High taxes for Crypto helped India dodge the bullet

Harsh Gupta Madhusudan: In November 2021, bitcoin was almost at $65,000 and has since fallen by around three-fourths. Many other “coins” have fallen much more, some going to zero. Crypto exchanges, ironically for a technology that is ostensibly decentralised, are under pressure with some going bankrupt due to basic business model weaknesses or in a few cases outright fraud. Directly or indirectly, trillions of dollars have been lost albeit on a relatively small base compared to the larger global markets.

If the finance ministry or the Reserve Bank had encouraged crypto, a relatively young and financially unsophisticated India would have lost massively even though all damage could not be avoided.

Many a social media influencer was being paid heavily for peddling crypto in India and FOMO (fear of missing out) was created that India would lose its tech jewels to other countries because they were ostensibly more friendly to “Web3”, “DeFi”, “NFTs-based metaverse” – a suite of technologies that nobody has been able to define so far, much less tell us about its use cases.

The introduction of relatively high transaction and other taxes for crypto assets in India around the last budget helped India dodge this bullet. Simultaneously, a central bank digital currency or e-rupee (CBDC) was announced then and has been recently rolled out although it is in its early stages because its full potential requires a less bank-heavy financial intermediation model.

More importantly, the India stack of digital public goods including UPI payment infrastructure (which India will evangelise during the 2023 G-20) shows that India is not against innovation per se, just against harmful speculation which has no broader economic purpose.

It is already forgotten what various governments – especially the Indian government – were being told about crypto by a variety of Silicon Valleysque “tech bro” folks not so long ago: from the well-intentioned to the deliberate Ponzi enablers. We were told that crypto was the ‘next Internet’.

Underlying this hype, on the well-meaning side of the spectrum at least, was a fundamental libertarian or miniarchist conceptual error that the state was ipso facto totalitarian.

With the now-defunct Soviet Union being born almost exactly a hundred years ago, and Communist China just having gone through a terrible zero-Covid policy and the end of ‘collective leadership’, not to mention our own brief Emergency in the 1970s, one is easily reminded that an unaccountable state can indeed be totalitarian – above all to its own people.

Indeed, the real history of civilisation is about having more accountable states over larger societies with innovation, competition as well as cooperation, and enough diffusion of power to have peace but not so much that unity is lost to centrifugal forces.

One key power for such modern states has been the power over money because it goes along with its monopoly on coercion.

American credit was established because Hamilton decided to pay off war debts and form a national bank. Britain often prevailed over its continental colonial competitors because of its better access to finance; moreover, state control over money meant that a gold or silver standard could be abandoned at least for some time – those who stuck to it dogmatically suffered more during the Great Depression.

It is true that all fiat currencies have devalued themselves, but so long as it is orderly and moderate even that has its benefits.

The key is to build institutions such as autonomous and competent central banks, not to throw the baby out with the bathwater. Whether it is national security or a public health emergency, without large deficits being absorbed by debt markets with limited monetisation or seigniorage at least being a temporary option, no democratic system can survive the resultant economic volatility – much more extreme than anything we see even today.

Yes, innovation is critical. Blockchain has potential along with AI/ML, AR/VR, 5G/6G and so on but cryptocurrencies are different. They are private, non-state coins more akin to the “free banking” era of the nineteenth century especially before the frequent and painful financial crashes led to the Federal Reserve being created in the early 20th century.

The Fed, RBI, many other central banks are competent but imperfect and on a learning curve including now. But we are better off with them than without them. The crypto-fiat replacement thesis was not going to work out, but it did cause a lot of pain. Hence my thanks to the PM, FM, and RBI for letting 2022 be a little less gloomy than it already was. May 2023 see Indian finance doubling down on real innovation and genuine inclusion.

(The writer is an investor, author and economist)