Saturday, January 9, 2016

Crypto-currency is not digital equivalent of a national currency

The way we use money is based on some fundamental assumptions that are rarely noticed. What we call money is actually a national version (sometimes regional too) of money that is called currency. Dollar, Pound, Rupee, Yen and Yuan are versions of money but only in a national context. In a different geographical territory, they may not fetch any value. For that, they must be exchanged. That is where exchange rates come in. So, what is called money is actually not a global definition. Currency is only a fragmented or a limited understanding of money; it does not signify a flat world.  If it has to become money, it will have to jump across the exchange barriers every time it crosses borders. A national currency may go digital but it cannot avoid this barrier of exchange and related costs involved rather it imposes a negative element to the global definition of money.
The digital currency has got a new rival and that is what is called digital money or more truly, a crypto-currency. In July, 2014, there were 400 such crypto-currencies and over half of them were trading currencies too. Around fifteen months after as on December, 2015, the figure has risen to around 670 crypto-currencies and 580 of them are trading currencies. It all started from Jan3, 2009 when Bitcoin was launched by an anonymous coder/s called Satoshi Nakamoto. While it lay dormant for around two years, it quickly surged ahead in 2011 and reached over $1100 in 2014 and is currently staying around $430. Other crypto-currencies followed like Namecoin, Litecoin, Ripple, Dogecoin, Peercoin and many more. The total market cap of all these currencies is over $ 7 billion today. Over 120 of these currencies have a market cap of over $100,000; nearly 30 of them have market cap of over $1,000,000 and six of them have more than $10 million each and three have over $100 million each. This has happened in a very small period of less than five years. Who is investing in them and why the money is shifting to these new currencies? Are they not the true versions of money without any exchange barriers?
 A crypto-currency is a Whatsapp like message app. The way you share message with no restrictions and no cost with anybody in the world, you can share digital cash with no restrictions with anybody anywhere in the world. Even message apps were not known in public domain before 2009. Whatsapp has grown from zero to over 700 million active users in just 5 years and over 2 billion smartphones use message apps today. Imagine if message apps give you an option to make digital payments by inserting a crypto-currency like ripple, bitcoin or stellar or ether, what would happen. If people choose to shift from physical cash to digital cash in such a mode, what will happen to physical cash????? A rupee-based payment chunk (or any national currency) would simply vanish from the current value of its GDP. This may seem an imagination but it may be a reality if paper currencies keep devaluing themselves by continuous inflation or meaningless third-party transaction charges and bottlenecks.
On a fundamental level, money is nothing but an instrument that facilitates exchange of utility between two persons. Currently, this is a paper currency but if two people have the freedom to use a better alternative, they will definitely use the one where there is no inflation, no transaction costs, no fear or no conversion hassles. That is where crypto-currencies are turning out to be a huge favourite. A good government is known by sound money and not by high inflation. 
The world is seeing the deluge of debt-laden governments and public sector enterprises. Either an economy is suffering from inflation or fear of disinflation. A big country like Brazil is nearing economic disaster and we have already seen the cases of Cyprus and Greece. Their national currencies have not helped their people in choice of a better economic future. Now, the people have found that it is not the government that can be changed rather they need to change themselves by shifting to digital currencies. If the growth rate of bitcoin is divided by a factor of ten and distributed across only 10% of these digital currencies, the entire paper currency system of the world will have an equivalent flow of crypto-currency. Though this is only an imagination and needs political testing yet the fact is that people can have alternatives even if the governments fail.  All the governments need to understand this. Their job is to safeguard the value of money and its equal distribution. If they don't understand this, they are going to face a monetary apocalypse.
(This was published on on 5th January, 2016.