The saga of Bitcoin, that rose from zero to $20,000 in 10 years, has had varying impact on stakeholders of all kinds – from skepticism to unwavering belief, awe to disgust, frustration to exhilaration, and fear to recklessness.
To illustrate the confounding nature of crypto, especially to rule makers, it was labelled a “security” by SEC, a “commodity” by a US judge in a CFTC case, “money” by FinCEN, “property” by IRS, all in a span of weeks earlier this year.
This, after nearly a 1000 ICOs raising over $5.5 billion in 2017, and the crypto economy exploding from $20 billion to nearly $800 billion, all in the span of 12 months. The world leaders who gathered in Davos for WEF 2018 had a new star to contend with in the form of bitcoin, which outshone the biggest stars. It was proving to be a hydra-headed enormity for the traditionalists, who were yet to grasp the true essence of the phenomenon – Why was bitcoin unstoppable, despite their best efforts?
Despite a statement just weeks earlier by its own CEO Jamie Dimon that Bitcoin was a fraud, J.P. Morgan had to acknowledge its fear in their annual report for the first time: “A variety of new technologies could force the company to spend more to modify or adapt its products to attract and retain clients and customers.” Bank of America also mentioned crypto as a real risk to its business models. Interestingly, both JP Morgan and Bank of America have dozens of blockchain patents filed early in the technology’s life cycle.
The eroding public confidence in banks is fuelling the momentum in the crypto economy, which people are slowly, but surely, seeing as a substitute of sorts to the traditional centralised financial institutions.
Former RBS India Chairman, Meera Sanyal’s comment in the aftermath of the $2 billion PNB – Nirav Modi scam is apposite. “Banking is nothing but trust and credibility. If you don’t trust your banker, there is no bank. The crisis that we now have is that people believe banks and bankers are crooks, and regulars incompetent,” she said.
The problem with embracing blockchain and not crypto
Not surprisingly, governments want to keep a tight leash on this new phenomenon, through regulation of the crypto economy, while allowing themselves to mint their own coins for the public, as and when they are persuaded of its merits.
But governments can’t embrace blockchain technology and shun crypto. You need an Ethereum platform (or an equivalent) to code smart contracts, and the most popular platform for creating such blockchain applications has a native token running its ecosystem called ‘ether’, which is a cryptocurrency.
So, even if you ban mining or buying or selling of “ether” in your country, somebody somewhere is mining and trading in ether to keep the platform going. No, regulation is not going to stop it.
Learn from China’s mistake
The most unpredictable of them all – Russia’s Vladimir Putin – has been exceptionally consistent in his views on crypto. He comprehended its power early, and vowed to make Russia a crypto-empowered nation. Putin was perhaps encouraged by Russian developers, who seem to have an edge with crypto, and Russian-born whizkid Vitalik Buterin, who founded Ethereum as a teenager.
China, after watching bitcoin’s dizzying ride for nearly a decade and the ICO mania in 2017, finally drew the curtains on it in August 2017, banning Initial Coin Offerings (ICOs) and crypto exchanges. This was done to put a stop to the enormous pull crypto had over Chinese millionaires, who were going all out for this new asset class. It is no surprise that India’s politicians, who are often the last to get on board any technology, find it totally beyond them.
As an example of Chinese assertion of their economic power, over 90 per cent of bitcoin trading volumes were consistently from China in 2014-16. In 2017, ‘The Year of the ICO’ and also the year of Ethereum, over 90 per cent of ICO funding came from China until the ban was imposed.
But, who can stem the tide whose time has come? When China banned cryptocurrency mining and ICO investing, they also inadvertently made history by becoming the reason for a newly formed exchange set up just outside China, Binance, to become the crypto Alibaba overnight.
Binance, set up by entrepreneurs of Chinese-origin and backed by Chinese venture capitalists, benefited immensely from China’s decision to ban crypto. Founder Changpeng Zhao became an overnight billionaire in 6 months. With its 1.4 million-transactions-per-second capability, Binance has attracted 6 million users, making it the world’s largest crypto-exchange.
Ever heard of regulation creating mega rich billionaires? Zhao has the Chinese ban to thank for his fortunes! You don’t have to look far for a home-grown example. Vijay Shekhar Sharma became the youngest Indian billionaire after demonetisation’s overt help to Paytm. It had become the only solution for millions of cash-dependent poor and middle class, who were trapped between starvation, life and death in the ugly aftermath of Modi-made disaster. What passes for regulation in other countries, is achieved equally effectively in some by state endorsement for political friends.
The problem with centrally-issued cryptocurrencies
The very premise of a crypto currency is its inherent purpose in the ecosystem, and its issuance or supply is algorithm-driven and therefore resistant to arbitrary interventions in supply and demand. This is something centrally-issued government coins would be vulnerable to.
The government coins of Russia, Japan (J-Coin), Sweden (E-krona), Estonia (Estcoin), UK. Uruguay, Kazakhstan, China would all be good cases to study. BIS has just issued a statement warning Central Banks against issuing their own crypto currencies, predicting that citizens would run to state-issued crypto in times of crises, which would damage the stability of economies.
We have an elegant example in Ripple’s XRP token – which is not really a cryptocurrency in the sense that Ethereum or Bitcoin are. XRP is centrally issued, controlled by few banks which own Ripple, and isn’t a coin which is essential for the running of an internal token-based blockchain.
Such coins, which are detached from blockchains, are vulnerable to price manipulation by parties with vested interests, and run the risk of being likened to ponzi schemes. This is because they have no crypto-economy fundamentals boosting their valuations, such as network effects of users thronging to it, and future applications being built on top of platforms.
Contrast this with ICOs where the makers have force-fitted a token for the purpose of an easy fund raise. But, at least their tokens are used in their economy, even if it is without a strong intrinsic demand or justification – which the token subscribers have to evaluate before buying.
Take for example, the tokenised peer-to-peer IPO highway we are building for companies in the broad economy, run entirely on smart contracts. Such a critical infrastructure alternative to current investment banks and exchanges is an enormous public good. If we were to try to fund this with private funding or equity, 100 per cent would be taken by banks and centralised institutions, whose interests would not be aligned with such a platform.
Having banks as stakeholders would be the death of this vision. This is the reason, no single bank has yet built a single invention that is a true public good, despite banks having access to inventors and resources a millions of times greater than startups like us do. Public goods have to follow the ICO model to succeed. Otherwise, they will die the death of umpteen fintech startups that were acquired by banks in the past decade and went nowhere.
In its 7 February 2018 testimony on virtual currencies the Securities and Exchanges Commission said, “…we should embrace the pursuit of technological advancement, as well as new and innovative techniques for capital raising, but not at the expense of principles undermining our well founded and proven approach to protecting investors and markets.”
This would be a glowing endorsement for a new capital formation market place we are building such as Capital Coin, run on tokens and smart contracts, within the legal framework, and not by the incumbents. Would India be wise to shut itself to such innovation just because the bitcoin and crypto craze threatens the tax collector?
Arifa Khan is a crypto pioneer and India Partner Ethereum and tweets as @misskhan