India should launch a digital rupee – and back it with digital gold. More broadly, India should champion decentralized cryptocurrencies like Bitcoin and Ethereum to safeguard national security, prevent deplatforming, attract international capital, strengthen monetary policy, deter financial fraud, accelerate technological development, and hasten India’s ascendance as a global power.
We make this case below. But if you haven't been following cryptocurrency closely, or India's proposed ban, don't worry. Our first step is to review the basics for folks new to the space before explaining why Prime Minister Modi should buy Bitcoin rather than ban Bitcoin, and how India can use crypto to regain its rightful place on the world stage.
1. Crypto is now a Trillion Dollar Industry
Bitcoin was invented in 2009 by a pseudonymous engineer named Satoshi Nakamoto. His creation solved an unsolved problem in computer science and created a trillion dollar industry.
Yes, you read that right: trillion. In June 2010 the value of all cryptocurrency worldwide was $0. As of today, it's $1.1 trillion. Bitcoin alone is worth more than $600 billion. That's more valuable than any of the tech unicorns founded in the last decade, more valuable than Uber, Airbnb, Stripe, and Slack combined.
So in retrospect, Bitcoin was the most economically important technological innovation of the 2010s, like the internet was to the 90s. And like all great innovations, it's led to the creation of remarkably valuable companies (like Coinbase, Binance, and Kraken) and technologies (like Ethereum and Zcash). But people still don't get how large the space is. Let's give some more numbers.
- Ethereum, the number two cryptocurrency, is worth >$100B. It extends the concepts introduced in Bitcoin to permit so-called smart contracts, which allow engineers to write programs that can send and receive money.
- Ethereum has given birth to an entire sector called decentralized finance ("defi") which is to traditional finance ("tradfi") what the internet was to paper-based media. Almost $30B in assets are now held in defi for the purpose of earning interest, taking out loans, or trading assets.
- The Ethereum and Bitcoin networks were used to send >$1T in volume in 2020, more than PayPal.
- So-called "stablecoins" built on Ethereum have allowed the transfer of stable US dollar equivalents to anyone in the world; they too transact billions of dollars in volume every 24 hours.
- The website coinmarketcap.com has a higher Alexa ranking (#324 at last check) than the website wsj.com (last ranked as #440). In other words, a crypto website that lists the price of cryptocurrencies is more popular than the Wall Street Journal's official website! And that flip first occurred in 2017.
- The research paper describing Bitcoin has been cited at least 13,000 times by professors at places like Stanford, Harvard, and MIT, and cryptocurrencies have stimulated innovations in applied cryptography and distributed computing.
- More than five billion dollars in venture capital has been invested in cryptocurrency and blockchain startups by the world's top tech investors, including Marc Andreessen's Andreessen Horowitz, Peter Thiel's Founders Fund, and Fred Wilson's Union Square Ventures.
Thousands, millions, billions, trillions – the numbers start to stun after a while. So here's some qualitative commentary from prominent people and institutions to supplement the quantitative barrage.
- Elon Musk: The world's richest man has said that Bitcoin is "inevitable" and changed his Twitter bio to simply "#Bitcoin".
- The IMF: Cryptocurrency could "completely change the way we sell, buy, save, invest, and pay our bills" and "could be the next step in the evolution of money."
- The World Bank: "Cryptocurrencies and blockchain protocols are
part of a tidal wave of new technologies that is changing the way production and commerce are organized."
- Larry Summers, Former US Treasury Secretary: "Bitcoin is here to stay" and the "financial industry will adopt the technology underpinning bitcoin."
At this point you should realize that this crypto thing is kind of a big deal. And that there's an enormous gap between the economic impact of crypto versus its portrayal in the popular press, and that it might seem a little hasty to cut India off from an emerging trillion dollar industry.
But it's actually even more important than that. Because crypto isn't just an economic sector, it's a civilizational advance on par with the internet, and – if embraced rather than banned – can actually solve many of the issues facing modern India. Starting with national security.
