Love it or hate it, but you cannot ignore cryptocurrencies. Monetary historians point out that even Nobel laureate economist Milton Friedman had foreseen the emergence of cryptocurrencies when, in 1999, he said, “The one thing that is missing but will soon be developed is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B without them knowing each other.” Not that he was talking Bitcoin, but many see it as the first mention of a digital currency by an economist of his repute and someone who spoke positively about it.
Globally, the interest in the future of cryptocurrencies, which are built on the Web3 technology or blockchains, has risen tremendously. There are two schools of thought that fiercely defend their antagonistic positions on cryptocurrency. On the one side, there are tech theorists and companies which conceptualised it and want to replace fiat currencies with it. “Cryptos were designed to be unalloyed global commons. They were premised on the maxim of distributive justice. The first generation of blockchains had serious monetary ambitions. They focused on creating a currency with a strong deflationary touch,” says A Damodaran, a professor at the Indian Institute of Management, Bangalore, about the ideals with which cryptocurrencies were developed. On the other side, these idealists were pitted against central banks, which see cryptocurrency posing challenge to their sovereign rights over money supply in the economy.
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The origin of Bitcoin is attributed to a white paper written by “Satoshi Nakamoto” in 2008. This simple statement hides two curious facts which have made naysayers suspicious about the whole concept. First, no one knows who Satoshi Nakamoto is. It could be an individual or a group of smart people who proposed a financial idea that has caught the imagination of, first, young techies and, then, young investors. Second, the white paper was written at a time when the existing global financial system seemed to have crashed. Many people believe that the two events are connected and the idea of replacing fiat money with a seemingly open-source model emerged more out of the need to try out a new financial model rather than some do-gooder anarcho-capitalists taking on inflation-driven central bankers.
Whatever may be the reason of its rise, the reality now is that with each passing year, a huge amount of money is being poured by venture capitalists in the crypto sector, so much so that even traditional investors who were initially averse to the sector have had a change of heart. The Oracle of Omaha Warren Buffet, who once called crypto “a rat poison” recently bought $1 billion worth of stocks in a crypto-centred digital bank. Buffett’s company Berkshire Hathaway made its crypto investment public with a regulatory filing with the US Securities and Exchange Commission, revealing a stock purchase of $1 billion in Nubank, a digital bank based in Brazil. If the global crypto sector needed one big endorsement for legitimacy, this is it.
Buffet’s change of stance on cryptocurrencies is symptomatic of the change in the economy that has been introduced by Web3, which is threatening the old-world order. From being accepted by companies to pay salaries in different parts of the world to countries like El Salvador that have made Bitcoin one of its many legal tenders, cryptocurrencies have come a long way and are here to stay for a long time.
Though estimates vary, there seem to be around 6,700 cryptocurrencies in the world, with a total market capitalisation of around $2.5 trillion. With different characteristics and use cases, every cryptocurrency has the potential to grow in its multiples over the next day. The risks associated with the development of cryptocurrency use cases are equally high and this is why, in the words of former RBI governor Raghuram Rajan, “most cryptos are unlikely to survive with high values going forward”.
Industry watchers believe that the potential of cryptocurrency as currencies has given way to its utility as a tradable asset. The mushrooming of crypto exchanges all around the world has happened due to continued interest of institutional investors in them. It also soothes the nerves of central bankers who are happy to see the challenge to fiat take a different route.
However, the challenge, while it lasted, opened up the possibility of an e-currency, which government and central banks the world over want to experiment with. The Bahamas, China and Nigeria have taken the lead in launching their own central bank digital currencies (CBDC). Finance minister Nirmala Sitharaman also announced in her budget address in February that India would soon launch its blockchain-based CBDC.
If there is one contribution that the crypto sector has made to the financial system, it is CBDC. While El Salvador is the only country that still feels that a cryptocurrency can be a legal tender, for the rest of the world, the fiat aspect of crytocurrency has metamorphosed into CBDCs