Cryptocurrency has been proclaimed as money of the future. Now 12 years since release of Bitcoin in 2009 and followed by release of 6000 more Cryptocurrencies after that, Cryptocurrencies seem long way from Global legal tender and becoming everyman’s money.
The world deals with paper money, plastic money like credit and debit cards , electronic money and mobile money. Digital money (Cryptocurrencies) is still far away from legal tender and everyman’s money.
Money is anything that performs three functions, namely, medium of exchange, unit of measurement and store of value. In view of high price fluctuations, Cryptocurrency has failed as a store of value. The paper money also loses value (purchasing power) due to inflation, but that has been in the range of 2-3% in stable economies. As of July 23, 2021, CMC200 have lost almost 50% over the last 6 months. Please see below:
Currency as we know is fiat money; that is by decree (order) of the government. Each dollar bill issued by US government is inscribed with the words: This Note is Legal Tender for all debts, public and private. In some other countries like India, Currency note is a promissory note where the issuing authority (government) promises to pay the bearer the sum of the Note.
Cryptocurrency is a private promise. The experience with private promises in US banking has not be impressive. Before formation of Federal Reserve System in1913, many private banks issued their currency but eventually failed causing bank panics and financial Chaos. Indeed, it is after formation of Federal Deposit Insurance Corporation (FDIC) in1933, after the Great Depression of 1929-32, that banks have attained stability and public confidence.
In the context of Cryptocurrency as the Global Legal Tender and money of the future, there are a few fundamental factors worth noting:
In two most populated economies, and Number 1 and 3, in terms of GDP (PPP) of the world, namely China and India, Cryptocurrency mining may not find favor.
China has already banned cryptocurrency mining.
India is most likely to ban cryptocurrency mining. The reason is simple to understand. According to a report, “One Bitcoin transaction takes 1,544 kWh to complete, or the equivalent of approximately 53 days of power for the average US household.” At 2019 average price of electricity of Rs 6/- per kWh in India, each cryptocurrency transaction would cost Rs 9,264. If you consider ‘best use’ of 1,544 kWh of electricity in India, there are many other competing uses better than mining and transacting Cryptocurrencies.
Coming to USA, the price of electricity in 2021 varied between 9.37 cents per kWh in Louisiana and 32.76 in Hawaii. That means each cryptocurrency transaction would cost $145, minimum, just in terms of cost of power. It also means that any cryptocurrency priced in the market for less than its cost of mining and transaction has very limited future.
The prime arguments in support of Cryptocurrencies have been that those provide anonymity, security, speed and low cost transfer of money. The current web-based transfers are as much secure, fast and low cost. As far as privacy and anonymity is concerned, it may be the need of select few and certainly not of masses. The common person continues to disapprove money laundering and dark web and supports good governance and transparency..
The biggest challenge facing cryptocurrencies is legitimacy of its anonymity, and acceptability. That is why, when CEO of a company says, ‘his company will accept Cryptocurrency for sale of wares’, the price in the market goes up; and next day when he says, ‘no, no, not till cheap renewable energy to mint and transact Cryptocurrency is available’, the price goes down. A Cryptocurrency exchange reports on its website that a country has adopted cryptocurrency as its legal tender. That one country is only one of 245 countries and territories of the world, and otherwise a speculative grade country. And the Finance Minister of that country within a week elsewhere says, ‘no, no, not really’.
The highly likely scenario is that India like China would ban cryptocurrency mining. The trade would be permitted with due disclosure and acknowledgement of its risks, may be on the lines of sale of cigarettes saying, ‘Cigarette smoking is injurious to health’.
According to reports, the Government of India is thinking on the lines of Central Bank Digital Currency (CBDC). But how would CBDC provide anonymity? And how would it be a better use of electricity? These are stark questions.
The Government of the United States of America is also, according to reports, dabbling with the ideas of Stablecoin and CBDC. I don’t think CBDC, if it comes, will ever be Cryptocurrency as originally intended.
Implications for Trade
Let’s accept that Cryptocurrency is a highly speculative investment. So, to enter or not is a matter of your personal/ institutional risk aptitude and appetite.
An ominous comment in the financial literature has been that Hashcash of 1997 has been the most immediate predecessor of cryptocurrencies; and Hashcash eventually lost because of problem of electricity.
Sat Parashar, PhD, is former Director, IIM Indore, India and currently teaches Money and Banking, and Financial Markets and Institutions at the Rady School of Management, University of California, San Diego, CA. The views are personal.
DISCLAIMER: The author is solely responsible for the views expressed in this article. The author carries the responsibility for citing and/or licensing of images utilized within the text.