Why India should not outlaw cryptocurrencies

Even as plans are afoot to launch a digital rupee, India proposes to ban cryptocurrencies altogether, and a law is reportedly in the works that would make holding cryptocurrencies a crime that would put you in jail. RBI has already banned cryptocurrencies. This is myopic. India needs to be open to the possibility of using cryptocurrencies for international payments bypassing the dollar.

Cryptocurrencies have a bad name and that is probably well-earned. But all currencies that move around using the blockchain technology are not of the same kind. A subgroup is called stablecoins. Unlike bitcoins, which can be produced independently of any central bank, whose value is unstable and whose total numbers would hit a predetermined ceiling, stablecoins are linked to fiat currency, managed by banks and other reliable entities.

Don’t Think Just Bitcoin

The principal attraction of a new stablecoin — there are many floating around, apart from Facebook’s proposed Libra — is the possibility of using that for settling international payments that do not involve a US counterparty, without using the dollar.

At the time when negotiations were on to create the International Monetary Fund, John Maynard Keynes had proposed, on behalf of the British government, creation of Bancor, a new unit of account for settling international payments in a new International Clearing Union. The Americans poohpoohed the idea and said the dollar would do quite well as the world’s currency for settling international payments, thank you.

The war-ravaged Brits were in no position to resist the pressure of the US, then financing much of the Allies’ war effort, and Bancor went into that heap of good ideas in history that never saw the light of day.

The US derives much power from the use of the dollar as the world’s principal currency for settling payments between countries. It can borrow as much it wants from the rest of the world and simply print dollar bills to repay the loans. Other countries cannot follow that example. That is bad enough.

Those were innocent times when the US merely profited from global seigniorage. Then, it started weaponising the dollar. The latest example is the Iran sanctions. If any entity transacts with any entity that has transacted with Iran, that is, even indirectly, that entity would be denied access to the dollar payment network.

No bank can afford to be cut off from access to the dollar. So, no bank would deal with anyone that deals with an entity on which the US has declared secondary sanctions. The dollar is a powerful weapon in the hands of the US that it can wield against anyone it wants to. The Europeans made a half-hearted attempt to create a shied for European companies that want to do business with Iran, but this found no takers — so little credibility did this system have.

Clearly, the way out is to have a payments system that allows transactions that do not involve a US counterparty to be settled in a currency other than the dollar. Of course, you can settle trade with the EU in euros and trade with Japan in yen, if you have those currencies in reserve. If you do not, you have to settle in dollars, as with all other countries.

For Non-Dollar Payments

Creating a payments system that sidesteps the dollar is primarily a political task, granted. But if that courage is summoned, a technical challenge would still remain. A blockchain-based currency is the most likely technical solution. If India’s legal system makes all blockchain-based currencies beyond the pale, that would hurt India’s ability to take part in, leave alone lead, an effort by a coalition of nations to create a payment mechanism outside the dollar framework. Facebook’s Libra is the one making the most news. But JPMorgan is launching its own stablecoin. IBM has created the framework for a global payments system using cryptocurrencies.

Not all currencies and payment systems that make use of the distributed ledger inherent in the blockchain are suspect by definition. Of course, systems must be put in place to prevent money laundering and heists that leave the unwary and the unsavvy bereft of their savings.

Distributed ledgers would probably play a big role in fintech solutions for cross-border remittances. When a migrant labourer in Dubai wants to send money back home to India, the cost can be prohibitive, as much as 5%. Fintech is working on the problem. Several of the solutions could take the form of tokens that move around on the blockchain technology. India should not be prohibiting such experiments.

Instead of banning cryptocurrencies, India should be taking the lead to rope in China, the European Union and other willing national governments and the Bank for International Settlements (BIS) to create payment and settlement systems that do not allow one issuer of a national currency to acquire a stranglehold over the global financial system, leaving open the possibility of a new stablecoin linked to a basket of currencies being created for the purpose, the basket and the linkage being managed by a credible body such as the BIS.