If the Indian Government were a parent, it would be the kind who would like to accompany you even on your honeymoon! For the past few years we have experienced how Government is trying to establish its control over various aspects of our life – Be it the internet, social media, news, finance, food, religion, art, gaming, entertainment and even opinions, earlier which was restricted to fewer aspects such as education, health, taxes and society.
The role of Governments is restricted to our public life, where it creates rules for public harmony and enforces them through its administrative machinery. However, the Governments around the world, and not just India alone, have taken the liberty to extend their control over personal aspects of life as well. ‘Free world’ is a concept left alone in books, as our life is increasingly controlled by the self-proclaimed ‘higher authority’ who decide the good and bad for our living, according to the secret society backing them and their agenda to stay in power.
While you may not have imagined the above conversation in the context of cryptocurrencies which is merely a financial instrument, the underlying and less-talked story of the emergence of the cryptocurrencies needs your attention today before we talk about the future aspects of this new development. Because cryptocurrencies are not a new ‘fintech revolution’ which aims to improve our living, instead they are a new ‘fintech resistance’ which aims to change our living radically!
Our Currency System
We live in a digital world today where although our money is physical i.e. coins and notes, we still use it digitally through bank accounts, debit cards, credit cards, wallets and online payment and transfer thereon. So what is so different about Cryptocurrencies? To understand this, we first need to understand the history of our currency system.
In ancient times, people bartered goods and services and the quantity bartered would depend on the demand and supply, as rare things were more valuable than others. Over time, metals were discovered and they gained higher value, as their quantity was limited and thus, metals coins became the storage of value i.e. a medium of transacting. Later, as the world realised Gold and silver coins which were more rare and valuable became storage of value and continued to be a medium of transacting for a long time.
Gold coins had their limitations, as they couldn’t be carried and stored easily. Besides, with an increase in the value of gold, it became difficult to transact, as the coins weren’t divisible. These problems were resolved when printed currency notes were introduced which were to be exchanged against commodities, referred to as ‘Commodity Currency’. Gold became the defacto commodity owing to acceptance of its value. This is known as the ‘Gold standard’ where the value of the money is based on gold e.g. when first introduced in 1861, United States Government declared the value of one ounce of gold equivalent to USD 20.67. Thereby, the currency in circulation was equal to the gold reserves with the Government. Meanwhile, people were assured that the paper currency in their hand had value attached to it, in the form of gold, as the currency note was a promissory note that its value could be redeemed against gold.
As the world developed, more gold reserves were found and mined, and with increased supply, the value of gold and the currency issued on the gold standard dropped. This made the value of currency notes unstable. When World War I broke out, the Governments needed more money for their military activities, however, the gold reserves weren’t going to shoot up magically. To print more money, the Governments temporarily suspended the Gold standard and printed currency, as required.
With more money in circulation, the trust in the value of the currency was lost and thus, people realising the importance of gold started hoarding it. This resulted in lesser money in circulation, and economies moved towards deflation, as recessions emerged. In 1933, when the Great Depression reached its peak, the United States had to shut down all its banks, as its gold reserves were depleting with people heavily exchanging it for gold. With new rules in place, all gold with banks was turned to the Central Bank, and the general public was not allowed to exchange the currency for gold.
The United States, over years, created a huge reserve of gold and held the majority of the world’s gold supply. Since US Dollars were issued against the same reserve, the trust increased and US Dollar became a standard, instead of gold. The rate of currencies of different countries was pegged against US Dollars instead of Gold and thus, the foreign exchange rates emerged. Thus, gold was the underlying asset for US Dollar and US Dollar became the underlying asset for their global currencies.
However, later when the United States prospered and imported in large paying in US Dollars, many countries became worried about huge reserves of US Dollars with them. Thus, they started redeeming the US dollar for Gold which depleted the United States’s Gold reserves and in 1970, when the United States could no longer meet the growing obligation, it closed the conversion of US Dollars into Gold and ended the Gold Standard completely. The currency was now no longer backed by any underlying asset and such currency is known as ‘Fiat Currency’.
The value of fiat currency which has no underlying asset is thus left to its demand and supply, which indirectly relies on the country’s economic performance. If a country isn’t performing, the demand for its currency would fall, as there is a lesser guarantee for the redemption of currency for some value, goods or services. This is the reason why, when the economy doesn’t perform, INR/USD increases i.e. more INR is required for 1 USD than before, as INR is not as valuable as before.
To ensure that the currency holds value, the Central Government control the interest rates, increase it if there is more supply of money (inflation) and decrease it if there is less supply of money (deflation), as lower interest rate would force people to invest instead of keeping it idle.
