Category: Real-World Crypto

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Investing Personal Finance Real-World Crypto

How India could regulate crypto investments – Part 2

In Part 1, we discussed three ways in which the Indian government could apply existing regulation to cryptocurrencies instead of simply banning them outright:

One, cap the amount that people can invest in cryptocurrency. Two, set a high minimum to invest in cryptocurrency to place it out of reach of new, vulnerable investors. Three, limit access to only accredited investors who have a certain minimum income or net worth.

Each of these three are discriminatory in some way. One caps the amount of upside. The second and third limit investment and potential upside to those who already hold significant capital. Far from democratising access, each of them perpetuates the gap in investment opportunities.

I’d rather that investing in crypto, and alternative assets in general, require taking a test. After all, the question is whether or not the investor understands the investment and its risks well enough to make an investment decision.

This is not unlike a drivers’ license, which requires you to take a test to prove you can be responsible for not just your own safety (as is the case with investments) but that of others too.

Drivers’ license tests also show that India is capable of administering tests at scale, nationwide, throughout the year.

You don’t need to rely on the transport police infrastructure, though. The capital markets regulator’s National Institute of Securities Markets, or NISM, administers a range of tests for mutual fund distributors, PMS distributors, investment advisors, registrars, valuers, among others at centers nationwide in a number of languages. The government could require the capital markets regulator to expand this infrastructure to prospective investors too. The marginal costs are a lot lower than setting one up from scratch.

Education democratises access to opportunities. Capital requirements restrict it. To me it’s clear which path the government should take.

(ends)

(Featured Image Photo Credit: maxime niyomwungeri/Unsplash)

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Investing Personal Finance Real-World Crypto

How India could regulate crypto investments – Part 1

The government in India is expected to table a bill that, among other things, bans “private cryptocurrency”, making it “one of the world’s strictest policies against cryptocurrencies“.

One of the companies I advise, a tech-enabled wealth management service, has offered alternative assets for a few years now. Those include securitised debt, digital gold, P2P lending, settlement financing, portfolio management services, among others. I’ve gotten to see how they have been regulated – or not.

And I wonder if India’s government, central bank and capital markets regulator could apply some variation of these existing regulations to cryptocurrency, especially when held or traded as an asset.

The government could cap the amount of Indian rupees invested in cryptocurrency across all crypto exchanges. This is like P2P lending, which was initially capped at INR ten lakh, and expanded to INR fifty lakh subject to a few net worth criteria. The RBI controls the toll gates to crypto – the on ramps to transfer money from a bank account to a crypto exchange to buy crypto. That makes it possible to enforce these limits.

The government could set a minimum amount to hold in cryptocurrency. That puts it out of reach of the most vulnerable small investors who the government ostensibly wants to protect. This is like portfolio management services, whose investment minimum was recently doubled from INR 25 lakh to INR 50 lakh.

It could restrict investment in cryptocurrency to accredited investors, a qualification that’s well known in the USA but which the capital markets regulator has only just proposed. So instead of investment minimums or caps, the investor needs to have a certain minimum net worth or annual income. As of this writing, the qualifications are so strict, only a few tens of thousands or very low hundreds of thousands will quality.

(Part 2 – while each of these three are workable, I describe what I’d rather do)

(Featured Image Photo Credit: naraa .in.ub/Unsplash)

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Data Custody Investing Products and Design Real-World Crypto

Virtual real estate NFTs

(Also posted earlier this week on my crypto/DeFi Whatsapp channel).

We have discussed NFTs or non-fungible tokens before, mostly in the form of digital art and collectibles. Not only do some of them sell for millions of dollars, they can also be re-sold on secondary marketplaces for gains.

The Wall Street Journal reported on Monday that we’re now seeing pieces of virtual land inside games being sold as NFTs.

In some games, players can buy digital deeds for real estate in the form of an NFT, which proves the authenticity of a certain plot in a specific game.

The real estate will appreciate as more players join the game and scarce land is sold to other players who require the plots for certain tasks and missions.

It’s not just buy-and-hold. Those ‘assets’ are being put to ‘productive use’:

Players can then rent out their land to other gamers, charge others for using it or even sell it—either within the game or on a third-party exchange such as OpenSea.

that real estate, too, can be sold for large sums:

A group of people last month paid $1.6 million for Citadel of the Stars, a large kingdom in the unreleased fantasy role-playing game Mirandus

virtual world The Sandbox sold about $2.8 million worth of land in a pair of well-received sales that now have the company valuing its digital properties at about $37 million.

The sale of properties in games that are not even released reminds me of Bollywood/other Indian movies, which start making money through sale of music weeks before the movie’s release.

that real estate, too, can be sold for large sums:

A group of people last month paid $1.6 million for Citadel of the Stars, a large kingdom in the unreleased fantasy role-playing game Mirandus

virtual world The Sandbox sold about $2.8 million worth of land in a pair of well-received sales that now have the company valuing its digital properties at about $37 million.

