India, the "War on Cash" and why we need cryptocurrencies
Introduction
In my post yesterday on anonymity and fungibility I briefly mentioned the way that we are facing a "war on cash".
Chaos in India
This included the situation in India where Prime Minister Narendra Mohdi announced a plan to eliminate the 500 and 1000 rupee notes in November of 2016:
The prime minister, Narendra Modi, gave Indians a 50-day window to declare and deposit their 1,000- and 500-rupee notes after a surprise announcement on 8 November that both denominations would become invalid that evening.
Source: The Guardian
This move has caused chaos across one of the most populous nations in the world.
Massive queues have persisted around banks and ATMs as people have desperately tried to exchange their cash before it becomes worthless.
The weak always suffer the most
As is often the case the lowest rungs of society, the poor, elderly, infirm etc. seem to have suffered the most.
There have been reports of people dying as a result of having to queue for excessive periods.
Some have commited suicide due to sheer frustration when they couldn't buy food with the old notes or the inability to buy seeds to plant.
Others have died because they have been unable to access medical treatment without cash.
In only the first 7 days 33 deaths were directly attributed to this move.
Midnight tonight (30th December 2016) marks the end of the deadline where people can still exchange the old illegal currency for alternative notes or bank deposits.
What was the purpose of all this chaos?
The official reason is to reduce tax evasion and corruption as stated in this excerpt from a BBC article in November:
Indian Finance Minister Arun Jaitley says "honest people" have no need to worry about a decision to scrap 1,000 and 500 rupee notes.
Mr Jaitley said the move would flush out tax evaders, adding that all old notes deposited in banks would be subjected to tax laws.
The surprise move, announced on Tuesday evening, is part of a crackdown on corruption and illegal cash holdings.
This certainly makes sense from a government perspective - you can tax electronic money (which this move has caused an uptick in) much more easily.
Tax is only part of it
It is more than that though. From the same BBC article:
Mr Jaitley said that the move would also help India move towards a cashless economy, saying that farmers could "now keep their money in banks".
This is a strange thing to say. A lot of poor people in India don't have access to banks or banking for a number of reasons that are out of their control and those things will not suddenly change.
The problem for the unbanked is often one of exclusion, lack of access and unsuitability rather than choice.
Raghuram Rajan (formerly at the Reserve Bank of India had this to say in a speech in July 2016:
The excluded may live in remote areas or may belong to communities or segments of society that undertake economic activity informally—they do not maintain records or have signed contracts or documentation. They often do not own property or have regular established sources of income. As a result, a banker, especially if as is typical, he is not from the local region, will have difficulty getting sufficient information to offer financial products.
A second concern is incentives. For example, loans are easily available only if the lender thinks he will be repaid. When the legal system does not enforce repayment quickly or cheaply, and when the borrower does not have any collateral to pledge, the lender might believe that he will find it difficult to get repaid.
The third impediment is transactions costs. Since the size of transactions by the poor, or by micro farmers or enterprises is small, the fixed costs in transacting are relatively high. It takes as much time helping a client fill out the forms and to provide the necessary documentation if he is applying for a loan for Rs10,000 as it takes to help another one borrow Rs10,00,000. A banker who is conscious of the bottom line would naturally focus on the large client in preference to the tiny one.
At present it seems there are not necessarily advantages to these people actually being banked anyway.
They may end up worse off.
So why are they still hell bent on getting rid of cash?
In one word "control".
Why cash is "good" for people and "bad" for governments
Cash is:
- Peer to peer currency (one of the original forms). Once it is out in the world people can freely exchange it without requiring a middleman like a bank to intercede.
- Permissionless - if I give you a pound coin or a dollar bill I don't need to get permission before I do it.
- Anonymous - I don't need to give you my personal information in order to do the exchange.
- Hard to track - it can be done but it is time and resource intensive, which limits the ability for it to be done. Further methods such as marking notes may be detected by the entity you are attempting to track.
