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oney evolved not from barter, the evidence of anthropology suggests, but from credit—in the sense that it began in ancient times as an abstract unit conceived to keep account of who owed exactly what to whom—with IOU tokens for it issued only later. Sketchpad in hand, even a game of Monopoly can be played without its paper cash. This concept could be scaled up by private online ledgers to ‘metaverse’ levels someday, which is but one among several reasons why our bustling cryptosphere of digital tokens spawned by blockchain technology has top-level attention. Last week, Prime Minister Narendra Modi exhorted democracies to work together to ensure that cryptocurrencies do not “end up in the wrong hand" and “spoil our youth". Earlier, Reserve Bank of India (RBI) governor Shaktikanta Das had spoken of “serious concerns" and called for an in-depth debate on cryptos. This unease can be attributed to a complex tangle of risks posed by their success. We must get a grasp of these likelihoods just to weigh their potential downside against upside—and likely inevitability—before we frame our crypto policy.

Talks have been held with stakeholders, which proliferated over the pandemic period after India’s top court lifted an RBI ban for being too harsh, and signals from the Centre now point to regulation in the works by way of law. At the socio-political level, the reckless way that cryptos have been advertised has raised worries of naive speculation, while their digital encryption evokes the suspicion of their acting as a cover for illegal deals and ill-gotten wealth. At the macro-economic level, we must mull over what wide crypto adoption in the future might imply for stability. As the market for Bitcoin and its ilk (with caps on supply) displays the volatility of an ‘asset class’, even if prices are not based on returns (but on demand), they could be regulated as such. The rupee’s real challengers are ‘stablecoins’, which peg their value to a bundle of national currencies, just as the US dollar was anchored by gold till half a century ago. In theory, by serving as mediums of exchange, these could supplant the rupee.

If digital tokens achieve wide circulation in India, our rupee manager would find it harder to handle monetary conditions. It would be worse if RBI must contend with a single rival someday, a winner-takes-all coin. Apart from the extra burden fiscal policy will have to bear should RBI lose its leverage on growth and inflation, our economy could get shaken by the actions of profit-oriented crypto issuers. They may, at a stretch, even do what the US did with its dollar in 1971: unpeg their tokens, that is, in pursuit of associated privileges. As cryptos are global, wide adoption would also open our gates wider for capital flows in and out, worsen a trade-off faced by RBI between managing the rupee’s external value and internal worth (tied to its interest-rate policy), and hence weaken its ability to cushion us from financial shocks. Scary as these long-horizon risks sound, we must also consider the gains that crypto-based enterprises can generate and be realistic about a genie that won’t get corked back in. Moreover, it may be time for issuers of fiat currencies to face competition. So long as the cryptosphere has sufficient rivalry, an official option in the form of a digital rupee run by RBI would have an advantage in the fray. Its emergence as our top choice could fend off threats to RBI’s role. And this may depend on the details of its design.

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