which penalised people who held large amounts of them.
But the point is that the "airmiles economy" doesn't matter. It's not a systemic risk to anything. Neither is crypto at the moment. But it could present a systemic risk if it went mainstream. Which is the reason that pretty much every global regulator took against Facebooks shitcoin. That and it also worried the data protection regulators, because of the massive boost it would have been to their global data-gathering empire.
He also says:
""financial assets have underlying cash flows and need to be some person's liability." Cryptocurrencies have neither cashflow and create no liability."
That is also true of gold, which has negligible value apart from being a store of value.
Gold isn't a financial asset. It's a commodity. You're holding your value in something you physically own. Which could be wheat or oil - or cigarettes, if you're in prison.
Gold was used as money in the past, because it's a lot easier to move around than the equivalent value in wheat, plus it doesn't go off.
Gold's intrinsic value is hard to judge. Unlike Bitcoin it does have many industrial uses, plus jewellery is also a use - but a large portion of its value does just come down to 10,000 years of most human cultures going, "ooh shiny!"
Central banks rightly fear Bitcoin. It solved the Byzantine Generals problem which removed the need for a trusted 3rd party. Friedrich Hayek wrote in the 1970s about the need denationalisation of money.
It provides an escape from a failing fiat currency. Why should money just be the preserve of Governments to maniplulate at will? And why do many people accept without question that inflation should be 2%? In other words our money must always lose buying power. Money represents time and inflation theft of time.
We accept out governments having control of our currencies because at least in democracies we have some control of them. Even dictatorships fear destabilising their own currencies, because it tends to lead to people rioting on the streets, and possibly hanging their dictators from lampposts. Bitcoin is of course controlled by a group of people you don't know and can't even get at with a lynch-mob. It's mostly controlled by the votes of its miners - and when the time comes that the last Bitcoin is mined, I strongly suspect that the miners will vote to keep creating new ones on the grounds of "keeping the currency alive". And users will of course not be able to do anything about it.
And why do many people accept without question that inflation should be 2%
Economists and central bankers have spent barrels of ink on this very problem. The short answer is that low levels of inflation are fine, and do very little damage to an economy - they actually encourage people to invest their savings, rather than just hoarding them, which leads to future economic growth. But the more important reason is that deflation is a total disaster. Both economically and socially. The reason that people still talk about the 1930s Great Depression is that it lead to mass unemployment, misery, economic dislocation, internal refugee crises within even advanced economies, starvation, political instability and was one of the major causes of the ensuing global war.
Deflation destroys banks. Makes investment almost impossible, and investment is the driver of next year's economic growth. It creates a debt spiral, which means that paying off debts becomes increasingly hard, which leads to the progessive and continual failure of businesses, prolonging the recession (and deflation) and leading to depression, and then all the evils listed above. Deflation is also a lot harder to cure than even hyper-inflation.
That's why having a 1% inflation target was considered too risky, when modern semi-independent central banks were being designed. After the 2007 recession there has even been serious talk of raising those inflation targets to 3%, particularly after the Eurozone crisis - which has continued on-and-off for 15 years now because the Eurozone have never fully been able to get rid of deflation in economies like Italy's and Greece's.
"One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated," he said.
He should have used human trafficking, or illegal gambling, or some other illegal but still not stamped out activity as a justification for maintaining a law which you know will still be broken.
Drug trafficking is the result of the drugs being criminalized. Making drugs harder to obtain increases their value, creating a highly profitable market for drug merchants. Drug use is caused more by despair than by the physically addictive nature of the drugs. People use them for recreation but mostly to escape their misery, and their misery is often the result of poverty caused by underlying economic issues. Putting people in prison doesn't make them less miserable, and the threat of it doesn't sufficiently deter them from using drugs to escape reality. It does however, fuel the prison-industrial complex, another profitable market.
Sherlock the tobacco in his pipe is a drug.
