Crypto – Messiah or Misadventure

Money is not just a number on the Bank statement but the purchasing power it represents. From the days of the Barter system to the present day, the payment system has evolved with several innovations and each methodology was subjected to severe scrutiny. The only difference being, Cryptocurrency, like Covid, is discussed not only by experts but also by novices.

The current monetary system has many flaws and some countries mistrust the global arrangement. The cryptocurrency is viewed by social historians as a rebellion against traditional mechanisms of international finance.

Unlike Fiat (Government-mandated) currencies, Cryptocurrency is a decentralized digital currency/payment system that does not rely on banks to verify transactions. It enables transactions using only digital identities, granting users some degree of anonymity. Instead of being physical money like paper currency that is carried around and exchanged in the real world, cryptocurrency exists purely as digital entries in an online database that describe specific transactions. A simple definition is that it is a collection of binary data which is designed to work as a medium of exchange and has its own architecture. The binary grouping is approved by an undisclosed committee and the proponents take pains to explain that the number of coins will be limited.

Cryptocurrency has been sold to the masses and  Masterminds as having several features

1. Technological superiority
2. Real-time payment system
3. No Bank or Government supervision.
4. Asset Class or store of value

Like all new systems, Cryptocurrencies have been discussed threadbare and the adherents have an answer for every bit of criticism.

1. Technological superiority: If anyone attends a Conference on any aspect of Crypto you are made to go into great detail on Block Chain/Distributed Ledger/Digital Currency etc. All transactions are validated and time-stamped. The Crypto are stored in individual wallets to which only the user has access. Digital currencies are managed through advanced encryption techniques. It is presented as a fraud-proof mechanism and those who have called it as an unfounded fad have been brushed away pointing out that Currency note users have no clue to its manufacturing process (At times laughed away that those who have gone into details have ended up protesting about animal fat in Polymer banknotes!). Any criticism of the Crypto Technology is met with stern rebuke that the critic is a Luddite or more politely anti-modern/non-progressive. 
2. Speed of payment—present-day real-time payment systems are adequate for domestic payments and international payments have speeded up tremendously in recent days. As proof, the Bitcoin network has overtaken Paypal’s in terms of value.
3. Bank Supervision—The Crypto-protagonists are averse to Governmental supervision of all Commercial activity and this is the feature that has attracted the wrong-doers/money-launderers/tax-evaders the most as the Government/Bank do not get involved where transactions are purely in Crypto (more so when the transaction is multi-layered. While at inception of the Crypto-currency there could be a Bank audit trail for the acquisition, subsequent transactions are not transparent). As a decentralized currency Crypto differs from Fiat currencies as there is no central issuing authority within the network. Instead, it relies on a highly replicated public ledger, secured by means of a hash chain and validated through community consensus. This feature is viewed by
4. Asset Class: As the initial promotional propositions (which in most conferences have not found many believers) Asset-class is the currently-favoured medium of sale. The novel investment option which is a bunch of digits in your Digital wallet is expected to be viewed as any other financial product. After all money does not mean only Brick & Mortar, Currency notes or other precious metals. One group of sponsored presenters at Conferences argue ad nauseum that the same way we spread the risk in different asset classes, the monied would like another asset class like Crypto. The Banks hold money in numbers in ledgers so the protagonists argue how does money in digital format, present a philosophical problem? At the same time the psychological need to have a property different to others is another selling proposition.

From a handful of Cryptocurrencies in 2013 now there are more than 11,000 currently of which Bitcoin, Ethereum, Binance Coin, Tether and Solana are the Top Five. The 300-odd Exchange platforms (Binance, registered in Caymanislands is the biggest exchange) which trade in crypto are open to investors in all countries and age/income group has not been a barrier for the new fancy products. The value of all the Cryptocurrencies is now estimated as $ 2 trillion (!). Unarguably no single product in history has grown so rapidly and covered the entire planet and so powerful to ban it outright.

Sociologically another aspect we need to recognise and appreciate is that throughout history the upper classes, apart from having a different moral structure used a different mode of payment and spoke a different language compared to the common people. Viewed from this historical perspective, the driving force for the affluent class to use cryptocurrency as a store of value or payment should not come as a surprise, even though efforts are being made to popularise it amongst all socio-economic classes.