2. National Security: Crypto means India can’t be deplatformed
As noted above, a recent bill introduced in the Indian parliament proposes a ban of cryptocurrencies like Bitcoin in favor of a digital rupee. One of the likely justifications is to protect India's national security. But as we'll see, Bitcoin and allied decentralized technologies are actually essential to India's national security.
Bitcoin prevents financial deplatforming
First, some definitions. A digital rupee would be a centralized currency controlled by the Reserve Bank of India (RBI), while Bitcoin and Ethereum are decentralized international cryptocurrencies that no single actor has control over. The administrators of the digital rupee at RBI would be able to issue wallets, freeze accounts, and reverse transactions. But Bitcoin is more akin to digital gold, and cannot be frozen or seized by any state.
It is this property that makes Bitcoin so precious for safeguarding Indian national security. A network that cannot be shut down by any state is a network that India and its diaspora can rely upon in times of conflict. For the same reason that Germany recently repatriated 3,378 tons of gold from the United States, India should prioritize national support for digital gold as a financial rail of last resort in a situation like the 2008 financial crisis or the 2020 COVID crash.
Ethereum prevents social deplatforming
Similarly, for the same reason that Mexico, Germany, and France expressed concern over the deplatforming of a sitting US president and his followers by a collection of American tech companies, India should prioritize national support for decentralized platforms like Ethereum to create social networks and messaging apps that US corporations can’t shut down. Part of the solution will also be national replacements for Twitter, but non-Indians won't be on Indian Twitter, and India will still need to get messages out to the world on neutral international platforms. That's what crypto permits.
Note that the risk of political deplatforming is not theoretical. Once you’ve banned the “most powerful man in the world”, it’s no big deal to ban anyone else. Every day brings another headline to this effect. Recall too that millions of Indians are currently dependent on American apps like Twitter, WhatsApp, Facebook, Gmail, PayPal, and Google Pay. Given sufficient negative press, American technology companies may ban the Indian Prime Minister or Indian citizens not just from entering the US, but from much of the internet itself. And not just from communicating over the internet, but from sending and receiving payments over US-controlled platforms like SWIFT, PayPal, or Google Pay.
What could catalyze such an event? Well, America is excitable these days. A fake photo of a Brazilian rainforest fire was published in the New York Times and prompted a writer in the Atlantic to call for the invasion of Brazil. Cooler heads prevailed once the photo was revealed to be fake, but next time it's India that may be the target of official misinformation. And digital hostilities may commence with little warning.
In short, the threat of Chinese espionage against India is obvious and has already been acted upon with the TikTok ban, but the threat that arbitrary deplatforming by US corporations poses to India's national sovereignty is in some respects even greater. Crypto fixes this, as decentralization defeats deplatforming.
3. Foreign Investment: Crypto brings capital to India
A second concern often voiced as a rationale for the proposed crypto ban is that cryptocurrency will cause capital flight. But the opposite is true.
After all, what do Elon Musk, Marc Andreessen, Jack Dorsey, Peter Thiel, Reid Hoffman, Naval Ravikant, Chamath Palihapitiya, and countless CEOs, founders, angels, and venture capitalists have in common? They all support Bitcoin. So do Russian and Chinese ancestry entrepreneurs like Pavel Durov and Changpeng Zhao. The value of Bitcoin is something leaders in the global tech community agree on, like the internet or open source.
Estimates vary, but if and when Bitcoin hits $200,000 per BTC, my colleague Olaf Carson-Wee at Polychain Capital estimated that roughly 25-50% of the world's billionaires will come from cryptocurrency.
As such, if India bans cryptocurrency, it doesn't just criminalize the holdings of countless innocent Indians. It repels a trillion dollars in crypto capital from coming to India in the first place. The proposed crypto ban would itself cause capital flight.
And capitalist flight. Lest we forget, Indian entrepreneurs are highly mobile. Major crypto exchanges like Coinbase, Binance, and Kraken are already worth many billions of dollars; so are cryptocurrency mining companies and new digital currencies like Ethereum. All the Indian analogs to those services would happen overseas, as Indian founders are once again forced to move abroad.
