<An abridged version of this article was published in the October 2021 edition of the WIMWIan, a tri-annual magazine with a readership of over 18000 IIM Ahmedabad alumni>
The IIMA Public Policy Alumni Special Interest Group (PP ASIG) is currently in the midst of a webinar series on cryptocurrency to understand the space and come up with a public policy vision for India.
It’s an interesting problem to tackle considering a few unique elements. Firstly, the entire industry is less than 13 years old – Satoshi Nakamoto’s seminal white paper on Bitcoin and blockchain was released on 31st Oct 2008, in the backdrop of the global financial crisis. In as much time, the crypto industry has mushroomed from 1 cryptocurrency to well over 12,000 at last count. From a market capitalization point of view, cryptocurrencies have gone from being near worthless to a combined market cap that crossed $2.5 trillion in May 2021. In this time, cryptocurrencies have captured the imagination of millions of people around the world (estimated at 3.9% or ~300 mn).
Along the way, people have adopted cryptocurrencies for a multitude of reasons – for many, it was the first digital-born native currency that worked seamlessly across borders in a fraction of the time it took traditional currencies to traverse the world. For others, it was the ability to control your own money outside of the confines of the traditional financial ecosystem. For yet others, it was the fact that cryptocurrencies like Bitcoin were coded into existence with a fixed supply, one which no central bank could dilute through quantitative easing. And for yet others, it was the fact that you could move money publicly, yet anonymously, at the click of a button from anywhere in the world. And finally, for many millennials and digital natives, it was the fact that cryptocurrencies felt infinitely better than the real thing – readily portable and infinitesimally divisible – completely invisible in the real world, and with a minimal fear of offline confiscation.
In the initial days, crypto was adopted only by those who were curious enough to participate in a new experiment – it was funny money, if at all it was even that. As time went by, the anonymity it offered helped it become a payment of choice for the dark web as its participants wanted the portability that digital money offered without the traceability. However, as more law enforcement agencies started using customized tools to analyse the public ledger that underpins blockchain, transactions became far more traceable, and following money laundering trails became a lot easier.
If you take a step back and look at the macro view, crypto initially captured the imagination of tech-savvy early adopters, who realized that the adoption they had begun to see had enormous potential to generate wealth. This realization helped capture the attention of financially-savvy early adopters, who began to see cryptocurrency as one of the best investment opportunities of the last 15 years. Crypto adoption has gradually spread out in multiple directions since then – we are nowhere near mass adoption yet, but if history is any indicator, it will happen slowly but surely at first, and then all of a sudden.
We’ve seen a couple of watershed moments in the last few years though – one was back in the summer of 2017, when Bitcoin prices had finally come to a head and blown past the $1500 mark. Bitcoin peaked at $20K in that bull run, and then dropped precipitously, almost overnight. In hindsight, it was likely the introduction of bitcoin futures back in Dec 2017-Jan 2018 that allowed skepticism to enter the markets and temper the excitability of the crypto space.
2017 was also the time of the ICO (Initial Coin Offering) boom, when people realized they could use the crypto space as a global peer-to-peer crowdfunding marketplace with easy accessibility to funds without the regulations of capital markets. The interesting part was that almost all funds raised through ICOs were raised using cryptocurrency during the bull run, so when the markets turned, it did in the ICOs too. When the dust settled, billions of dollars’ worth of crypto raised by thousands of projects were worth but a fraction of what they were worth at the time of fundraising. As a result, the sudden drop in the value of funds raised had a knock-on effect on startup runways. Needless to say, the ICO phase also saw many scams where projects with nothing more than flashy websites and obscure whitepapers raised millions of dollars. Nonetheless, the ICO boom of 2017, and the following bust, helped the crypto space consolidate around better projects as fly-by-night ones faded away into oblivion.
It’s been 4 years since 2017, and the flavours of the 2020-21 crypto bull run have been Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs). DeFi is the ability for peer-to-peer participation in financial arrangements (like lending, investments, insurance) without the need for a centralized entity (like a bank) that holds your funds. The DeFi space has grown 100x in terms of Total Value Locked (TVL) over the past 18 months – from less than $1 billion in April 2020 to a shade under $100 billion in September 2021. On the other hand, NFTs are about ownership of digital assets, which are publicly visible and accessible, but yet scarce and unique, and hence, non-fungible in that sense. NFTs look to introduce the concept of scarcity in a digital world where the cost of replication has always been zero-to-none – and it is likely going to impact areas beyond just art or collectibles. Presumably, NFTs have the potential to capture anything unique that benefits from being tokenized in a transparent & public manner, including real estate and other real-world assets.
As we can see by now, it is widely believed that blockchain technology that underpins cryptocurrency will have far-reaching impact on not only the financial ecosystem, but also reinvent the world in other domains. 2020 has shown there are institutional investors like Microstrategy, Square and Tesla willing to buy Bitcoin on their books – and most international banks are well on their way to enabling their high-net-worth investors with exposure to crypto markets. 2021 has also seen El Salvador take the first step ever taken by a country to adopt Bitcoin as ‘legal tender’ alongside their existing currency of the US Dollar. With every passing day, the crypto space continues to be taken more seriously, and there is a growing demand for positive and clear regulations from multiple quarters – including a growing global retail investor base that expects their countries will not exclude them from participating in a once-in-a-lifetime wealth creation opportunity.
Closer home, India finds itself at an interesting point in her journey… she has a growing population, which will help her overtake China as the world’s most populous nation before the turn of this decade. She has a young population, with an average age of less than 30 years. She has the largest growing middle class anywhere in the world, and also the world’s largest English-speaking population.
India’s Reserve Bank has not been a fan of cryptocurrencies though – it released a circular in 2018 that banned its member banks from servicing cryptocurrency exchanges, effectively cutting off any fresh supply of fiat funds into or out of the Indian crypto markets. Less than 2 years later, the Supreme Court of India ruled that the RBI circular was unconstitutional, effectively overturning it. This also coincided with a global downturn in financial markets due to COVID-19 lockdowns around the world, which then led to a bullish recovery that has lasted the better part of the last 18 months. Along with traditional equity markets, cryptocurrencies have also been on a tear, with their combined market cap growing more than 15x between the trough of March 2020 and the peak of May 2021, a mere 15 months later.
Seeing the potential of cryptocurrencies to create generational wealth, and how blockchain promises to be a technology underpinning many important solutions the future world will need, it is important that India come up with a public policy that enables the best parts of crypto to thrive, whilst regulating the riskier parts of crypto so as to protect the most vulnerable parts of society.
As this entire ecosystem unfolds before our eyes, the IIMA Public Policy ASIG is keen to form an educated opinion around the cryptocurrency space in India and come out with a set of public policy recommendations. For more updates, follow the webinar series at the JSW School of Public Policy – IIMA.