The sale of properties in games that are not even released reminds me of Bollywood/other Indian movies, which start making money through sale of music weeks before the movie’s release.

We’ve heard news for years from governments who have wanted to tokenise parcels of land, even apartments. The current Indian government’s think tank also recognises real estate as a major area for the adoption of blockchain (Blockchain: the India Strategy, January 2020).

Innovation in virtual worlds made from scratch will always be faster because they have fewer messy problems. That said, there’s a lot for governments to learn from them about distribution and market mechanisms – if they choose to. For instance, governments could require new real estate projects to list on their real estate blockchain, just like the unreleased games that sold plots of ‘land’ as NFTs.

The smart contract could abstract the chain of ownership from the actual chain of transactions on the blockchain. That is, as the government understands the ownership history of the plot of land on which the new project is being built, the on-chain record history can grow ‘backwards’.

At the same time, the chain of ownership of that plot could also grow ‘forward’ as it is sold repeatedly.

Both the backwards and forwards additions to ownership are immutably recorded on the real estate blockchain. The abstraction means you don’t need to wait for the definitive ownership history of each plot of land to be determined before you list them on-chain.

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Real-World Crypto

Not That Fiat

Last week, a friend sent me a link that claimed the car company Fiat would reward buyers of its upcoming 500e electric vehicle with cryptocurrency for every mile they drove.

It sounded strange, so I looked into it. There were many articles in tech and auto publications saying the same thing:

The press release from Fiat’s parent company Stellantis also made a reference to the cryptocurrency, Kiricoin:

The partnership with Kiri enables Stellantis to achieve three world firsts in the automotive industry. First, the ability to collect a cryptocurrency simply by driving; second, giving access to an exclusive marketplace; finally, providing extra rewards for the highest eco:Scores.

Driving data, such as distance and speed, is uploaded to the Kiri cloud and automatically converted into KiriCoins, using an algorithm devised by Kiri. The result is downloaded directly to the user’s smartphone and the KiriCoins can then be used to purchase products and services in the Kiri marketplace.”

– Stellantis press release

That sounds highly limiting.

Now I couldn’t find Kiricoin on any major crypto exchange.

Nor could I find any reference to it being listed anywhere. So I read through Kiricoin’s own website:

It turns out that Kiri itself doesn’t make any reference to itself as a cryptocurrency.

It’s a simple, light website that describes a private currency for ‘ green merchants’ to provide ‘exclusive offers’ to the ‘Kiri community’ – in other words, a private currency closed wallet.

Kiri is being honest here.

It’s amusing, if a little disappointing to see how every reporter on single news article about Fiat and the 500e simply parroted the ‘cryptocurrency’ angle without actually verifying it.

Or questioned why a cryptocurrency’s even needed for something so centralised.

The next decade will be fun as we see more brands riding on the crypto wave in name only.

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Decentralisation and Neutrality Real-World Crypto

Of bitcoin and asset bubbles

In an efficient financial market, high volatility is correlated with high expected returns. This is one of the most basic principles of finance. Volatility is the cost that investors pay to hold an asset that is likelier to yield them bigger rewards. Risk is the pain, expected return is the gain…

 Many people over the years have argued that Bitcoin is this type of trash asset. … But let’s assume it’s not. Suppose Bitcoin’s value is slowly rising to some long-term equilibrium. The existence of semi-regular bubbles and crashes every few years will tend to slow that process, because it keeps some people scared and keeps them out of the Bitcoin market. That depresses the price today. But then as the bubbles keep happening and the skeptics realize that this is just how Bitcoin works, they eventually lose their fear and jump into the market, and Bitcoin’s price rises.

– Triumph of the HODLers

The article goes on to make the point about bitcoin as a hedge not just against equities or bonds or a specific asset class, but against “system failure”:

 The system of governments, banks, financial regulations, etc. etc. that currently runs the world is not infinitely robust. In the places and times and future conditions in which that system fails, peer-to-peer financial solutions like Bitcoin are inherently very valuable. That gives Bitcoin fundamental value.

and then ultimately hazards a guess at what makes Bitcoin so political.

All around, an excellent read.

Related post:

Bitcoin as insurance
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Decentralisation and Neutrality Real-World Crypto

Single point of failure of imagination

I’ve been thinking about India’s will-they-won’t-they reckoning with the legality of cryptocurrency. Even a year after the Supreme Court ordered the RBI to rescind its ban on banks dealing with cryptocurrency-linked exchanges and directing the government to formulate a law instead, there isn’t one. Instead, there’s a bill that has wound its way through committee and is now awaiting tabling in the ongoing session of Parliament.

The one-line description of the bill makes a reference to the banning of “private cryptocurrencies”. As a consequence, the sword of damocles that has hung above India’s collective cryptocurrency ecosystem since the RBI ban in 2018 has gotten a little wobblier. Every week, for weeks, people in the ecosystem have parsed the odd statement by the minister of finance, and the governor of the RBI and other bureaucrats to glean some indication of which way the wind is blowing.