Conversely, the right crypto policy would cause not capital flight, but capital landing. Visualize billions of dollars in cryptocurrency landing in India. And note that far-sighted technology capitals and financial centers like Switzerland and Singapore have taken positions that are highly favorable to cryptocurrency, because they want the world's top entrepreneurs and investors to alight in their country.
4. Remittances & Remote: Crypto enables the remote economy
While thinking about crypto's impact on Indian capital flows, consider the following facts:
2. COVID means many more jobs can now be done over an internet connection.
3. India is already a world leader in business process outsourcing, earning ~$150B+ per year.
5. Cryptocurrencies work across borders, at the speed of the internet, and are globally popular with tens of millions of users worldwide. Here are some stats from 2019, before the current boom.
If you put those facts together, India is poised for an absolutely massive boom in remote work and remittances, with crypto serving as the conduit for large flows of money into the country to pay Indians for performing remote work.
Now, as a believer in global free trade, I think this will benefit both sides of the arrangement. But even a mercantilist would find it difficult to argue that a crypto-catalyzed surge in remote work and remittances is not at least in India's national interest.
5. Strengthened Monetary Policy: A digital rupee backed by digital gold
Another issue sometimes raised is that decentralized cryptocurrencies may hamper the Indian government's monetary policy. Yet the smart use of Bitcoin will actually strengthen India's monetary policy.
Begin by noting that monetary policy doesn't happen in a vacuum. Why does the Reserve Bank of India hold 600+ tons of physical gold? Because in an economic crisis, the rupee may need to be gold-backed. Well, by analogy, a digital rupee may need to be digital gold-backed.
In more detail, every national currency trades against every other currency in a global foreign exchange market. Excessive money printing can devalue a currency. And this is part of the reason why central banks around the world say they continue to hold gold: because it's a hedge against inflation, highly liquid, a safe haven in a crisis, and internationally accepted.
That's why India holds 600+ tons of gold, worth tens of billions of dollars. And if it issues a digital rupee, it's going to want to acquire digital gold. Because the digital transformation of the economy won't just stop halfway. Digitization of national currencies will be accompanied by digitization of precious metal reserve equivalents.
That means the single highest value thing the RBI and the government could do for India today is not to ban Bitcoin, but to buy Bitcoin. Even a $3B purchase of BTC might appreciate to be on par with India's gold reserves given another 10X appreciation in the Bitcoin price. If RBI makes the right decision on Bitcoin in 2021, it could save India many billions of dollars by 2025. This is true even if the RBI doesn't want to peg the digital rupee to digital gold right away, but to simply hold BTC as a strategic reserve.
Remember also that India has had a multi-millennia long love affair with gold, and is the world's largest importer of gold. Gold was never a threat to India; gold has always been an asset for India. And Bitcoin is valuable for all the same reasons gold is valuable. It’s an internationally accepted store of value, it's highly scarce, and it's a so-called bearer instrument that can't be seized with a keypress. Like gold, it even has industrial utility; for example you can store files undeletably on a blockchain, or use it to prove the existence of a digital file for the purposes of establishing priority. But most importantly, like gold, Bitcoin will soon be the asset that sovereigns use to back or supplement their national digital currencies.
In short: digital gold is not a threat to India, digital gold is an asset for India, just like gold itself. And digital gold will be a crucial component of India's digital monetary policy.
6. Deterring Financial Fraud: Crypto means mathematically provable accounting
Here’s a little known fact: the big four accounting firms (PwC, EY, KPMG, and Deloitte) now use Bitcoin and Ethereum as a gold standard of truth when auditing firms that engage in cryptocurrency transactions. See for example PwC's Halo, which "interrogates the blockchain to independently and reliably gather corroborating information about blockchain transactions and balances."
That corroborating information is trustworthy because blockchains, by their nature, use cryptography to create an immutable global record of who paid what money when to whom. So even if a company has a bug in its internal database of Bitcoin transactions, it can reconcile that payment by reference to the entry recorded on the blockchain!
