Imagine Pranav and Ashish are living in different parts of India and Pranav has something that Ashish wants to buy and they don’t know each other, they are strangers. So Pranav send money first or Ashish send goods first? This is essentially a trust deficit and we have middlemen to bridge this trust deficit in all transactions. Banks are essentially doing the same thing in financial transactions, you don’t know whether the other person is good for the money or not and if you do anything with them you need some kind of guarantor, saying That this person is good value for money.
So when Lehman Brothers collapsed and all these different financial institutions started collapsing in many parts of the world, it was a domino effect. It started with an intermediary who traded, bundled and traded an asset that was not worth anything and the actions of that intermediary caused the interconnected financial system to collapse. Instead of actually investigating that moral hazard problem, they were eventually freed from taxpayer money.
So that’s the basis of the whole thing, you need to understand it because bitcoin is as much a technical movement as a political movement… , He is the first generation of crypto, which was bitcoin. It is a system that is capable of self-motivating people, so this whole intermediary function is decentralized.
So it starts as an alternative system of finance. It started with just one use case, which was payments. Bitcoin, to date, serves only one use case. Of course now that they are looking at bitcoin-based DeFi, there will be other things. A few years later this second developer came along and said, “Okay, why can I just pay, why can’t I add conditionals to these payments. Why can’t I say that if these conditions are met, A transaction is executed. It’s essentially called a smart contract. And that was Ethereum, and that’s why Bitcoin and Ethereum are like the granddaddy of this whole system. But they’re bringing different levels of functionality to this money. Every coin brings something else.
So just calling it a commodity doesn’t change the nature of crypto. We can call it whatever, but crypto is everything and it has been since the very beginning, all kinds of crates, whether it is currency, or whether it is a commodity, or whether it is security. I think crypto can’t really be given any broad identity.
Just saying one thing or the other doesn’t solve the problem. Whatever it is, everyone is together. It is simultaneously a currency and an equity in the network.
what one is actually investing in
When you buy a token, you essentially own a portion of the network. Which one gives you depends on the design of the network. So sometimes when you have tokens, what the network gives you is allows you to stake those tokens and you earn interest on that. And then what everyone knows is that the price appreciates and you can make things happen with crypto that you have.
Why do banks in India hesitate to allow crypto transactions?
It really has nothing to do with lack of trust, banks’ issues are different. There are many countries where crypto is completely legal and banks don’t mind, but banks still don’t bank crypto. Even in Singapore and very progressive on crypto, getting a bank account is quite a difficult task. The reason for this is the calculation of banks. Banks are basically providing you financial services based on the assets you have and there are people in the chat who get worried seeing the volatility of crypto, so what do you do with a customer who only holds on to these assets? keeps? keeps? Maybe he’ll bring you assets worth about two million or something and maybe by the time you’ve issued him your bank account, which is a quarter or a day or two, or turns in a cycle . So how do you manage operational risk in a scenario like this? It’s extremely difficult. For those reasons, banks are a bit concerned and honestly if you look at banks, crypto is really competing with banks.
Is there a global consensus on regulating crypto
There is already a global consensus on the KYC side to some extent, which is the final guidance issued by the FATF (Financial Action Task Force). It came out in 2019 and now every country will start ratifying it. So you will see that on the issue of terrorism
Finance, money laundering, has already come a standard. Now when it comes to other aspects, it is very difficult to reconcile it, because there is no agency that has that kind of authority over one’s economy. There is no agency that can mandate that you should not have capital controls or that you should have capital controls or that your securities market should or should not have such a law. There is no such binding institution.
On the role of CBDC
I think they are completely different things, so CBDC (Central Bank Digital Currency) only matters if there is a sovereign country and if it is issuing its own cryptocurrency. For day to day operations, I think CBDC
Perhaps a more impressive tool would be. What crypto enables, CBDC cannot enable. But CBDCs may never have legitimacy in crypto, so I think they will operate on different tracks.
On whether the government will be able to control the financial problems
This is a common misconception. Crypto is not infallible, it is actually a completely public ledger, the only thing that is not known on it is identity. There is already a field called blockchain forensics, which is quite advanced now. It’s even in places where there isn’t AadhaarThere is no KYC, there is nothing; They are able to identify these actors quite effectively because of basically two elements of clustering and identification.
How can the common man benefit from cryptocurrency and how can it have an adverse impact on the environment?
So bitcoin has a very energy intensive mechanism, which is called proof of work and the trade off is that it is also considered to be the most robust. It’s what’s most decentralized, nobody can hold it, it’s the hardest, so people can’t cheat. Bitcoin maximalists will tell you that it is less expensive than running a multi-layer financial system. For example, seven percent of US GDP goes into providing financial services. This is also a huge fee, a huge amount. Some would say that with this proof of work chain we are bypassing the cost. This was the reason earlier. It’s a consensus proof of work, it’s energy intensive, it’s computation intensive, and that’s why it has all the environmental impacts. I think there is some innovation happening in terms of chips that will be used for mining, could this whole thing move towards renewable energy. A lot of bitcoin mining actually takes place on renewable energy.