Following the seemingly punitive measures taken by monetary policy makers in India and Venezuela, Glint examines the pick up of cryptocurrency and whether it makes a viable alternative to state backed fiat money
“What’s in your wallet, a democratic government can turn around and say: ‘that’s no longer worth anything’. It makes people start thinking ‘what was it worth five minutes ago before you told me it was worth nothing?’ It was actually worth nothing the whole time. Just because you say someone has to accept it, it doesn’t mean it has value.”
Cameron Parry, CEO of Lionsgold, is referring to the unprecedented shock India experienced in late 2016, when Prime Minister Narendra Modi announced the demonetisation of the ₹500 and ₹1,000 banknotes, the two highest denominations, removing their status as legal tender. This radical government move was an attempt to crack down on illicit activities such as smuggling, counterfeiting, and the use of corruption-breeding “black money”, as well as a clumsy push for a more cashless economy.
In one move, around 86% of the cash in circulation was wiped out. The government executed the policy without warning, catching both owners of illicit funds and innocent citizens off guard; banks and ATMs closed the day after to prevent runs, leading to long queues to exchange redundant notes for new ones. Ninety-five per cent of India’s transactions are in cash and 60% of the population do not have a bank account. The limbo created by the policy left millions of Indians stripped of a large chunk of their assets overnight and without access to emergency liquidity. Gold, so often the go-to for people looking to protect their assets — especially in India where it has high cultural significance — was also targeted. Tax officials were given powers to confiscate gold holdings suspected of being bought with illicit funds, leading many to desert the asset for fear of corrupt or opportunistic officials.
The impact of Modi’s monetary bombshell has led to a surge in activity on digital currency markets, notably bitcoin. Bitcoin is a digital “cryptocurrency”, acquired when computers “mine” by solving mathematical puzzles, upon which the transaction is verified and added to a distributed ledger known as the blockchain. With each puzzle solved it becomes progressively harder, and more resource-intensive, to mine further bitcoins.
Parry compares this system to gold extraction: “When more people are involved, you have to spend more money, you have to dig deeper to get it, you don’t get as much and, ultimately, it will hit a finish line at 21 million [bitcoins]”. This quality is crucial to bitcoin’s appeal — it can’t be debased through flooding the market with supply, unlike government currencies. It is “not controlled, owned or issued by a bank or a government, there is no mediator in the middle, and [it has] incorruptible, verifiable solvency,” explains Michael Hudson, CEO of bitcoin investment house Bitstocks.
Its immutability has certainly proven attractive: Zebpay, an Indian bitcoin exchange, saw its prices for bitcoin jump up by 35% within a month of Indian demonetisation and reported 50,000 new users, more than doubling the company’s usual intake of new users. The low cost of smartphone usage and limited reach of traditional financial establishments, has made India a fertile breeding ground for currency alternatives.
Parry doesn’t buy the objection that bitcoin is too technical and hard to use in the developing world, saying only Western societies see it as complicated. “If you don’t have online banking, it isn’t clunky at all, it’s your only solution on your mobile phone”. Bitcoin wasn’t unheard of in India prior to Modi’s demonetization measures, around 1% of the population (1.2 million people) were already engaged with the digital currency. “Around half of the bitcoin in India is used as a store of value and a hedge against the rupee, and around 20-30% is used for remittances from the US because it’s quicker and costs less than paypal,” says Parry.
India is not alone in seeing bitcoin pick-up following monetary policies that look more punitive than prudent. On the other side of the world, a representative from Venezuela’s bitcoin exchange, Surbitcoin, revealed their users went from 450 to 100,000 between 2014 and 2016. Much of this interest follows crippling economic and social problems, price controls and an inflation rate of 800%.
Getting other currencies is also far from easy. “Exchanging swiftly depreciating Venezuelan bolivars for foreign currency is subject to a myriad of regulations and a complex maze of different rates, dependent on the type of transaction,” says David Howden, professor of Economics at St Louis University. Said complex maze involves a four tiered system of exchange rates, the best exchange rate is for food and medicine, then two for businesses importing goods of differing cultural importance, and the worst is for currency trading.
