Copper, silver, and gold coins were legal tender in India and other parts of the world historically. These metals were considered sacred in India because of their economic, religious, and medicinal importance.
Copper may be losing its status as a ‘precious metal’ due to its increasing industrial use. However, gold and silver continue to attract attention. Even the acceptance of silver and gold as’sacred’ metals is slowly declining.
The Government of India has made great efforts in recent years to encourage the ownership of gold in non-physical forms, such as sovereign gold bonds (SGBs). Digital gold has gained popularity in recent years due to its ease-of-transaction and ability to be held.
The global financial system is still relatively new to cryptocurrencies, such as Bitcoin. These currencies are not yet currency in the traditional sense, except for El Salvador which declared Bitcoin legal tender. Some countries (e.g., China, Indonesia, etc.), have banned the use of cryptocurrencies as a medium of exchange. Some jurisdictions (e.g., China, Indonesia, etc.) have outlawed all cryptocurrency as a means of exchanging money.
Cryptocurrencies would have to be accepted more widely and better. This is usually possible with awareness and time. It took gold centuries to become an asset and a popular medium for exchange. This status may be granted to a few cryptocurrencies in the future because of modern technology.
Over the last five years, cryptocurrency has gained immense popularity in India. There are over 100 million Indians who own cryptocurrencies, which is the highest number of cryptocurrencies worldwide. This is significantly more than the Indian publically listed shares. Indian citizens own cryptocurrencies worth close to $900 billion.
In order to regulate cryptocurrency, the government proposed that “The Cryptocurrency Regulation of Official Digital Currency” Bill 2021 be introduced in Parliament’s winter session. It is designed to create a framework to facilitate the creation of official digital currency by the Reserve Bank of India and to ban private cryptocurrencies with some exceptions in order to promote the technology and its use.
A high-ranking inter-ministerial committee had suggested that private cryptocurrencies be banned, with the exception of virtual currencies issued directly by the State. The government resisted pushing for the legislation during the budget session. A balanced approach was needed in this matter. This requires a wider consultation with all parties.
The government appears to be against cryptocurrencies being used as legal tender, but it supports the development of and use blockchain technology. Therefore, it is possible that a regulatory framework could be created to allow for the ownership, transfer, sale, and taxation cryptocurrency. If this is the case, cryptocurrencies could be considered capital assets under taxation laws.
The proposal legislation could also allow for a digital currency that is based on blockchain technology to be created by the RBI and any other public agency. This currency will not be able to replicate the characteristics of Bitcoin, which is a distributed, decentralised digital token with finite supply. Most likely, the RBI’s digital currency is a centralised currency that has an infinite supply. This is similar to a fiat currency. The RBI’s digital currency could be described as a dematerialized currency note, which is delivered to the receivers’ accounts as a book entry.
A fiat digital currency is not to be confused with a distributed, decentralised cryptocurrency.
An Idea That Has Finally Come to Life
Every democracy, particularly socialist ones, tends to regulate all innovation because new innovations often make a few wealthy and leave the rest. This increases inequality fears. Overregulating innovations is often motivated by the desire to ensure that the majority of people remain at the bottom.
This was evident in the British government’s attempt to ban cars from public roads during the early years of automobiles. This was argued because it could have adverse consequences for the employment of low-income people who run horse carts on London’s streets.
There is no historical evidence that a government regulation killed an innovative idea that was ready to be adopted by wider segments of the public. An example is the expansion of organised retail in India.
A Bad Omen For Gold
A well-regulated cryptocurrency market could be a bad omen for ‘valuable assets’ such as gold and silver. Factors like popularity and spread of technology; the rise of fascist and communist tendencies due to worsening socio-economic disparities; the rise in electronic transactions lowering the risks arising from physical transactions; the emergence of new articles of luxury; stronger and deeper social security programmes; etc. are all leading to the sustainable decline in traditional demand and pre-eminence of gold. This decline is set to continue.
The table below clearly shows that gold and cryptocurrency are comparable assets in most respects. Some argue that gold has an ‘intrinsic’ value, whereas cryptocurrencies have none. The intrinsic value of gold developed over many centuries of wider acceptance by the State and religion. This intrinsic value has been on the decline for the past few decades.
Insofar as the volatility is concerned, in the past two centuries, gold has seen many bouts of wild volatility, similar to what cryptocurrencies are witnessing these days.