The Weird World of Cryptos and an Emerging Struggle for Power

Context: India is considering a ban on crypto-currencies wants to replace it with its own digital currency.

Challenges Posed by Crypto-Currencies

• Aid in money laundering: they are as conducive to criminal activity and hiding from government regulation as cash was due to their anonymity and ability to bypass the banking system.
• Avoid surveillance: Unlike state-sponsored digital currency that enhances surveillance, private cryptos are meant to avoid surveillance and provide anonymity.
• Threatens sovereign power: wide use of private crypto (issued by private players) as medium of exchange would threaten the sovereign’s authority of issuance of currency as a medium of exchange.
  • Cryptos are beginning to act as mediums of exchange, E.g. –
    • Elon Musk has announced that Tesla would accept bitcoin as payment for its cars.
    • A county in Florida has authorized the use of Bitcoin for tax payments.

Arguments in Favour of Digital Currency

• Enhances effectiveness of monetary policy: digital currency (unlike digital funds) bypasses the banking system completely and thereby helps central banks achieve their monetary policy objectives.
  • E.g. unlike digital currencies, cash will be kept by the citizens in their homes, if someday, the central banks push for negative or zero interests rates.
• Strengthen sovereign power: digital currency makes it easier for the central bank to encroach upon citizens’ lives.
• More in common with fiat currency (than gold): Like a fiat (created with electronic entries by a central bank), a digital currency is mined using computer software.
  • Implicit rule linking the creation of money with the trend in nominal GDP (after the abandonment of nominal anchors like gold, silver) does not exist anymore.

Conclusion: Crypto currencies are the thin end of the wedge of a power struggle between the elites that currently hold power and other elites wanting in, it will probably not end well for either.