“An even bigger problem than these practical issues is that the most widely used official rate of 10 bolivars to the US dollar is nowhere near the black-market rate, which is currently near 4500 bolivars to the US dollar,” says Howden. Unsurprisingly, some have sought out bitcoin as a medium of exchange to source dollars and use “something that can preserve its purchasing power and facilitate payments better,” says Howden. “The fact that Venezuelans can do so anonymously makes bitcoin an excellent option for avoiding the black market where they must currently trade in their bolivars.”
There have been reports of Venezuelans using bitcoin to buy Amazon gift vouchers which then become currency. There’s clearly a premium on such services as earlier this year the Venezuelan authorities arrested four bitcoin miners with the veiled charge of “stealing electricity”. Since then other miners have also been arrested and charged with money laundering and terrorism offences. Bitstocks CEO, Michael Hudson recognises people are getting desperate: “Demonetisation in India, financial collapse in Venezuela — it doesn’t take a degree to understand that something is wrong.”
Not all bitcoin use is reactionary, however. According to Charlotte Bowyer, former head of Digital Policy at the Adam Smith Institute, there is “a small but growing industry in Africa using bitcoin for remittance payments and cash transfers, showing it has alternative uses than just a hedge”. Trading platforms such as BitPesa have allowed Kenyans, Ugandans, Nigerians and Tanzanians to convert bitcoins sent from abroad into local currency. Kevin Dowd, economist and professor at Durham University Business School emphasises the remittance capability bitcoin brings to places “where firms such as Wells Fargo would usually charge 10% or so for such transfers”.
Bitcoin is not a perfect solution though. It remains non-tangible and unregulated. Lionsgold’s Cameron Parry, a bitcoin investor himself who lauds its “superior technology and fungibility”, is not so engrossed in the cryptocurrency that he thinks it is inherently worth more than other money, highlighting the value of faith and establishment: “People are more confident in using government fiat because the mainstream use it”. Dowd echoes this point, saying “the value of it, to me, depends, in part, on how many other people are using it as a currency. So the existing, big currencies have the network advantage that the smaller ones do not have”.
Parry also recognises the inflexibility of committee design: “If Microsoft wants to implement an upgrade, they tell us, they say ‘here is version 10 of Microsoft Office’. So there’s a central authority in control that says ‘here’s the upgrade’. Bitcoin doesn’t get upgraded that way, it’s done by this consensus. It’s a very different and strange paradigm and people don’t understand that very easily.”
Digital currencies remain outsiders in another sense too: as facilitators to nefarious practices such as money laundering or terrorism financing. Although that does not make it unique says Parry. “Mobile phones are used for drug dealing, but they’re also useful for the rest of us who aren’t breaking the law.” That may be so but the fact bitcoin has such associations has, so far, made it easy for states to dismiss its value.
Defining a strange new world may make bitcoin pioneering but not necessarily prosperous. Dowd doesn’t think the future bodes well for it, highlighting that the “economies of scale in mining it are so great that they undermine the decentralised, atomistic competition that was one of its initial key selling features”. However, Bitstock’s Hudson has higher hopes: “when you combine the blockchain and cryptocurrency technology with the pre-existing internet, [it’s] the next great leap — like electricity and microprocessing, it’s the next stage; the infrastructure is already there.”
But if bitcoin does transpire to be ephemeral, its real value may be in opening a floodgate. “Alternatives look promising — last time I looked there were well over 600 other digital currencies, and with so much competition it’s difficult to see inferior models such as bitcoin lasting,” says Dowd. “I’ve always used the analogy of the Ford Model T: in its time it was the dominant form of car, but you don’t see many of them around anymore.” Arguably, the context of bitcoin’s presence in India and Venezuela is making the same point on monetary policies and state fiat.
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