Necessity is the mother of invention. The fiat currency system has worked well for mankind for a long time now. The Central Banks have an ardent job of maintaining their value, however, the Governments enjoy controlling the currency. In 2008, when the world faced a financial crisis, the economies contracted and Governments lowered their interest rates to near-zero percentage and in some economies even opted for negative interest rates. However, when all still didn’t go back to normalcy, Governments printed more money and circulated the same to boost domestic economies, however, the money in the hands of the public was now of less value. Governments have always controlled our money – if you are not a routine follower of the Central Bank’s Monetary Policy and Guidance, this might be new to you, however, still the plain truth.
In 2008, amidst the global pandemic, Satoshi Nakamoto felt that ‘the trust-based model’ where a third party (the Central bank) is necessary to ensure that money is not being double-spent or in case of physical currency – counterfeit notes should be done away with. He provided a solution to the same in his paper where a peer to peer network system based on cryptography can self-authenticate the transactions without any central agency regulating it (and thus, not controlling it) and thus emerged ‘Bitcoin’, the first cryptocurrency which later in 2009, Satoshi Nakamoto successfully mined.
‘Crypto’ means secret or concealed. Cryptocurrency is a digital or rather virtual currency secured by cryptography, a system that makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Over the past 13 years, Bitcoin has emerged through various bugs and fault, and the system has improved over the years. Money is no longer based on some storage of value or standard, its value fluctuates according to the demand and supply – cryptocurrency takes the same system into the virtual world, overcoming all fallacies of fiat currency as well as digital transactions. The idea of cryptocurrency is fascinating, as it finally does away with the central agency concept and the need to ‘trust somebody’ that the currency we hold has value and transactions occurring are real. However, even after 13 years, not there is still so much uncertainty around Cryptocurrency, have you wondered why?
Cryptocurrencies – a fad or the future?
If the world wants a better financial world, Cryptocurrency is the future. However, what the world wants is decided (and even influenced) largely by the political bodies in every country. The Governments are the key to Cryptocurrency’s success. If the Governments do not accept them wholeheartedly the cryptocurrencies are going to die – and that’s the most probable scenario if you understand the dynamics here. We are probably going to receive an over-cooked version of the cryptocurrency. The central idea of Satoshi Nakamoto was to remove the ‘Central trusted authority’ i.e. the federal or reserve banks and leave the currency network to take care of its own. While this would have many problems as noted above, with rules and regulations in place, the cryptocurrency network can be made better and safe from manipulation. However, this would also minimum interference from the Governments and thereby, giving up the power to control the money and grant freedom, in its truest sense to the world. Is that possible?
In the present scenario, the way cryptocurrencies have operated so far, the way Governments have ignored it or tried to restrict it, we are nowhere close to cryptocurrencies being accepted as legal tender. This makes cryptocurrencies only an investment option, in a market where manipulation is common. Thus, with no future landscape in focus, cryptocurrencies would soon become a fad that existed in the early twenty-first century. However, if the Governments work towards making a better financial world with benefits such as the ability to track transactions, collecting taxes efficiently and also providing a safer and secure financial ecosystem to the public to transact and prevent frauds, with little regulation and restricted interference of the Government, Cryptocurrency can become the ground-breaking revolution of this century. Cryptocurrency is the future, only if we nurture it, else just another fad!
Revolution vs Resistance
Compare any point of time in your past with the present time, you will realise how quickly our world is changing in different spheres of life. Old, outdated and obsolete is being replaced by new, novelty and advancements, in a very brief period. This is what we generally refer to as a ‘Revolution’ to depict how the world around us is changing. The introduction of bitcoin has changed our world and can completely change our future financial world. However, don’t you find it strange that the world is talking about a revolution and the architect of the revolution has hidden forever behind the pseudonym ‘Satoshi Nakamoto’? Maybe because he is shy or too noble, or maybe, because it not a revolution, it’s a resistance!
Satoshi Nakamoto came up with his idea of ‘decentralised virtual currency in midst of 2008 global financial crisis when the Governments around the failed and did nothing about the real factor leading to the crisis – the governments themselves. The economic world succumbed to the profit-making strategies of the large corporates and nothing could be done about them. It’s the common public who lost money, and it’s the common public who will lose them again.
Cryptocurrencies are a revolution for sure, however, only if they are implemented as a revolution and not as an investment fad. Most countries have allowed cryptocurrencies to exist, to depict a positive picture, however, none of them has made any push towards making it legal tender or anything close to it. The Governments are resistant to change, the powerful ones who manage and manipulate from behind the scenes are resistant to change and even the general public will probably never be explained the past, current and future system of economic manipulation. And that’s the reason why Bitcoin is a ‘Resistance’, not ‘Revolution’ – because it is not a change implemented successfully, but the beginning of a long battle to bring the change!