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Cryptocurrencies seem to be one of the biggest financial revolutions in the history of mankind. While indeed cryptocurrencies are bound to be the future, they still may not give people the financial freedom and privacy that they now see digital currencies such as Bitcoin promising them. The reason for this is likely to be the responses governments across the world are likely to take in regard to cryptocurrencies. Governments are not going to like this prospect of power being taken away from their hands while the people would no doubt fight for absolute privacy of their financial transactions. The responses of governments will be about finding a middle ground between themselves and their citizens. This middle ground, I believe, will manifest itself in the form of National Digital Currencies.
Firstly we need to understand why governments are likely to oppose these decentralized digital currencies. Let’s start with authoritative governments. The looming danger of loss of regulatory power is likely to prompt these conservative and authoritative nations to take stringent action against cryptocurrencies. The political parties in certain countries such as Russia and China rely heavily on their ability to control financial markets for maintaining their authoritative regimes. These countries won’t be willing to compromise this power. This fight would not be as tough for them as one might perceive. This is so because they need not outrightly ban cryptocurrency to maintain the status quo. They can simply introduce their digital currencies such as China is introducing Central Bank Digital Currency. In fact, as per the Bank for International Settlements, over the last 12 months, 60 nations have experimented with the national digital currencies.
As for the liberal, free-market promoting nations, while they may be reluctant to ban private digital currencies, they are still likely to oppose them and subject them to some minimal restrictions. There are two reasons for this. Firstly, decentralized cryptocurrency is purportedly free from the risk of inflation caused by excess supply. Now, imagine if governments across the world hadn't taken liquidity-infusing measures during the Covid-19 pandemic. While cryptocurrency remains protected from inflation, it also renders governments incapable of taking remedial measures for the economy during a crisis. Most of the time inflation happens when the governments artificially stimulate demand during a crisis.
There have been exceptions such as Zimbabwe (2008) but these happened because of inefficient or corrupt governments for which a check mechanism in the manifestation of elections and democracy either exists or can be created. Thus, even bonafide governments are likely to be apprehensive about this loss of power to redress the economic crisis. Crisis can also happen because of natural causes such as a flood or a disease outbreak. Not only governments but also certain sections of the general public, especially those lacking technological literacy necessary to operate digital currencies are likely to support the government’s retaining of certain regulatory and stimulating power. This is because these people are not just unlikely to use sophisticated digital currencies but also because this section of the population is likely to rely heavily on government aid to see through any such crisis. While paper money would not be entirely eland governments would still be able to artificially stimulate demand or supple as the case may be, decentralized cryptocurrencies would still significantly hamper governments’ ability to do so. The middle ground for them is again likely to be National Digital Currencies as their Central Banks can make more of them as and when necessary.
Lastly, we need to understand why people are likely to not be able to completely realize their demands and instead settle for the middle ground, that is, National Digital Currencies. There are two reasons for this. The first reason is the enhanced likelihood of fraud to be committed via decentralized cryptocurrencies and the inability of the governments to stop it. Since it is not possible to trace cryptocurrencies, they are already being used on the dark web for illegal activities. Also, there have been numerous instances when fake Cryptocurrencies have been sold to people via fake Public Coin Offerings. One such instance was when Centra Tech proposed to launch Centra Card claiming that it would allow investors to buy with their digital currency at any business accepting Mastercard or Visa. They thereby managed to dupe investors of $25 Million.
Also, cryptocurrencies are vulnerable to cyber-attacks. Such vulnerabilities and possibilities of fraud are further enhanced by a lack of technical knowledge among the masses such as in India. As such cases rise, likely, more and more people vulnerable to such attacks and not much educated are going to demand governments to place some sort of regulatory mechanism. The governments, in turn, would most likely propose their digital currencies. The second reason is that the energy consumption of digital currencies such as Bitcoin is very high. As people become more and more aware of climate change and more and more conscious about prudent energy consumption, digital currencies may start seeming like a waste of high amounts of energy to people.
While people owning such currencies may continue to oppose such a perception, we have to understand that as the problem of climate change becomes graver, those who will have to bear the immediate and most brutal repercussions of it will be the poor and middle-class people, especially in the low and middle-income countries. These are the very same people who lack both the capital and technical know-how to purchase such expensive cryptocurrencies. These will be the people who will create pressure on the Government to bring to a halt the wastage of enormous amounts of wastage on cryptocurrencies. Ultimately, this too will manifest in the owners and supporters of cryptocurrency having to settle for the middle ground as they can’t fight both their governments and a half(if not more) of their fellow citizens at the same time. Thus, national digital currencies are likely to be the future.
Written by: Sidharth Badlani, Ramjas College, Delhi University
Edited by: Muskaan Shah, Pandit Deendayal Energy University
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