India’s tough stance on crypto has a silver lining

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When the Indian government this week announced plans to tax cryptocurrency and launch a central bank digital currency, the news drew a mixed response. Some members of the Indian crypto community gave it a half-full reading while others reported that their drinking vessels were half-empty.

The former were relieved that Narendra Modi’s government did not ban cryptocurrencies, as previously threatened. The latter were furious that they now have to cut 30% off every crypto trading profit they make.

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Both have missed the bigger picture, one that goes beyond India to the rest of the world. In other words, in betting on a digital monetary future, the financial authorities of the world’s second most populous nation are joining those of other nations in accelerating the arrival of a multi-currency international monetary system – whether they want to or not. this result. In this world, cryptocurrencies will inevitably occupy a key place.

There are important messages here for the US government, the guardian of the current single-currency international monetary system, which according to a report released last week by Barron considers the need for new crypto regulations a “matter of national security.” . ”

How the United States approaches this national security issue will be key. With an openness that encourages a global model of free-market financial innovation? Or with a defensive posture aimed at protecting the existing centralized system and the reserve status of the dollar? It’s hard to overstate how much rests on this choice.

Taxation vs Legitimacy

First, let’s recognize that India’s decision to impose taxation on cryptocurrencies and postpone a more detailed regulatory step that could still include some sort of ban, is less than ideal for the outlook. term of the domestic crypto industry.

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Policy 4.0 founder Tanvi Ratna tweeted that “taxation does not imply legality” as even illegal transactions are taxed in India.

Still, there is no real hostility in Finance Minister Nirmala Sitharaman’s statement, which only speaks of “a phenomenal increase in virtual digital asset transactions”, which “made it imperative to provide for a tax regime specific”.

Be that as it may, measures aimed at taxing an activity are often considered as a de facto legitimization of this activity. (That’s one of the reasons I took my own half-full read of last year’s battle over the provision of crypto in the US infrastructure bill.) So in the together, it looks like crypto has a moderately clearer path to adoption in India. That path will be blazed, in part, by the other development that will emerge from Sitharaman’s announcement: plans for a central bank digital currency (CBDC).

CBDCs as Crypto Adrenaline Boost

It is fair to assume that the Indian government, like that of China, believes that the development of a CBDC will reduce the expansion of decentralized cryptos such as bitcoin. There is already overwhelming demand for national currencies like theirs, it is believed, so making these government funds digital will neutralize the only attractive competitive advantage of non-national digital currencies.

This is zero-sum mistaken thinking. This assumes that there is a fixed share of demand for currencies, and as the use of one currency increases, the amount mined by the other must decrease. It fails to predict the second-round effects a CBDC rush will have on the broader crypto ecosystem.

How will CBDCs boost crypto?

First, once fiat bearer digital instruments, whether CBDC or stablecoins, are used for payments in other blockchain-based services such as supply chain management, games or non-fungible tokens (NFTs), this will boost this larger crypto ecosystem – the decentralized metaverse of Web 3 – as it goes mainstream.

This will in turn generate demand for cryptocurrencies and other native crypto tokens that decentralized finance (DeFi) and Web 3 services need for governance. If an injection of CBDC funds boosts demand for NFTs, for example, there will be more smart contract transactions on platforms such as Ethereum or Solana, which will then boost demand for ETH and SOL.

The second factor is that once established globally, CBDCs could challenge the supremacy of the dollar. Either way, it’s hard to see how cryptocurrencies are losing.

The end of the dollar or a golden age?

The programmable nature of CBDCs will allow for direct atomic settlement between currency holders of two different countries, which will eliminate the need for an intermediate reserve currency in international trade agreements. Some central banks, such as China, Singapore, Thailand and the United Arab Emirates, are already experimenting with direct interoperability between their respective CBDCs.

The endgame here is the potential disruption of the SWIFT network for international currency settlement, a system that is built around the centrality of the dollar and the primary role of US financial institutions as international correspondent banks. Its disappearance will in turn reduce the demand for dollars and diminish the international influence of Wall Street, which will limit Washington’s ability to exploit the exorbitant privilege of the American currency to control the transactions of other countries and guarantee good foreign financing. market for the consumption habits of Americans.

In response, the United States has two options.

First, it could do nothing, hoping that the existing dollar-centric international monetary system would persist under the weight of its own dominance. (Or he could do something that is actually nothing, like ask the Federal Reserve to issue its own CBDC and integrate the existing Wall Street-dominated banking model.)

In this scenario, the dollar will fall from its base. But it won’t be supplanted by China’s digital yuan, or any other country’s currency for that matter. The world will no longer have a single reserve currency but many digital currencies competing with each other.

It’s a more financially uncertain environment, where governments are more likely to go rogue and engage in currency wars – or worse, physical wars – generating economic, political and social instability. If so, the demand for an apolitical alternative store of value could increase. It won’t be a fun time. But it could be great for bitcoin.

The other US option is a more radical break with the status quo. Rather than putting the Federal Reserve and US banks in the same driving position, this could encourage the growth of non-government US dollar-backed stablecoins that circulate freely and quickly internationally through decentralized blockchain protocols. In this case, one could imagine that the greenback will become even more sought after by foreigners as it will become readily available.

In this scenario – the one that Circle, the USDC issuer, presented this week in full-page ads in American newspapers – we could see the United States and its values ​​of openness and free trade win again. more influence in the world. This would come at the expense of the Wall Street-centric model for moving money around the world, but it would largely spur global financial innovation to the benefit of the United States.

In this context, stablecoins and native blockchain currencies such as ether and bitcoin would thrive. The freer flow of dollars around the world would fuel a broader cryptocurrency, blockchain, and Web 3 ecosystem and drive demand for tokens.

One way or another, governments like that of India are accelerating the expansion of crypto.

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