Image source - Yahoo Finance
If a battle can’t be won, don’t fight it - Sun Tzu
The only way the Reserve Bank of India (RBI) can ban cryptos is if it convinces its counterparts in the US and China and Russia and Korea and Sudan and the rest of the 190 odd countries of the world to also root out cryptos in their jurisdictions, even if that means violating the rights of citizens by confiscating their assets and taking brutal action like destroying mining equipment.
An effective ban would require every country to declare all crypto companies illegal, stop trading in bitcoin trusts, bitcoin ETFs and bitcoin futures, get their citizens to turn over the private keys to their coins to the authorities under threat of jail time, find and bulldoze mining farms (seizure of mining capacity is not enough as you don't want the governments to keep mining capacity for themselves), somehow stop hobbyists from mining from their homes. Easier said than done!
Now consider some of the recent developments in cryptos:
Bitcoin has reached a market cap of $1 trillion.
Coinbase is on the verge of a public listing at a valuation of $100 billion.
Paypal will soon allow its merchants to accept payment in bitcoin.
Grayscale Bitcoin Trust has reached an AUM of $30 billion.
Tesla has added $1.5 billion of bitcoin to its corporate treasury.
A recent conference hosted by Michel Saylor of MicroStrategy, educating corporates on how to add bitcoin to their treasuries, was attended by 6,000 corporates.
The city of Miami is considering paying part of government salaries in bitcoin.
Wyoming is positioning itself as a hub to attract crypto investments including giving banking licenses to crypto companies like Kraken and Avanti Financial.
Columbia has approved 9 partnerships between regulated banks and digital currency exchanges to make cryptocurrencies more accessible to citizens.
Switzerland hopes to reclaim its reputation for financial privacy, and its "Crypto Valley" has started accepting cryptocurrencies for tax payment.
Despite China restricting its citizens from buying bitcoin with RMB, Huobi and OKCoin are still servicing millions of Chinese citizens.
In this scenario, how realistic is it that India will be able to lead a coordinated attack on cryptos? The truth is that India cannot ban cryptos. It can only ban Indian citizens from accessing cryptos through legal means, which will leave them at a massive disadvantage vs citizens of countries that do not ban cryptos.
The RBI is in a Prisoner's Dilemma
If every country in the world bans bitcoin, then RBI will have achieved its purpose of retaining monetary control. But what happens if some countries cheat and don’t impose a strict ban? Just like in the original Prisoner's Dilemma game, each country is better off vs the other countries, if they cheat. The countries that do not cheat will be worse off because they will be forced to reverse their ban in the future, by which time their country will be behind on financial innovation. And what credibility do we think the Central Bankers of those countries will have, after being clearly responsible for the its drop in financial competitiveness?
2 final outcomes are possible for bitcoin. Let's evaluable the 4 Prisoner's Dilemma situations in both outcomes:
(i) Bitcoin becomes a globally accepted currency
A - If India bans cryptos and the rest of the world does not - Some of the impacts will be:
(a) Indians will lose out on capital gains
(b) India will not have any home-grown, globally-competitive crypto companies.
(c) Indians will not be able to build Decentralized Finance protocols on smart contract platforms like Ethereum and Polkadot and therefore will be excluded from providing any financial products and services that rely on these new payment rails.
(d) India’s high-quality human capital will be excluded from contributing directly to crypto innovation. Also, it’ll be unable to benefit from remote working opportunities as Indians will not be able to accept remuneration in this globally accepted currency.
=> The combination of the above will disincentivize crypto innovation and lead to capital and brain drain. By the time India is forced to accept cryptocurrencies as a reality, it would have missed the boat. India currently has among the best payment systems in the world and this ban will exclude it from developing capabilities in the next generation of payments technology.
B - India does not ban and the rest of the world also does not ban - It'll be a level playing field for everyone. India with its large supply of young and educated people will be able to build world-class, tax-paying companies that attract capital and enjoy a healthy domestic and international user base.