The best way to combat drug use is by decriminalizing drugs, provide counseling, and provide social services to address economic issues. People ween themselves off of their drug habits when their lives improve.
Yeah, that's what they fear. Not rioting in the streets when a currency devalues to the point of absurdity. What was it you crypto nuts were screaming 3 months ago about reaching USD 70k? Now look it's worth just 50% of that in under 3 months! If that happened to the USD, GBP, etc, there'd be mass rioting, starvation and potential anarchy, suggest you look up what happened in Germany in the early 20th Century when a currency becomes worthless, it's not pretty.
"cryptocurrencies are designed to evade government control"
There you have it, the real reasons governments don't like cryptocurrencies is that they can't control them. And big banks, as in the forum he was speaking to, don't like them because they cut thee banks / middlemen out of financial transactions. If people can lend money to each other directly, how do banks make money?
Many of the points he mentions can fairly be raised against some cryptocurrencies, but not all. For example bitcoin isn't 'backed' by any government, but is backed by the faith of hundreds of millions of users, which is more than most countries have citizens. That means that it works as a store of value. Other cryptocurrencies can be lent out, giving the lender far more interest than they would get in lending it through their banks. This is again why big banks and central banks are opposed to what they call 'private' (but are actually public) cryptocurrencies but quite in favour of creating their own truly private (i.e controlled by them) cryptocurrencies.
There are at recent count 800-1000 cryptocurrencies, and it's probably fair to say a good few of them are absolutely speculative Ponzi schemes, that doesn't mean they all are.
And when those millions of people who rushed in assuming they could get rich without effort start rushing out again to try and stem their losses, they will discover that they can't raise interest rates to keep their "currency" stable, nor borrow on the bond markets to invest and keep their economies (and currencies) afloat.
The foolish thing was to believe that just because it was new and invented by people who can do clever things with computers, it was nullifying the basic rules of economics.
"nullifying the basic rules of economics..."
Is it a problem that most people don't know the basic rules of economics? Why aren't kids not taught that at school? A cynic might think there are vested interests not wanting a financially educated population.
Much better for the school system to produce obedient workers who pay their taxes and never stop to wonder how for every dollar they deposit in a bank at 0% interest, the bank is loaning 10 dollars at anything from 5 to 20%, or where there savings are disappearing to between inflation, hidden fees etc!
Is it a wonder that when people realise how they're being shafted by the incumbent governments and banks, that they are willing to take (sometimes foolish) risks to get a better deal? Governments and central banks should stop pretending their anti-crypto stance is anything to do with concern about the proles. They just want no-one interfering with their control and money making.
Most education systems are actually like that: they "train" kids into being obedient workers, nothing more, nothing less. Why should companies spend money training people to do the jobs they require when they can convince the gov't to pay for that?
And frankly, you give a "choose which stick to hit you" situation. Do you prefer being hit with big bad govt stick, controlling the economy, or would you rather be at the mercy of a bunch of super rich whales that have zero accountability? At least people can complain and, in most cases, pressure their governments into doing something right at least once. Can you do that with cryptobros? Suppose the economy ran fully on whateverCoin, can you walk up to someone when its price crash in the course of 2 months and demand they do something about it, because the economy went tits up?
but is backed by the faith of hundreds of millions of users, which is more than most countries have citizens.
faith is such an ephemeral thing. Personally I want my money backed by something a bit more concrete than the whim and hopes of speculators and the uninformed
Hundreds of millions of users but what happens if the crypto currency has a flaw or that faith evaporates? In the UK my money in the bank is protected up to £85k per bank by the government. So if I have money in two banks, that’s £170k in total. If I have money in a crypto currency I have no protection at all.
The value of something is based in large part on the supply and demand of the thing, liquidity. Bitcoin has the advantage as I understand it of finite numbers of the things. However it’s still reliant on demand, I.e. people wanting them, doesn’t matter how many you have if nobody wants them. If everyone decides to sell these ‘coins’ then the value can plummet and do so rather rapidly.