- Does not require any extra equipment. You don't need a phone, internet connection or even electricity.
- Harder to tax.
- Hard to control - combine all of the above and you have something that governments, banks and law enforcement hate.
All of the ABOVE are advantages for the individual but HUGE disadvantages for a government which wants to micro manage and control every transaction itself(not to mention the fact that they generally want to control every single thing we do).
Cash is not perfect though - why we need cryptocurrencies
The disadvantages of cash:
- Issued by a central authority e.g. government or central bank. They can control supply and we have the economic issues that brings.
- Relatively bulky (better than gold in this respect) but still not easily concealable.
- Exchange requires proximity. You can't exchange cash without meeting the other party.
- Deteriorates over time as it is a physical entity - so needs to be replaced.
Cryptocurrencies are better than cash in many ways
Bitcoin (and cryptocurrencies in general) have solved most of these problems.
I don't think it is a coincidence that Bitcoin sells at a 20% premium in India and other parts of the world where cash is either being removed or devalued by inflation.
People in these places are forced to confront the inherent problems that cash and any form of government controlled money has.
They see the value and freedom from state control that things like Bitcoin bring them.
Satoshi to the rescue!
I think rather than pushing people into regular electronic banking, government actions such as those in India are pushing the adoption of cryptocurrenices like Bitcoin.
If you remove cash people will try to have something that gives them the same kind of utility and even better protection from government interference.
I think this will result in places like India and Venezuela becoming the first places to have widespread adoption of bitcoin with direct transfer.
By this I mean that ordinary shops and individuals will likely start accepting bitcoin directly for payments without any need for conversion.
This has not really happened in the West yet because most people don't have the pressing need for it.
In a place like India people do have that need and they will find ways to make it a reality.
The IT access problem
The disadvantage in that cryptocurrencies require technology (phones, internet etc.) to function remains but it is perhaps not as serious as it might seem at first.
Mobile phone adoption has penetrated even the poorest areas. Communities that never had landline phone infrastructure have taken up mobile phones almost as fast as the developed world.
Further cryptocurrencies have ways of getting around the limitations of technology - people can memorise seeds and keep paper wallets.
This way even the poorest and most remote of communities (who may not have immediate access to IT resources) can transport their cryptocurrencies on paper or in their own minds - you can't do that with cash.
Conclusion - Where bitcoin goes other cryptos follow
Once people get used to using bitcoins as currency it is only a matter of time before they start looking at other cryptocurrencies like Steem.
Although the "war on cash" is not a good thing, it could have a positive benefit in accelerating the demise of the old banking and financial systems.
I am not naive though, I know that the world's government's and major banking institutions will not just let this all pass without a fight.
That is why we need to remain vigilant to the risks and keep working on systems to protect cryptocurrencies from their control and manipulation.
Thank you for reading.
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The very real problem the west is going to face, if this trend, as you suggest, continues, is exclusion.
The third world, mostly, will adopt Bitcoin and run with it, abandoning traditional currencies. Without the constraints placed upon them by banks, the IMF etc, the third world will thrive. They have all the natural resources, but they have a jackboot on the back of their necks holding them down, preventing them from advancing.
Crypto currencies may just be the 'gap in the wire' that allows them to escape.
In the developed west, still controlled by major banks, you'll see a nasty fightback - expect wide-scale hacking attempts funded by the banks to prove that crypto currencies are not secure - to scare people away from it.
In 5 - 10 years the west will find itself so far behind the third world, locked out of trading deals, under innovating, that the balance of power will shift dramatically.
Those that do their homework now, and quietly get involved, through innovations like Steemit, are the ones that will do well I think. Those that keep their heads in the sand and try to preserve the status quo, will go the way of the dinosaurs.
My summer reading I think will be less about elves and wizards, and more about wallets and mining (a chance for dwarfs) and all things crypto.