C - India does not ban and most of the world bans - After banning cryptos for a few years, other countries will be forced to reverse the ban once cryptos gain international acceptance. India with its head start will have built world-leading companies and a thriving crypto ecosystem. India would have attracted top-tier capital and talent and become the global leader in this new technology. Even non-crypto Indian companies will be able to sell their products to people in Argentina, Nigeria, Cuba, etc who's population will be holding cryptos to escape the local currency system that they're already losing faith in.
D- If both India and the rest of the world ban bitcoin- We will revert to a world where central banks retain control of monetary policies. They continue to pump unlimited quantities of money, inflate assets and depreciate their currencies. The current SWIFT-based payment rails will likely be replaced by CBDCs like the Digital Yuan or Digital Dollar.
=> What will that mean for you and me? There will be no anonymity for citizens, meaning you wouldn’t be able to buy as much as a paper clip without the government knowing. Try buying an after-morning pill in a strict Catholic regime or alcohol in a Sunni regime then.
(ii) Bitcoin becomes Worthless
Of course, it is possible that the promise of crypto is never realized and the value of bitcoin falls to zero. In that situation 2 things will happen to countries that allow cryptos to exist:
(A) Capital loss to retail and institutional investors.
(B) Shutdown of crypto companies.
I ask you this. Would it have been justified to ban investment in internet-based companies in 1999 because of the risk that those companies could go under? Many of them did. Should we ban the stock markets because people lose life savings in them? Of course not. We should have checks to put a stop to practices like insider trading and wash trading, but banning is counter-productive.
The natural reaction to change - Self-preservation!
Let us try to understand what is happening here. I call bullshit on the argument that Central Banks want to save hapless investors from a fraudulent asset class. No, the truth is that they’re in self-preservation mode. Every time there’s a new technology in town, the reaction from the incumbent is predictable. The new technology must be stopped.
Taxi drivers asked for a ban on Uber because it threatened their livelihood.
Hotels accused Airbnb hosts of running illegal hotels.
The content industry tried to ban the sale of VCRs.
=> It’s the same with bitcoin. If the currency that Central Bank's print is undermined by bitcoin then what is the raison d'etre for Central Banks.
To be fair, the RBI has been among the more successful Central Banks in managing the currency. We haven't seen the kind of runaway inflation and devaluation that say the Argentinians have been victims of.
However, it is run by economists whose entire education and experience has been in the fiat monetary system. They’re unable to fathom a world that is different. We are asking the crème de la crème of India's monetary experts who have immersed themselves in reading and writing about the Great Depression, the Gold-Standard, Bretton Woods, etc to plan for a world where they cannot print money to prop the economy the next time there is a pandemic or bank blow up. If they’re presented with evidence that money printing has propped up stock markets and other assets without propping up actual lives, they dig their heads into the sand.
We aren’t just asking them to give up their power. We’re asking them to change their way of thinking. Of course, there will be resistance.
China’s stance on cryptos
The Indian government seems to be following the tough talk of the Chinese government which has invested heavily in the rollout of the Digital Yuan.
I ask you this. How is it that 60% of global bitcoin mining is happening in China when China is against bitcoin? We’re talking about a government which when the world was watching, canceled the Ant Financial IPO because its semi-retired founder made a factually correct statement that government bureaucrats don’t really understand FinTech. That government has allowed mining to continue on its land. It isn’t because it is powerless to raze every mining rig to the ground.
In a world where bitcoin is an important asset class, mining power will be of strategic importance and a matter of national security. Giving up control over it would be foolish. This is especially true when the US is ramping up on its mining capacity. China achieving leadership in mining might have been unplanned, but it is now a geopolitical asset that it is unlikely to want to lose.
Final Words
Instead of wasting our time discussing the impossible task of banning bitcoin, we should be brainstorming about how to navigate the new world dominated by decentralized cryptocurrencies. I propose that the first step should be for the RBI to accumulate bitcoin, the way it has accumulated gold.