I have investments in the stock market which is a gamble, I expect a return on that investment in the form of dividends and a rise in the share price. I can work out whether they are good value for money based on lots of publicly available criteria. It’s still a gamble just a less risky one than a crypto currency where I have no idea what increases or decreases the value other than tweets from Elon Musk.
> ... unlike fiat currencies they "do not have an issuer, they are not an instrument of debt, nor commodities, nor do they have any intrinsic value."
Remember what "fiat" in that phrase actually means, i.e. the value is what the "issuer" decrees it to be. (A bit like Picard's "Make it so" but without any underlying justification at all.)
So comparing cryptocurrencies with fiat currencies in fact makes cryptocurrencies look pretty good...
So if it keeps up, that would equal about $6 billion for the year. Is that globally? Or in one country?
By comparison, Americans lost $29.8 billion last year due to phone scams alone: https://www.cnbc.com/2021/06/29/americans-lost-billions-of-dollars-to-phone-scams-over-the-past-year.html
While UK citizens lost £2.3 billion last year: https://www.theguardian.com/money/2021/jul/15/more-than-23bn-lost-in-a-year-as-scams-surge-during-pandemic
Scammers always have and always will exist regardless of the currency involved.
Then again there is apparently evidence that at least some of the hackers raids on Crypto companies were perpetrated by the North Koreans funding their missile program etc. which is good to know it’s not being misused on things like food for the starving population https://www.bbc.co.uk/news/world-asia-60281129
Fiat currencies are backed by governments. Those governments have citizens, large economies, armies, police, tax collectors, gold reserves, reserves of foreign currencies, central banks, the ability to raise revenue in taxes, the ability to borrow from the IMF and/or the global money markets. That's a lot of backing. They have to really egregious fuck up over long periods of time to destroy their currencies. And even having done so, can create a new one that will work, if they have the will and can convince other pepole that they mean to do it properly this time.
It's not quite as hard as you think to destroy a currency. If a country prints a bunch of it, it won't matter how many guns the army has. If they borrow so much that they have to sell their reserves, they won't be able to borrow so much anymore. If they allow it to degrade slowly, they will find that their economies are less large and their citizens are less eager to have it. This occurs all over the world, from complete disasters like Venezuela to slow pain like Russia. Both examples, I note, are quite large countries with lots of natural resources as well as all the things you mentioned.
Cryptocurrencies are not better, just different. They are affected by many different things, and they too can lose value in unexpected ways.
It's not quite as hard as you think to destroy a currency.
I'd argue the opposite. In 1914 Germany started printing unsustainable amounts of money to fund the war. They suffered inflation of coure, but despite continuing this policy even past the war - and also despite losing that war - the hyper-inflation didn't kick in until about 1923. And they'd solved it by 1924, and launched the new Mark. The next problem was deflation after the 1929 crash - which is what led to the rise to power of Hitler.
It took Mugabe's regime in Zimbabwe years to destroy the currency as well. Turkey still hasn't hit hyperinflation despite having a President that doesn't believe raising interest rates lowers inflation and being on the edge of a currency crisis since about 2009 - including a couple of major devaluations (themselves inflationary).
It really does take consistent and quite egregious bad policy to lose total faith in a currency, and it's surprisingly easy to restore it.
"It really does take consistent and quite egregious bad policy to lose total faith in a currency,"
You are quite correct. Unfortunately, it takes much less to lose some faith in a currency. I'm not only including those cases where the currency becomes entirely worthless, but also those cases where people routinely buy things as soon as they have currency, are routinely converting it into gold or foreign currency, or are protesting the economic chaos caused by the problems with the currency. I've seen a definition of hyperinflation as 50% inflation per month for a year. That will cause complete chaos, but you can be a lot short of that and still have massive problems. Governments have been overturned for less than that. Wars have been started for less than that.