Deloitte and others have called this triple-entry-bookkeeping, a "game-changer" for accounting, a way to "vastly automate accounting processes in compliance with regulatory requirements." It's perhaps the most important innovation in accounting since the invention of double-entry bookkeeping…which historians believe led to a little thing like the modern financial system!
The key concept is that on-chain accounting doesn't just make it easy to perform audits, it makes it easy to automate them. There are technologies like proof-of-reserve, for example, that allow firms to continuously certify that they have the needed cash on hand. This would prevent scenarios like the allegations in the Vijay Mallya episode, where false evidence of reserves was allegedly presented to gain access to loans. A blockchain-based loan platform (like MakerDao) would never get fooled by such a trick, because it requires cryptographically provable on-chain collateral.
If this sounds fancy, don't worry. The internet did too, once upon a time. The main takehome point is that blockchains reduce the burden on regulators by allowing them to write programs that certify that financial actors are continuously in compliance with regulations.
Blockchains also allow regulators to replay transactions for so-called market surveillance, to delegate some enforcement to smart contracts, and to even permit on-chain issuance and custody of stock certificates to enable real-time settlement. And as India contemplates permitting technology companies to enter banking, blockchain-based accounting can empower regulators to monitor their activities and conduct risk management.
By combining IndiaStack and the digital rupee, India could leapfrog the world by mandating on-chain accounting, payment, and stock issuance for all firms by 2030. Putting all financial flows on-chain would reduce corruption, increase trust in the financial system, and attract more foreign direct investment because international investors could be confident in the accounting.
In short, you can think of this as a regulatory flip. Just like the United States government initially sought to ban encryption in the 1990s, and then turned around to mandate it, so too could smart Indian regulators recognize that blockchains can actually prevent financial crime and increase trust in the system through mathematical, cryptographic proofs of compliance.
7. Technological Development: Crypto is the financial internet
As Marc Andreessen (creator of the graphical web browser) noted in 2014, the invention of the Bitcoin blockchain is comparable to the advent of the internet itself. Because if the internet was about sending information, blockchains are about transferring value. Specifically, until blockchains, we didn't have a digitally native representation of scarcity. Yes, you could copy data from one user to another through the internet, but you couldn't prove that the original user no longer had access to that data.
Blockchains solve this problem. The details are technical, but the end result is that you can now provably transfer assets between people over the internet, rather than simply copying data from computer to computer. And this works for virtually any asset. Just like the internet digitized books, movies, newspapers, and music, blockchains enable a financial internet that is digitizing currencies, commodities, stocks, bonds, real estate, and every imaginable variety of financial instrument.
A crypto ban would prevent all of that innovation from happening in India. It would cut India off from this financial internet, just as it's hit a trillion dollars in value. It is like banning the internet in the year 2000 or smartphones in 2010.
Just to underscore this point, decentralized finance is a rapidly growing alternative to Wall Street, and Indians would be locked out of the next stock market. Decentralized crowdfunding is a way to raise funding without access to American VCs, and Indian entrepreneurs would be prevented from using it. Bitcoin is displacing gold as a hedge against dollar inflation, and Indian investors would be prevented from adding it to their portfolios.
And these are just the applications that are already at scale! Waiting in the wings are concepts like:
- User-generated capital. Right now users on social networks don't get paid for the content they generate. But new crypto-based tools allow creators to make money, not just social media corporations.
- Decentralized data feeds. Today people pay for feeds of price data from companies like Bloomberg and Reuters. Chainlink and other crypto oracles have developed tools to put this kind of data – among others – on blockchains so it's freely visible to the world and accessible to any application.
- User-controlled identity. Ethereum has been used to build an alternative to Facebook Login and Google Login called the Ethereum Name Service, which allows users to control their identity rather than Facebook and Google.
- Decentralized stock markets. Engineers have figured out how to put stock prices, stock certificates, and capitalization tables on blockchains, which allow any country to build their own Wall Street.
- User-controlled notifications. Two companies control push notifications to billions of smartphones: Apple and Google. But developers are building decentralized notification systems that are outside of American corporate control.
