The risks are magnified for an economy like India, which runs a net trade deficit and a non-convertible currency-unpredictable capital flows engendered by privately-owned cryptos can impair systemic stability faster than policymakers’ ability to take corrective actions. There is simply no data currently to model the tail risks of a privately-owned currency system. A monetary system with heavy influence of privately-owned currency will also have large, unpredictable tail-risks on macro stability, which no central bank would be able to predict, model and counter-act. The larger the developed ubiquity of cryptos as a medium of exchange, the less influence will domestic monetary policy tend to have on monetary aggregates-interest rates, money supply, capital flows. Just as “Dollarisation” effectively results in the economy importing US monetary and fiscal policy, “Crypto”-isation will mean importing the monetary policy engendered by a privately owned currency. Private cryptos as “currency” is rightly feared to have similar potential impact. In effect, dollarised countries end up importing the monetary policy of the US Fed and losing seigniorage revenues to the US Fed. Further, the domestic central banks lose their seigniorage revenues- difference between the 0 per cent interest on each currency note issued and the same deployed by the central bank into interest-bearing domestic financial instruments (like bank reserves, government securities etc). Domestic central banks lose the ability to influence interest rates and manage liquidity in the economy if the dominant currency is issued by a foreign government. In some ways, it is similar to private residents raising private militias for security, as a result of a breakdown of confidence in the state’s monopoly over violence.īut the “Dollarisation” of domestic economies has serious impact on monetary and fiscal policy settings.
Zimbabwe, Venezuela-in recent times-represent cases where there are widespread questions on the ability of the state to govern, leading to a breakdown of trust in tools of the state (including its fiat currency). But all these cases are in countries with serious, even complete, breakdown of confidence in the state itself. In yet more cases, while there is a domestic currency still in circulation, USD (or other “hard currencies”) are preferred modes of exchange. It is not uncommon for countries to depend on a non-domestic fiat currency-there are dozens of African and Latin American countries where the US Dollar has been (and is still) the default primary currency in use. Along with a legal monopoly on violence, it allows the modern nation state to exercise control over fundamental levers of economic social contracts-trade, banking, taxes, government intervention to correct imbalances etc.Ī private cryptocurrency competing with fiat currencies upends this arrangement. One of the core structural attributes of the nation state is the sole monopoly to issue fiat currency. Mukesh Ambani Bullish on Blockchain Technology, Says it is Vital for Equitable SocietyĪlternative Currency? Fundamental Source of Discomfort The US Securities Exchange Commission (SEC) recently approved two Crypto ETFs for listing in the US.Ĭrypto-Currency or Asset Class?RELATED NEWSĬryptocurrency Update: Bitcoin Price Today Down by 22%, Ether, Cardano, Others in Red What was a geek fad not so long ago found institutional backing during the course of 2021 – almost every large financial institution globally, including Wall Street giants like Goldman Sachs and JP Morgan, have set up (or started the process of setting up) crypto offerings for their customers. The big macro questions on the impact of cryptocurrency on fiscal and monetary policies remain unanswered. It’s a good time to explore the possibilities around regulating cryptos in India, starting from first principles. But the matter has been top-of-mind for policymakers, with PM Modi himself alluding to the risks/opportunities of cryptos recently. However, the exact proposals in the Bill are still not in the public domain. Is it the world’s financial future? Or is it a scam? Or worse, is it a shiny new tool to facilitate money laundering and fraud? The government has listed a new law to be introduced in the Winter session of Parliament to regulate cryptocurrencies.