I hear that a lot: the idea that cryptocurrency has Big Government (and Big Finance) crapping their pants because it takes away their power over the oppressed masses. Just like with any other conspirationist drivel there is a tiny grain of truth here: cryptocurrency is indeed not controlled by a central authority. In this respect it's a lot like the old American wild west: one great big free-for-all. There's plenty of freedom for everyone to do whatever they want, but the downside of that is also that it is also a fertile breeding ground for lawlessness. There are good reasons why crypto has a bad rap as being the tool of choice for scammers, terrorists and other criminals: it is ideally suitable for their purposes, so of course it does get used for those purposes. A lot.
Crypto's lack of regulation is a two-edged sword: it allows total freedom, but that includes the freedom for it to be used for crime with impunity. In practice, "unregulated" quite often means "lawless" and that goes for crypto, too. And it shows.
Just like the old wild west, crypto will eventually lose its unregulated character when (not if) the disadvantages of lawlessness will begin to outweigh the advantages of non-regulation. When that happens the question is what raison d'etre crypto will have left.
Meanwhile crypto is here, and both banks and governments are trying to deal with that fact as well as possible. Pointing out its disadvantages and making a point for its disuse is not to be taken as a sign of fear or envy. Both scammers and conspiracy nuts would have you believe that, but that doesn't make it true.
Crypto is just like home-made banknotes.The 'crypt' bit is just a mechanism to prevent forgery using an hash algorithm or similar to make generation of those notes difficult, just as we use various anti-forgery devices in real banknotes. There's nothing special about that, as is the notion that crypto is worth exactly what anyone is prepared to pay for it. It has no intrinsic value (you can't recover the energy expended in creating or manipulating it) which is why its value is expressed in real currency like US dollars. Since there's no central bank to backstop it the value of crypto fluctuates wildly, like bonds its value is worth exactly what you can sell it for (but unlike bonds it doesn't pay a dividend -- in fact you might say its got a negative dividend because of the high cost of transactions). So the value fluctuates wildly. Like junk bonds there may be opportunity in there for a sophisticated investor but I won't go near them, there's no hedge against risk.
NFTs are just a way of extending crypto to everything -- suddenly the most mundane articles can be the focus of rampant speculation. They're not exactly setting the world on fire at the moment despite the Web 3.0 hype because, once again, there's no intrinsic value, they're just a sump for someone with too much cash and too little sense.
I am surprised no one has mentioned the miners' side of this. Besides all the hijacked computers mining as zombies, the amount of electricity needed to fuel the mining is phenomenal, much of it stolen. Estimates are equivalent to countries with tens of millions of citizens. How about global warming. Think of the children, snark.
First thing's first: I don't really like cryptocurrency. I don't have any, I don't want to have any, I don't think you should buy any unless you're into gambling. Some of the goals of cryptocurrency have appeal to me, and all popular cryptocurrencies have failed to obtain these or even to work meaningfully in that direction. They cause harm and environmental damage. And this guy has made a bunch of really terrible arguments against them, nearly all fallacious. Now that I've stated my views, I must address his arguments.
"While advanced economies may be able to endure cryptocurrency-driven disruptions to their economies, the deputy governor said India lacks the consumer protection and regulatory frameworks to do so."
Some cryptocurrency claims are complete scams, and countries should probably have a mechanism to protect people from that. If they don't, they should create it. This guy is arguing that, instead of adding those frameworks, they should just ban cryptocurrency and scams go away. They don't. You can also scam people with fake stock instruments, but he's not calling for India to close down the stock market, is he? If there isn't enough consumer protection, add more.
I turn now to his main point: "They threaten the financial sovereignty of a country". This is more an opinion, but countries earn their financial sovereignty and don't need to have it. If I think my country is not managing its currency correctly and choose to import pounds and use them, and the shops agree to accept them, that too would weaken my country's financial sovereignty. However, it is my right to do it. I still pay taxes to my country, I still follow the laws there, but I don't agree that whatever they do with the currency should affect me. The control he wants is not control he should have.