- Decentralized social networks. Twitter and Facebook can deplatform anyone at any time, but blockchain developers are working on platforms controlled by users and communities instead of US companies.
You don't need to understand all these things to understand this: crypto is rapidly decentralizing power away from American corporations, and India has the talent to take advantage of this opportunity. But if Indians can’t even buy Bitcoin and Ethereum, let alone develop new smart contracts and crypto protocols, India will not be internationally competitive in the next generation of technology.
On the other hand, if India embraces and fully legalizes cryptocurrency, Indian entrepreneurs can build global protocols – not just companies – to fill the role that American technology companies are now abdicating to the world's surprise and dismay. The financial return from launching these protocols would come back to India to enrich the country, and the international usage of these protocols would strengthen India's reputation on the world stage.
8. Digital Independence: Crypto is the open source alternative to foreign corporations
The Indian government already encourages the use of open source over proprietary code when available:
The Government of India shall endeavour to adopt Open Source Software in all e-Governance systems implemented by various Government organizations, as a preferred option in comparison to Closed Source Software.
The government should prefer crypto APIs over corporate APIs for the same reason, because blockchains aren't just open source, they're also open state and open execution. That means:
- Open source. Every user can view a blockchain's source code.
- Open state. Every user has root access to the entire blockchain database.
- Open execution. Every user can replay every action executed by a blockchain.
This is very different from a centralized service like Twitter. Twitter is closed state, so you can't download every tweet. It's also closed execution, so you can't look at Twitter's server to see what it's doing in realtime. This means Twitter can ban you from viewing its tweets, or downrank your tweets silently so that you don't know if people are seeing them.
Blockchains can fix this. Indeed, they've already fixed it by providing open source alternatives to many financial services. You can use Bitcoin instead of SWIFT, stablecoins instead of PayPal, crypto crowdfunding instead of Kickstarter, and much more.
Defipulse.com has a great list of all the ongoing open source finance action, but the point is simple: India should prefer crypto APIs as the open source alternative to corporate APIs whenever possible, just as it prefers the open source equivalent in other areas.
9. Foreign Policy: India Should Back Neutral Crypto Platforms
India is the #3 power in the world. It is not America, and it is not China. It should play a different game.
Right now, the US and China are on a financial collision course. The US wants all countries to accept the dollar, while China may push its digital yuan through the Belt and Road. Europe wants to stay out of this developing Cold War, but there isn't an obvious alternative yet.
The Decentralized Movement
India can reposition the non-aligned movement as a decentralized movement that advocates crypto protocols as a successor to the rules-based international order, beginning with its own financial system: a digital rupee backed by digital gold.
As noted in the Diplomat, India has already started to recognize that a renewed non-aligned movement will play a balancing role in the coming US-vs-China Cold War. And cryptocurrencies give an intellectual framework to economically align the otherwise disparate nations of this movement.
Unlike America and China, which will try pressuring nations to accept the dollar or digital yuan respectively, India can recognize that each country will ultimately want to use its own national currency domestically and a neutral platform internationally. Bitcoin and crypto protocols provide that neutral platform, a demilitarized zone suitable for international trade and communication, similar to the role that gold played in the past and that the Law of the Sea plays today.
Put another way, every nation not named America or China has the following preference ranking when it comes to the financial system.
- Our country should be in charge (domestic national digital currency)
- No one should be in charge (international cryptocurrency)
- Others should be in charge, like the US or China (dollar or digital yuan)
This is true for India as well. Unlike the dollar or yuan, the digital rupee is not a candidate to become the reserve currency of the world. Thus, while India can be in charge of the digital rupee domestically, internationally it would prefer that no one be in charge – least of all the increasingly unpredictable US or China. And that equates to a preference for the use of cryptocurrency in international finance. Indeed, every sovereign that isn't the US or China will likely eventually align behind crypto for international trade because it's an acceptable second choice, a platform where you can't be deplatformed.
