TCA Ranganathan The former chairman of the Export Import Bank of India is a banker with a theory of everything  @tcartca
For over a decade, cryptocurrencies have dazzled the public imagination – a heady mix of technological innovation, financial independence, and the tantalising prospect of outsized returns. The decentralised digital currency using a new type of data – the blockchain, a distributed ledger that records transactions across many computers – eliminated dependence on any single person or central authority. The entire network owns and certifies the system, which rewards participants with auto-generated by-products, tokens or bitcoins. It promised anonymity, transparency and freedom from intermediaries. Soon, it became a rage. The potential was revolutionary and could/would seemingly allow decentralised maintenance of a variety of records.
However, in practice, the blockchain’s very strength – its ability to remove intermediaries and lower costs – made it unattractive to the powerful institutions it hoped to reform. Banks, lawyers, payment processors, and notaries make money by being trusted third parties. The more the trust, the higher the fees. Lower costs destroy their business models, earnings, and salary structures. Though several promising pilot projects did start, none seem to have flourished.
However, tokens caught the market’s fancy. Once the rewards for running the system, they are now its only needed product with an allure that has pivoted from utility to speculation. Today, several thousands of cryptocurrencies are available in a variety of forms: Ethereum, Solana, Dogecoin, Stablecoin, etc. At least 40 cryptos have market caps exceeding $1 billion and interestingly, without apparent underlying profitability or even income streams or business models. Some offer new functionalities like smart contracts, but most are riding on hype, trading momentum and volumes, and retail optimism. Interestingly, more than 2,000 cryptos have already failed, taking billions in investor wealth along with them and revealing how fragile infrastructures can be if hype overruns regulation.
Decentralisation doesn’t, therefore, guarantee durability or security, and utility doesn’t always translate into volume. Yet, a remarkable allure exists, though investor information available for evaluating risk is far below what is available for stock/commodity market investments. The crypto market values have quadrupled or more, post 2020, in contrast to Indian equities or the US S&P 500, which have merely doubled alongside. Historically, speculative booms anchored primarily on belief, sans fundamentals, rarely last, however solid and apparently self-evident the initial allure.
Admittedly, support for the belief in digital money is also coming from central banks, but with a technological twist. Bitcoin was visualised as a philosophical statement, to reimagine the foundations of trust in financial systems. However, now, the attempt is to reinforce State authority and regulatory compliance via tightly controlled programming. It is less about rebellion and more about infrastructure and avoidance of system leakages. The State’s attention towards tokens was brought about by Facebook’s attempt to popularise Libra, a global stablecoin pegged to a basket of currencies. This threatened to bypass national currencies and allow transactions outside formal banking systems and undermine State controls.
China was the first to start a pilot project to create alternatives to the US Dollar for cross-border settlements. The initial ideation was attractive. Central Bank Digital Currencies (CBDCs) can, if popular, enable instant and direct settlement of transactions 24/7 and reduce remittance/transaction costs by eliminating intermediaries (card networks, payment processors, and even bank branches) while enabling tax compliance and tighter enforcement of anti-money laundering laws. This pushed other countries, including the US, EU, India, Japan, and Nigeria, to explore CBDCs as a strategic safeguard.
However, in a combative, sanction-prone world, securing interoperability for national tokens could be challenging. Hence, at the interfaces, earlier challenges faced with blockchains will resurface. Also, digital money increases vulnerability to cyber- and chip-based attacks. In an age of AI and quantum computing, these vulnerabilities may prove costly. Digital innovations will undoubtedly shape the future, but some innovations may turn out to be red herrings, diverting energy, skills, and focus away from endeavours to secure enduring progress in technological manufacturing, materials efficiency, and supply chain resilience.
China, post-Covid, has been differentiating between soft tech and hard tech. Even highly successful ed-tech and e-commerce companies like Alibaba (and its once iconic founder Jack Ma), New Oriental, and Yuanfudao faced severe State ire. All individual/corporate activity in crypto systems is banned. Several tech firms hastily repurposed themselves. India, as per media reports, continues to rank globally as one of the preeminent centres despite experiencing high taxation. Perhaps more active incentivisation of alternative areas of digital and technological innovation may be needed to counter the crypto’s allure.