Sep 30, 2024 08:43 PM IST
The case for a non-US-control based international system of transactions is clear. The world needs to build pipelines
From September 1, Russia legalised the use of cryptocurrencies to settle international trade accounts and wants to create an “experimental infrastructure” for such payments. India has at least $900 million stuck in unpaid dividends in Russian investments that are unable to be repatriated due to the sanctions faced by Russia. India has allowed the Chinese crypto exchange Binance to reopen shop after being fined ₹18.82 crore by the Financial Intelligence Unit (FIU-IND) for violating local laws. These are unrelated pieces of news surely, but they swing by a common thread — the struggle to find a non-dollar regime for international transactions and the emerging role of a crypto-based system to do this that is not owned and controlled by any one country.
There are three reasons that the larger non-United States (US)-aligned powers of the world — India, China and Russia — are looking for an alternative to the dollar in international trade. One, the penchant of the US to use its control over payment systems to freeze assets and stop transactions in countries it dislikes. India, for example, is suffering from the inability of Russian companies to repatriate the money due to India because it has been frozen out of SWIFT — the international payment system. Russian assets are frozen and China runs the risk of a similar fate if it were to move on Taiwan.
Two, is the use of private companies as agents of the State to carry out US hegemonic moves. The sanctions against Russia in the aftermath of the Ukraine invasion were not just by the State, but also by private companies. Over 1,000 companies have either left or curtailed operations in Russia post-invasion. Last fortnight, Meta banned Russian State media outlets from its platforms Facebook, Instagram and WhatsApp.
Three, the overhang of debt in the US and the weird turn towards Marxist socialism make the world nervous about a possible future collapse of the dollar. US debt, at over $35 trillion now, is growing at $1 trillion every 100 days. The US debt-to-Gross Domestic Product (GDP) ratio at 123% in 2023 means that unless growth kicks in, the US is going to face problems in repaying its debt or faces an inflationary future, despite rate cuts on September 18 by the Federal Reserve. If finances are a problem, the deeper discourse that it is anti-business and leans on wokeness corrodes and weakens the country from within, leaving the world looking for an alternative. If there were another currency to flow to, the decision might have been easier, but in the absence of one, there is an emerging need for a transnational handshake on a currency, possibly a multi-State-led crypto, that will be an alternative to the dollar. But there are many wrinkles on this journey.
Despite the potential use case, countries are reluctant to legalise the use of crypto for domestic transactions. Russia, despite experimenting with using it for international transactions, is not legalising it for domestic use. India has not explicitly banned it but is wary of its use for transactions domestically. Though China in 2021 banned the use and mining of cryptocurrencies, it has not prevented the domestic holding of crypto by its citizens.
Most countries that have not legalised crypto have a nuanced policy prescription — citizens will not be prosecuted for holding crypto, but their holding is not protected by law. The implication of this was brought home to some users of the WazirX crypto exchange in India who saw $230 million getting hacked and the exchange forced some 4.2 million clients to bear the loss in a solution that looked to “socialise the losses”. Such a story is very difficult to pull off in a regulated market like the securities exchange. There are institutional mechanisms that protect the money as it moves through the regulated financial system. Not so for crypto.
I have been a crypto-sceptic and continue to believe that it is not a retail-ready product. But its use case, as I had argued in an earlier piece, is for international transactions that are costly in money and time. But the road to such an arrangement needs not just a handshake on what token to use, but also what are the support structures in such transactions. A payment system is not just the currency, but the entire infrastructure around it. For example, who will own the exchange where the chosen crypto will be traded? He who owns the exchange has the control. The need obviously is for a handshake between the three large powers outside the US to make this happen, but we have our own bilateral border issues that prevent trust, though trade is flourishing!
As I continue to document the crypto story as it moves from being a nerd coin to something more pervasive, I will still caution retail investors to stay away. Wait till there is regulation, else the risk is all yours on exchanges that run away with your money, “socialise” losses or coins that are fully fake.
Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal
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