How to solve the crypto conundrum?
Web3, the buzzword of the year, is, as some experts have described it, all about the decentralisation of the Internet. The current iteration of the Internet is dominated by gigantic technology firms, many with as much power as large countries. Some of these companies have their own Web3 plans. Yet, the next generation of the Internet is actually about a future where these companies are no longer the main gatekeepers and custodians of data. Instead, proponents of Web3 claim that thanks to the use of Blockchain technology, a collective of users will perform the twin roles — of gatekeeping and custodianship. Blockchain, the emerging vision for Web3 claims, will help build apps that bypass the current gatekeepers almost entirely. This is the disintermediation of companies that made disintermediation their business.
It’s all deliciously vague, like technology at the bleeding edge usually is — but so far, so good. And, in many ways, the promise of decentralisation that is at the core of Web3 (one analyst described it as a personal patch of the Internet) harks back to the near Utopian concept of an open Internet and one, more importantly, controlled by users, not large firms that do not always have the best interests of users in mind.
A quick diversion may be required here: AI (artificial intelligence) isn’t Web3, although some people see it as a layer on top of Web3 technologies that helps people interact better with other people, and with machines.
But to return to Web3, thus far our experience with this new phase of the Internet (the third, as the name suggests) has been shaped by cryptocurrencies, non-fungible tokens or NFTs, digital autonomous organisations or DAOs, and DeFi or decentralised finance. Those are a lot of fuzzy buzzwords, so some definitions first.
NFTs are unique pieces of data stored on a distributed digital ledger (Blockchain is nothing but a kind of digital, distributed, decentralised ledger, 3Ds and an L), so it is easy to see how a piece of digital art can be NFT-ised. DAOs are, again, decentralised organisations with no clear leader, usually set up for a specific purpose, with established rules, and funded either by NFTs or crypto; and DeFis are entities that use Blockchain contracts to offer traditional financial instruments (thereby completely disintermediating traditional financial entities including banks and brokerages).
It’s all very breathless and exciting. And, given the rush of venture capital to Blockchain companies across crypto, payments, mining, finance, and exchanges, flush with funds.
The most problematic of these (and also in the news thanks to the law that the Indian government hopes to introduce in Parliament this session, clamping down on private cryptocurrencies) is crypto.
It is problematic at three levels.
The first, at the sovereign one. Issuing currency is a sovereign right. Having non-central bank or monetary authority issued currency sloshing around the system has significant economic implications — few of them salutary.
The second is at the financial level. Just what is the asset underlying the currency. What is its intrinsic value? Central bank issued currencies are guaranteed by the sovereign. But what about crypto?
The third is at the operational level. Isn’t this a classic instance of the medium becoming the message? A case where code that seeks to make transactions and contracts secure (and distributed) and easy across borders, takes on value of the currency involved in the underlying contract or transaction?
And in India, there is a fourth-level problem as well. Replete with venture capital, a clutch of crypto start-ups have indulged in high-decibel, and often irresponsible advertising, passing off crypto as yet another get-rich-quick scheme. The numbers being thrown around — 15 million investors; $10 billion in investments; investments in Tier-2 and Tier-3 towns — have only served to create the impression of a bubble. Which isn’t surprising — because, at one level, it is.
The exact contours of the law that India will introduce isn’t clear. It could completely ban private cryptocurrencies and trading in them; or it could just ban their use as a currency and allow their trade as an asset class (although that begs the question on the value of the underlying asset). India’s long experience with companies that ran get-rich-quick schemes speaks of the relative unsophistication of small investors who burn their hands on these — which may mean a complete ban may not be out of place.
But there’s more to Web3 than crypto (although there’s an unkind school of thought that Web3 is an invention of crypto entrepreneurs to make their business seem above board; if so, India’s crypto start-ups did a pretty shoddy job of this). India would do well to tap other benefits of Web3. This could deepen financial inclusion, reduce the cost and increase the ease of investment in various financial instruments, make transactions safer and more private, facilitate smooth cross-border transactions, and help data localisation. It could even universalise land titling (in a country where most people do not actually have titles to the land or property in their possession).
Some of these objectives can be met by having a central bank issued digital currency. Years ago, in an editorial in Mint, my former colleague Niranjan Rajadhyaksha even suggested a name for this — Bharatcoin. And the others can be met by creating a national Blockchain or Web3 mission that figures out how to use these emerging technologies. There will be a significant role for Web3 start-ups to play in this, and new, and profitable business models. But however clever it may sound — the reinvention of currency isn’t a great business model. Or is it?