India, the "War on Cash" and why we need cryptocurrencies

Introduction

In my post yesterday on anonymity and fungibility I briefly mentioned the way that we are facing a "war on cash".

Chaos in India

This included the situation in India where Prime Minister Narendra Mohdi announced a plan to eliminate the 500 and 1000 rupee notes in November of 2016:

The prime minister, Narendra Modi, gave Indians a 50-day window to declare and deposit their 1,000- and 500-rupee notes after a surprise announcement on 8 November that both denominations would become invalid that evening.

Source: The Guardian

This move has caused chaos across one of the most populous nations in the world.

Massive queues have persisted around banks and ATMs as people have desperately tried to exchange their cash before it becomes worthless.

The weak always suffer the most

As is often the case the lowest rungs of society, the poor, elderly, infirm etc. seem to have suffered the most.

There have been reports of people dying as a result of having to queue for excessive periods.

Some have commited suicide due to sheer frustration when they couldn't buy food with the old notes or the inability to buy seeds to plant.

Others have died because they have been unable to access medical treatment without cash.

In only the first 7 days 33 deaths were directly attributed to this move.

Midnight tonight (30th December 2016) marks the end of the deadline where people can still exchange the old illegal currency for alternative notes or bank deposits.

What was the purpose of all this chaos?

The official reason is to reduce tax evasion and corruption as stated in this excerpt from a BBC article in November:

Indian Finance Minister Arun Jaitley says "honest people" have no need to worry about a decision to scrap 1,000 and 500 rupee notes.

Mr Jaitley said the move would flush out tax evaders, adding that all old notes deposited in banks would be subjected to tax laws.

The surprise move, announced on Tuesday evening, is part of a crackdown on corruption and illegal cash holdings.

This certainly makes sense from a government perspective - you can tax electronic money (which this move has caused an uptick in) much more easily.

Tax is only part of it

It is more than that though. From the same BBC article:

Mr Jaitley said that the move would also help India move towards a cashless economy, saying that farmers could "now keep their money in banks".

This is a strange thing to say. A lot of poor people in India don't have access to banks or banking for a number of reasons that are out of their control and those things will not suddenly change.

The problem for the unbanked is often one of exclusion, lack of access and unsuitability rather than choice.

Raghuram Rajan (formerly at the Reserve Bank of India had this to say in a speech in July 2016:

The excluded may live in remote areas or may belong to communities or segments of society that undertake economic activity informally—they do not maintain records or have signed contracts or documentation. They often do not own property or have regular established sources of income. As a result, a banker, especially if as is typical, he is not from the local region, will have difficulty getting sufficient information to offer financial products.

A second concern is incentives. For example, loans are easily available only if the lender thinks he will be repaid. When the legal system does not enforce repayment quickly or cheaply, and when the borrower does not have any collateral to pledge, the lender might believe that he will find it difficult to get repaid.

The third impediment is transactions costs. Since the size of transactions by the poor, or by micro farmers or enterprises is small, the fixed costs in transacting are relatively high. It takes as much time helping a client fill out the forms and to provide the necessary documentation if he is applying for a loan for Rs10,000 as it takes to help another one borrow Rs10,00,000. A banker who is conscious of the bottom line would naturally focus on the large client in preference to the tiny one.

At present it seems there are not necessarily advantages to these people actually being banked anyway.

They may end up worse off.

So why are they still hell bent on getting rid of cash?

In one word "control".

Why cash is "good" for people and "bad" for governments

Cash is:

Peer to peer currency (one of the original forms). Once it is out in the world people can freely exchange it without requiring a middleman like a bank to intercede.
Permissionless - if I give you a pound coin or a dollar bill I don't need to get permission before I do it.
Anonymous - I don't need to give you my personal information in order to do the exchange.
Hard to track - it can be done but it is time and resource intensive, which limits the ability for it to be done. Further methods such as marking notes may be detected by the entity you are attempting to track.
Does not require any extra equipment. You don't need a phone, internet connection or even electricity.
Harder to tax.
Hard to control - combine all of the above and you have something that governments, banks and law enforcement hate.

All of the ABOVE are advantages for the individual but HUGE disadvantages for a government which wants to micro manage and control every transaction itself(not to mention the fact that they generally want to control every single thing we do).

Cash is not perfect though - why we need cryptocurrencies

The disadvantages of cash:

Issued by a central authority e.g. government or central bank. They can control supply and we have the economic issues that brings.
Relatively bulky (better than gold in this respect) but still not easily concealable.
Exchange requires proximity. You can't exchange cash without meeting the other party.
Deteriorates over time as it is a physical entity - so needs to be replaced.

Cryptocurrencies are better than cash in many ways

Bitcoin (and cryptocurrencies in general) have solved most of these problems.

I don't think it is a coincidence that Bitcoin sells at a 20% premium in India and other parts of the world where cash is either being removed or devalued by inflation.

People in these places are forced to confront the inherent problems that cash and any form of government controlled money has.

They see the value and freedom from state control that things like Bitcoin bring them.

Satoshi to the rescue!

I think rather than pushing people into regular electronic banking, government actions such as those in India are pushing the adoption of cryptocurrenices like Bitcoin.

If you remove cash people will try to have something that gives them the same kind of utility and even better protection from government interference.

I think this will result in places like India and Venezuela becoming the first places to have widespread adoption of bitcoin with direct transfer.

By this I mean that ordinary shops and individuals will likely start accepting bitcoin directly for payments without any need for conversion.

This has not really happened in the West yet because most people don't have the pressing need for it.

In a place like India people do have that need and they will find ways to make it a reality.

The IT access problem

The disadvantage in that cryptocurrencies require technology (phones, internet etc.) to function remains but it is perhaps not as serious as it might seem at first.

Mobile phone adoption has penetrated even the poorest areas. Communities that never had landline phone infrastructure have taken up mobile phones almost as fast as the developed world.

Further cryptocurrencies have ways of getting around the limitations of technology - people can memorise seeds and keep paper wallets.

This way even the poorest and most remote of communities (who may not have immediate access to IT resources) can transport their cryptocurrencies on paper or in their own minds - you can't do that with cash.

Conclusion - Where bitcoin goes other cryptos follow

Once people get used to using bitcoins as currency it is only a matter of time before they start looking at other cryptocurrencies like Steem.

Although the "war on cash" is not a good thing, it could have a positive benefit in accelerating the demise of the old banking and financial systems.

I am not naive though, I know that the world's government's and major banking institutions will not just let this all pass without a fight.

That is why we need to remain vigilant to the risks and keep working on systems to protect cryptocurrencies from their control and manipulation.