This is a creative way of thinking about Indian foreign policy. India would still broadly line up with the West rather than China, but it would stand for the values of the West: free speech, free markets, and international law – all principles that the US has hastily abandoned and that China is in no hurry to pick up.
We should also remember that India is not a member of the UN Security Council. India is not a root user of the SWIFT system. India doesn't have Wall Street or Harvard or Silicon Valley or the New York Times. India really isn't that invested in the current system. But unlike the US, which has turned against the rules-based international order, and unlike China, which makes no bones about pursuing its national interest, India could adopt crypto to build new, provably fair digital institutions for billions around the world – a new Wall Street, a new SWIFT, a new Bretton Woods – just as it built IndiaStack for a billion Indians.
This would be digital internationalism, the pursuit of enlightened self-interest through international decentralized platforms. And it would play to India's strengths: software, finance, remittances, and above all the flexible and adaptable nature of the international Indian.
China could never make this leap, because China thinks about everything in terms of the narrow national self-interest of the Chinese people. That may be fine for them, but it is a turnoff to everyone who is not Chinese.
America likely can't make this leap either, at least not right now, because the East Coast establishment now loses in a world of truly free speech and free markets. Wall Street loses to random Reddit users without a thumb on the scale, and legacy media is outcompeted by social media in the absence of censorship. That's why the US establishment has soured on the values it once championed.
But India benefits from a game of free speech and free markets. The millions of Indians who emigrated to the US, UK, Canada, and Australia over the last 50 years did quite well in that game. With 400 million Indians newly online, in a newly remote world, India is poised to become even more formidable as a global exporter of software, finance, and media talent. Neutral crypto platforms will allow India to export these digital goods into every country, while simultaneously being provably fair to all parties. This is the spirit of Atmanirbhar Bharat. Unlike the US or China, India wouldn't just be playing to win, it'd be playing to win/win.
10. India should buy Bitcoin, build a stockchain, attract crypto, and encourage decentralization
To summarize, India is on the verge of banning a trillion dollar industry instead of using it to strengthen its national security, economy, currency, technology, and foreign policy.
But India's crypto ban has been reversed once before, and it's possible to envision a bold move here. Under Prime Minister Modi, the country shipped IndiaStack, ascended to #3 on the tech unicorn list, and leapfrogged the world in mobile data with Reliance Jio.
The next step is to demonstrate global leadership. As the world's third largest economy in PPP terms, India could lead a decentralized movement to develop provably fair crypto platforms, neutral international systems outside both American and Chinese control that all countries can embrace.
To get the ball rolling, Prime Minister Modi should:
- Create a digital rupee backed by digital gold. Shelve the proposed crypto ban and instead buy Bitcoin to back a digital rupee, making it the first national digital currency backed by digital gold. Even if the RBI doesn't want to peg the digital rupee to digital gold right away, it'll be useful to have BTC reserves as a backstop in a few years time.
- Add crypto to IndiaStack. Update IndiaStack to add on-chain accounting and a "stockchain", with the goal of putting the country's financial system – currency, payments, accounting, stocks, and more – entirely on-chain by 2030. With cryptographically provable financial statements, trust in Indian companies would rise and foreign investment would flow into the country.
- Attract crypto capital. Using the legislation passed in jurisdictions like Singapore, Switzerland, Wyoming, and Dubai as inspiration, create a crypto-favorable regulatory regime to attract tens of billions in capital to India.
- Encourage development of decentralized protocols. Encourage Indian entrepreneurs to build not just global companies, but global cryptoprotocols like Ethereum that can be trusted by any country expressly because they don't require trust.
- Help other nations with crypto. Recommend that India build its digital rupee and stockchain with an eye to exporting the designs to the rest of the world, either as services that others can use directly to work with the Indian economy or as blueprints they can fork to build their own versions.
India has the talent to pull this off. Such a move would make international headlines, attract global support from the world's technologists and financiers, differentiate India from the increasingly zero-sum economic policies pushed by America and China, and put the country at the forefront of a trillion dollar industry.
The first step is simple: India should buy Bitcoin, not ban it.