"If cryptocurrencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest will essentially be carrying out an illegal activity. Such exceptions should reinforce the need for a ban, rather than invalidate it."
This is very bad. Here's what it means in normal words. "If we make it illegal, then everyone who doesn't agree is a criminal, so they're bad and don't count". Things should be banned for a reason, and that people disagree should be reason to consider removing a ban because it means some of the public doesn't support what the government is doing. That doesn't mean it automatically works that way. If only 5% of the public thinks something should be made legal, then it probably won't be. However, the reasons those 5% provide should be considered in making that decision, not to brand them as reinforcing the need for the law.
You can't just develop a regulated market in financial services overnight. A well-regulated market isn't just the government getting its act in order. It's having a network of financial services providers who are used to complying with those regs. Which takes time. It's also about having consumers who have some idea of what they're doing and know to look to see if the companies they're using a registered with the regulators. Plus a source of independent information. So in the UK you can look up various papers and websites for reasonably impartial tables of the returns on saving accounts or various investment funds. And all this has taken decades to happen.
It's not like our highly regulated market is anywhere close to perfect, and even with all this freely available information I know people who've signed financial contracts with companies that weren't even registered with a regulating body (but fortunately they were solvent so the threat of court action got that money back).
This is very bad. Here's what it means in normal words. "If we make it illegal, then everyone who doesn't agree is a criminal, so they're bad and don't count"
That's not what he said. His point was that if you ban it, then most people won't do it. And it's ordinary investors he's there to protect. Anyone willing to jump through all the hoops to do it illegally will hopefully have a bit more knowledge of what they're doing and will also be doing it knowing they have no legal protection or comeback. So knowing the high risk.
It's a principal of a lot of regulation that ordinary consumers need to be protected, as they don't have the knowledge to protect themselves. But professsionals, who do have access to lawyers and advice, are assumed to be able to judge the risks.
If you ban something and put penalties on it, of course most people will stop doing it. That doesn't make it a logical thing to do. If you make staplers illegal tomorrow, I'll stop using one and there will be many on their way to the paper clip store. That doesn't automatically mean it was a good idea to ban staplers.
The part that shows he is dismissing critics is the last sentence: "Such exceptions should reinforce the need for a ban, rather than invalidate it." He isn't saying that the people who engage in the trading anyway are taking on a known risk and so they don't need protection. He's saying that they would be committing a crime, and since they're willing to commit a crime (that's not a crime yet), their activities are deserving of being banned. It's circular logic and doesn't make any sense, but it can produce some negative results.
The difficulty implementing regulations does not justify his proposals. It's true that "[y]ou can't just develop a regulated market in financial services overnight", but just because it's hard doesn't mean you can do whatever you want in the meantime. We don't have a perfect regulatory framework for data security or privacy, but it wouldn't be acceptable to ban all computers until we get one. In addition, he didn't say to ban cryptocurrency until they get a regulatory framework. He's advocating a permanent ban, and he didn't say anything about even starting to work on a framework. That's the wrong way round at least.
"It's also about having consumers who have some idea of what they're doing and know to look to see if the companies they're using a registered with the regulators. [...] [E]ven with all this freely available information I know people who've signed financial contracts with companies that weren't even registered with a regulating body (but fortunately they were solvent so the threat of court action got that money back)."
You cannot put the economy on hold until everyone knows how to avoid scams with perfection. People fall for them all the time, and most often, it's not using cryptocurrency either in fact or as a buzzword. Regulate it to prevent it, certainly, but you appear to expect that you can make consumers know what they're doing automatically, and you can't as proven by your own anecdote. As I said in my original post, there are scams surrounding lots of other activities, for example the stock market. He's not calling for that to shut down.