Is there really a use case for cryptocurrencies or are they a passing fad?
Cryptocurrencies come in different flavours. There is the traditional cryptocurrency like Bitcoin, there is the stable coin like Tether and so on and there are different kinds. Now some of them are being used for payments. Typically, payments which either are in the crypto world itself to buy crypto assets or in the past when a lot more was used for illegal payments and some of it is being used for cross border hawala– basically to escape capital controls.
Of course, in some countries with a terrible currency which is inflating at very high rates, what we are getting is an effective replacement of the domestic currency by a cryptocurrency. It is not because the authorities want it but because private people prefer trading in the crypto; Bitcoin or whatever than trading in the official currency. So there are varieties of uses of that kind.
Now is there a crypto which is used widely in public by people? Not yet. And my sense is by the time that comes central banks will have figured out what a reasonable central bank digital currency would look like and they will want that to be the main vehicle for transactions. So any crypto has to deal with the possibility that the central banks will come in.
A lot of crypto mythology is about central banks inflating away the fiat currency and therefore this is the last haven etc, etc; but at the same time, we see these cryptos fluctuating in value. It is not that they have stable values. you see Bitcoin go up 20%, come down 20%, sometimes large moves on the same day. So the notion that these are stable forms of payment relative to the fiat currencies, the central bankers cannot be trusted but this crypto can be trusted belongs to a small minority of people. So broadly I am saying there is no large scale use case at present; there are niche use cases.
Now what are the people betting on? They are betting on one crypto becoming a dominant force that may be the case but it requires new uses, not the traditional payments. UPI in India is fantastic. Why would you need an alternative to UPI? So where does the crypto come in? It comes in two forms – one is micro transactions where it is too costly to do the transaction every second but can be done with cryptos because it is all automated; that is one possibility. But that is not yet the use.
The second possibility is smart contracts. In securities business, I have to deliver a security and I get payment. A smart contract can do it without a third party involvement. So in many cross border transactions, when you do not want a third party involved, the smart contracts can work. So there are places they can be used but one does not see a lot of that use yet. Will there be this killer application, a killer crypto? Possibly, but which one of the 6,000 cryptos will it be?
The point I am trying to make is for somebody who has limited resources, cryptos are not the safe investment you want to be in. You could lose all your money if you invest in the wrong crypto, you could lose all your money if cryptos become less of a fad than they are because there is no substantial use case yet. Now will one of them become the currency of the future? Perhaps and certainly the central banks will try to give competition but we are still far from that and it is a very speculative investment.
There has been a huge clamour from the bond market for inclusion of India in the global bond index. Do you see that as a net positive or will it increase the short term flows and hence our vulnerability?
I do not have strong views on it. I would like to see more studies. I worry that we become more correlated with international markets and less with the domestic situation and if one is a big part of the index that correlation might quite possibly increase.
So unless we have a deep need for external funding, I think we should try and keep our current account deficit reasonable so we do not have that and if we do need that funding, it comes via long term money FDI. I am not a fan of foreign investment in our unicorns. We should have more domestic risk capital invested in them but I think those are ways that are safer than getting bond flows. Of course, if we have bond flows, I prefer long term bond flows rather than short term bond flows even though both can be sold instantaneously. At least, the guy who buys the long term suffers a little more of a hit in case interest rates move than the guy who is an investment tourists.