What is the most important takeaway for the Rich and Famous from this Cryptocurrency? Their life-style will not be questioned. After all, Parliamentary legislations are to tether lower classes. The Government of the day should not question the wealthy about their source or use of Funds. The Banks should not have an audit trail of their payment processes and should not subject them to sanctions/Anti Money-laundering Checks and report their suspicious Activities. Their Commerce, once Crypto becomes the Law of the land, should be above regulatory supervision and Law Enforcement. This would be a dream come true for the well-to-do. Apart from the ransom-receivers, tax-evaders the biggest beneficiaries would be drug-dealers, armament merchants, human-traffickers, corrupt politicians/Civil servants and the ilk .

Crypto-mining is not energy-efficient and millions have got hooked on to the apps. It is painstaking, costly, and only sporadically rewarding. The total expenditure on Crypto-mining is in excess of Billion Dollars(Apart from individual hobby miners, multi-million dollar mining farms on a large scale have been established in Cold places like Iceland, Russia, Kazakhstan& parts of China/USA). By way of comparisons, a BBC report said that Bitcoin uses more electricity than Argentina.

The response of the regulators as expected has been varied. They can be broadly classified as

1. Banned(as they are not backed by anything physical)—-Algeria/Bangladesh/Bolivia/Ghana/India/ Qatar.
2. Restricted (Somewhat restricted and cannot be traded or used for payment and they work on the fringes of the financial system) In such states, banks and other financial service pro-viders are prohibited from dealing with cryptocurrency exchanges and companies, and in more extreme cases the countries have even banned Crypto Exchanges)—-Bahrain /China/Hongkong/Iran/Saudi Arabia/Russia.
3. Neither Legal or Illegal—USA/Canada/European Union/UK
4. Legal—The only country where Bitcoin is legal tender is El Salvador(from Sep 2021) which is planning to issue a Bitcoin Bond for a Billion Dollars to pay off Sovereign bonds. On the issue of legalisation the position of most countries is fluctuating and they have taken different stances at different points of time.

The value of Cryptocurrencies has been disturbingly fluctuating to make it an attractive proposition. Bitcoin, the poster child of Cryptocurrencies is the oldest and most popular Cryptocurrency with 66 % share of Market capitalization, had a market price in Dec 2019–$7,200 and 2020–$ 28,800. The price touched its peak on 9th Nov 2021–$ 67,300 and is now $59,100 (expected to reach $ 100,000). When the market is so volatile, this can hardly be an attractive form of investment to any investors looking for financial security and stability. Cryptocurrencies are not backed by anything other than the faith of the people who own them.

The least attractive feature of Cryptocurrency is its lack of Central governance (even though this is touted as the most attractive as-pect). In the absence of Governmental controls on the issuance of Money in Circulation, the Govt will not be in a position to control prices, inflation and interest rates. In such a situation Savings would have no economic attraction to any citizen/Company and might create a perfect recipe for a financial disaster.

The complex terms and conditions applicable to digital assets as well as the need for reliable and resilient underlying networks make it difficult for investors and consumers to grasp the potential risks and how these assets function. While Crypto-trading may be extremely profitable to some, it has proven itself to be a financial disaster for others.

Warren Buffet, the Oracle of Omaha, said that the Crypto is an unproductive asset and does not have a real/intrinsic value. He calls them a worthless delusion and “rat poison squared”. He forecast in 2018 that they have only five more years to go and they will come to a bad ending. The Bank of England has already warned that the Crypto could trigger the next financial meltdown.

The 2007-08 global financial crisis was fuelled by speculation in sub-prime mortgages in the US and driven by low-income households using mortgages with ultra-low interest rates. The situation emerging globally now is the same, as Cryptos are vulnerable to rapid price corrections.

The next global financial crisis will be fuelled by Cryptocurrency unless the Governments step forward with tough regulations and drastically increase supervision of the Crypto market. Further Drug-trafficking, illegal sale of arms/money laundering/terrorist attacks which are facilitated by cryptocurrencies may shake up global security.

In short, if you have a normal heart don’t invest in Cryptocurrency but is a good play-ground when you have a stout heart and a huge bank balance.

Prabhakar Kaza is the CEO, Hamilton Reserve Bank. Former CEO, State Bank of India (London).Former Relationship Director,HSBC. Mobile/Whatsapp+447958146582. Email: prabhakarkaza@hotmail.com