there are calls in India not to ban it (and other cryptocurrencies) and instead embrace Bitcoin as a reserve currency. Balaji Srinivasan, a highly respected and accomplished Silicon Valley executive, has been voicing this opinion forcefully.
The timing of all of this is difficult to ignore—by all accounts the Indian government
is contemplating banning all private cryptocurrencies soon. Balaji, through a couple of essays and interviews, recently made a powerful argument that India should instead embrace incumbent cryptocurrencies and buy bitcoin as a reserve.
There is no disagreement on the application of blockchain technology and cryptocurrency in India, however. The government
has made it clear that it plans to introduce some sort of digital currency to begin with. Balaji’s argument has several flaws, and some of them are flimsy. The essay cleverly uses arguments in favour of cryptocurrency in general to suggest that Bitcoin should be the favoured one.
The first argument is possibly the flimsiest of the lot—that Bitcoin is too big to ignore. Why? It is
supposedly a trillion-dollar industry, the likes of
Elon Musk are backing it (a case of selection bias) and VCs are investing large capital in it and so on. So, the argument goes, India should not miss out on Bitcoin. In his essay, Balaji says that Bitcoin is going to grow 10x from here and the Reserve Bank of India (RBI) will be better off holding the asset. But no sovereign country or central bank of a large economy is going to make decisions on the basis of price speculations or the actions of a few individuals.
Next, Balaji makes a case that embracing Bitcoin will boost foreign investment. Foreign investors come into India because the economy is worth investing in, not because India owns some Bitcoins. India has created unimaginable roadblocks to foreign investments. For the most the past three decades, foreign investors have overcome those obstacles. For example, by bringing money into India via the Caymans and Mauritius, incurring transaction costs along the way. Investors will come into India and leave based on their relative and absolute assessment of the Indian economy’s growth prospects.
Another argument is around the ease of remittances as migration and remote working grows. Here, it is unclear how Bitcoin alone would help in comparison to any other digital currency or cryptocurrency. Bitcoin has no significant advantage over any other currency. Also, the majority of this remote working is going to be within India, where crypto does not add any special value for remittances, even if we ignore the costs of transactions. The current infrastructure of UPI, NEFT, RTGS provides sufficient means to transfer money at low cost.
Also, linking India’s recommended Bitcoin embrace with foreign policy is bizarre. The argument is—India is nobody in the international financial system, so must bid for its place by buying Bitcoin. Unfortunately, India is not a startup making an aggressive acquisition to justify its valuation to investors.
Balaji suggests that India’s Bitcoins could act as a hedge against being de-platformed. This can happen only when India defaults on its obligations on a very large scale. As Balaji says, India is the No. 3 economy, so can a Swift really deplatform India? Moreover, deplatforming individuals and nations is not the same.
The case for crypto deterring financial fraud is absolutely right—but again, it is a characteristic of a cryptocurrency in general and not only Bitcoin. Similarly, the argument that crypto is the financial internet also has merit—but it has nothing specifically to do with Bitcoin either.
In summary, the arguments for India to embrace Bitcoin wholeheartedly are sensationalist. A large economy like India cannot embrace something that has so many unknowns. Now does this mean India should ban private cryptocurrencies? Certainly not. Despite several unknowns, cryptocurrencies can offer fundamental benefits to the financial world and the likes of Bitcoin have a head start. If private individuals want to transact in Bitcoin, the government should not bother. It could choose to bring in some checks and balances, but banning it altogether is not a good idea.
The writer is co-founder and chief executive officer of Fisdom.