Thanks for the post @thecryptofiend. I think I may soon be bombarding you with a thousand questions ;-)
In 5 - 10 years the west will find itself so far behind the third world, locked out of trading deals, under innovating, that the balance of power will shift dramatically.
BINGO!
Yes that could happen. I hope it doesn't because we could be in big trouble then.
True.
Thanks for such a great response!
I agree that is certainly a possibility. Or we may face a disadvantage from coming late into the game.
Not only that they will start reframing the argument by accusing us of being criminals and terrorists for using cryptos. That's how the banks and governments (which are basically in thrall to the banks) normally do business.
Sadly this could well be the case.
Good idea, although I think initially at least you may be better off just purchasing cryptocurrencies. Mining is in some ways more expensive unless you have free or very cheap electricity.
No problem I am always happy to help although I am certainly no expert, everything I know about mining is thanks to other kind miners who were willing to put up tutorials and help out others like myself.
another one out of the park
We should look at cryptocurrency as one more tool in the "going Galt" toolbox, which reminds me I need to dig up my references on going Galt and put that together as a post.
As long as rent-seekers and do-gooders are preventing the free market from making us better off, we need to withdraw our cooperation with them.
You note that the stated intent of this was to reduce corruption. However, there is a simpler way to accomplish this.
When a poltician or burrocrat is caught with their hand in the till, cut that hand off: yes, literally
As long as a society tolerates corruption and malfeasance in government officials, those officials will continue to steal from the public.
In the American case, Clinton should have been behind bars, not running for the highest office of the land...which is what happens when a people tolerate corruption as long as it is "their side" doing it.
Of course, that is the idealistic side of it; we know that these anti-cash moves are not to combat corruption but to facilitate control of the population.
Thank you:)
Yes I think that is a side benefit for them. It doesn't do anything about big corruption from the rich and political classes - they continue that as normal.
Indeed, crypto is the next evolution of wealth. World events are just showing us time and time again why crypto is not only useful but necessary. There is no need for government to control the supply of money, put the power into peoples hands directly, secure it with cryptography, I mean it seems like a natural and logical progression forward does it not?
Absolutely!
thank you for the information. very motivating!
Thanks. Happy New Year!
I love how you put it: cash is good for people and bad for governments. Of course, individuals have incentive to protect their own resources, and governments have incentive to take those resources.
Yes exactly. Happy New Year!
Most excellent, @thecryptofiend.
Thanks mate. Happy New Year!
You know each day it appears as if Bitcoin and Crypto's (hopefully Steem as well) will be the money of the people... actually anything out of bank and government control is better until we take them out of control!
Yes for sure my friend! I think people will eventually realize the the genius of cryptos!
Very informative! Thank you :) upvoted and following!
Thank you very much!
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Thank you.
This is a sign of desperation. Experiments starting in Cypress, Greece, India and Venezuela will eventually reach the USA, UK and Europe. The bureaucrats and central bankers will continue to focus on "regulating cash" and every other aspect of our freedom, but in the end I hope that honest money (gold, silver & Bitcoin) will regulate the irresponsible actions of governments. Since 1971, Uncle Sam and others have been running history’s largest, most destructive and (for the first time, global) fiat Ponzi scheme.
Yes it is only a matter of time.
Yes although I think it is more likely to come bitcoin and cryptocurrencies since they are easier to hide than gold or silver. You can just memorise a seed or brainkey.
Since the gold standard was abandoned? Yes I would agree. The ability to print money whenever you feel like it is just nonsensical.
Yup. BTC is a new asset class that is still misunderstood and underestimated by the governments and banks that will be crushed by it. Gold standard was weak even prior to 1971, when Nixon "temporarily" closed the gold window after France and others hinted strongly that they might prefer gold to Federal Reserve Notes. Fiat money didn't start in 1971, but that was the last time printing of USD was in any way "regulated" by the limited quantity of gold bars in Fort Knox, West Point or Denver.
Cool thanks for explaining. Yes I never quite understood the reasoning behind removing the gold standard (long term that is).