Home / Opinion / The Russian roulette of geopolitics will favour cryptos

Russia’s attack on Ukraine has upset all the well-integrated and familiar geopolitical, geo-economic pieces. The global order of the past 30 years resembled a giant jigsaw puzzle with many uneven fragments—such as, a rules-based global trade and financial system, or a unipolar global political system—which somehow fit snugly into one recognizable template. All these pieces are now up in the air.

Nobody can predict where the pieces will fall, whenever they fall, but one outcome seems quite likely: the new, emergent world order is likely to see accelerated acceptance of official cryptocurrency. Western economies, of necessity, will be in the vanguard as Russia weaponizes crypto-products to get around sanctions and precipitates cyber-warfare to implant measured chaos. According to US-based media outlets, 21 American companies, including gas producer Chevron, faced cyber-attacks days before Russian forces crossed into Ukraine. In this chaotic reordering of the global financial system, it will be interesting to see where and how India manages its cyber strategy, especially in erecting a regulatory framework for private crypto-products and rolling out a central bank digital currency (CBDC) with a design that is transparent, user-friendly, hack-proof and interoperable with other CBDCs. Speed will be key here.

The fast-transforming financial landscape has forced even the US to bring forward its CBDC plans. President Joe Biden has mandated government agencies and ministries to start developing a digital US dollar and to come out with a report highlighting the risks and advantages of such a move.

The US move comes after many months of debate over whether the world’s most powerful currency would bite the digital bullet. Whatever the outcome, an American CBDC is bound to be a crucial turning point for the global financial system. Biden’s executive order is explicit: “My Administration sees merit in showcasing United States leadership and participation in international fora related to CBDCs and in multi country conversations and pilot projects involving CBDCs. Any future dollar payment system should be designed in a way that is consistent with United States priorities and democratic values, including privacy protections, and that ensures the global financial system has appropriate transparency, connectivity, and platform and architecture interoperability or transferability, as appropriate."

It does look like a rear-guard action to maintain the dollar’s superior status as a global reserve currency. In an article for US-based Center for Strategic and International Studies, analyst James Andrew Lewis writes: “The end of American ascendancy undermines the architecture of global governance and security… Rule of law and norms for responsible behavior, the themes that have guided digital governance, are now open to question and inadequate to guide policy in a confrontation."

Coincidentally, in January 2022, the US central bank, the Federal Reserve released a report titled ‘Money and Payment: The US Dollar In The Age of Digital Transformation’, seeking stakeholder feedback on the desired architecture for a digital dollar, including all its perceived risks and benefits. The idea behind seeking expert help is to minimize architectural flaws. This exercise is expected to continue independently, in parallel, while the US treasury department, headed by former Fed governor Janet Yellen, will also submit a report to Biden in September on the potential benefits and risks of a CBDC. Biden’s executive order focuses heavily on inter-agency coordination for finalizing Yellen’s report, somewhat like a war-time effort, suggesting that the US government probably sees cryptos as the next battlefield.

India too has publicly announced a CBDC launch. But, so far, the Reserve Bank of India (RBI) has shared little information about its likely contours: whether priority will be for wholesale or retail modules, the choice of technology, whether external agencies will be involved, or how the design will incorporate special features suited for the Indian financial system.

Going by what RBI deputy governor T Rabi Sankar said during the February monetary policy media briefing, the central bank is seemingly handicapped by legislation: “In the current Union budget, it has been proposed to amend the RBI Act which will enable RBI to issue the digital rupee. Once that is done, we can try releasing pilots, proofs of concepts of CBDC."

This cloak of secrecy extends to the government as well and muddies policy discussion on cryptos. The government promised to bring in legislation for regulating crypto-products in the country and publicly stated that a draft bill has been circulated for stakeholder feedback. But nobody knows the contents of the draft or among whom it has been circulated. The normal practice is to make the draft bill available to everybody and not to only a select group; a wider and universal circle of stakeholders improves input quality, minimizing opportunities for cronyism or surreptitious backdoors built into the CBDC design.

The government, though, has proposed a tax on profits from crypto trading, triggering speculation that taxation legalizes crypto products, adding to confusion. The Centre probably had its reasons for confidentiality but, post-Ukraine, the deck’s been reshuffled. This might require a change in strategy, one that blends domestic political compulsions with emerging geopolitical trends.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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