One day – no one knows when – everyone’ll refresh their feed and discover whether India’s entire industry lives free or dies or is condemned to a highly circumscribed life. That decision determines the access of one-sixth of humanity to something as transformative as decentralised ledger technology – someone in the industry draws comparisons with India’s mid-1990s decision to allow (extremely constrained) access to the Internet itself.

This is a terrible way to live.

Finally, what’s worse is that it’ll eventually be one person – whether an influential bureaucrat or an elected official – who’ll make the difference.

This isn’t unique to India. While in India the eventual lynchpin might be faceless, policy making in the US is transparently but routinely held hostage to a small handful of elected officials.

These are single points of failure. Failures of imagination. Failures that can and often do set entire populations and economies back by a generation.

Corporations make similar decisions at different levels in their hierarchy. The difference for people like you and me is one of choice. We can usually switch to another product, another provider, another subscription. There are switching costs, of course. But the costs of switching countries are many orders of magnitude higher.

Finally, corporations reverse decisions quickly as well. The feedback mechanism is tighter. Decision making is more agile than countries to begin with. It’s a lot harder to rescind an executive order and reverse a law: citizens have only the judiciary and the ballot box.

In the coming face-off between corporation-states and nation-states, this agility will be a big competitive advantage.

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Investing Real-World Crypto

Another 100+ year old institution adopts cryptocurrency

Less than a week after Christie’s sold a digital collage to an investor who paid $69 million in cryptocurrency, rival auction house Sotheby’s said it was considering an option to eventually let bidders use digital currencies to pay for physical artworks—from prints to Pablo Picassos—as well as digital works.

– Sotheby’s Enters NFT Digital Art Market, Considers Broader Cryptocurrency Options

Sotheby’s is 276 years old. Christie’s is 254.

We saw last year how other century-old institutions had begun investing in, parking money in and/or getting into the business of cryptocurrency. That list included Mass Mutual, State Street and the SEC:

Crypto: mainstreaming, one boring institution after another

That’s why its hard to witness the finance ministries and central banks of young countries – China, India, Nigeria – take a hard stand against it.

These countries are roughly sixty and seventy years old, but China was reborn economically just forty years ago; India ten years later.

Their institutions should be among the least protective, most imaginative and most welcoming of new technology.

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Products and Design Real-World Crypto

“Crypto can’t contribute anything further” and the failure of imagination

This article in The Ken newsletter isn’t very hopeful about crypto’s ability to make much of a difference to India. There are a couple of strong downsides to allowing unfettered access to crypto, but the article doesn’t make those. I think I’ll write about them on this site in a future post.

This article, unfortunately, makes claims like this regarding the “tens of billions of dollars coming to the country from remittances and remote work”

the contention that crypto will serve as a catalyst is moot. India already has a robust banking system to support inward foreign remittances and crypto can’t contribute anything further.

I wish the writer had chosen a different hill to make a stand on. I really do.

Cross border remittances are infamous for few options, very high processing fees and currency markups. Here’s the World Bank lamenting the state of remittances [PDF report].

Providers of remittance services in the formal sector typically charge a fee of 10–15 percent of the principal amount to handle the small remittances typically made by poor migrants.

For every INR 100 a migrant ends back, if their family receives just INR 85, that’s INR 15 worth of that migrant’s labour wasted. Lost. In moving electronic records from a computer system to another. In 20201.

This is unconscionable.

And as regard the robust banking system, look no further than this:

I am myself, as of Monday, waiting for an overseas payment that was made to me on Thursday. I have no idea where it is in my bank’s systems. When I wanted to remit money overseas late last year, my bank had me pull records from 2014 to prove that the money I was sending was in fact mine.

There exist many startups, both Indian and otherwise – Remitl.y, Remit2India, RemitGuru, Azimo, Xoom, Transferwise – that choose to tackle the problem of remittance in India.

Remittances is broken.

To say ‘crypto can’t contribute anything further’ is to accept the current state of finance: payments, investments, even inflationary money.

This is an example of failure of imagination –the worst sort of failure.

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Investing Real-World Crypto

Bitcoin institutional purchases now influencing price

From the Indian financial news site Moneycontrol:

Bitcoin surged to over $55,000, albeit briefly, this week… the interest comes primarily from institutional investors as they hope that stimulus checks from the Biden administration will pump financial markets and lift cryptocurrencies.

– “Bitcoin breaks $55,000 as interest from institutional investors stirs appetite: Report“

Just a couple of years ago, mere interest from ‘institutional investors’ in cryptocurrency was weird. Bitcoin – and cryptocurrency in general – was dismissed as too volatile, purely speculative, a conduit for terror financing and the drug trade.

All of this is still true. And yet, institutional investors have not just come around, their buying of bitcoin now influences the price itself.

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Personal Finance Products and Design Real-World Crypto

The e-yuan cryptocurrency and privacy

China’s e-yuan – the Financial Times takes a look at how the Chinese Government is pushing adoption of the natively-digital currency, not just to advance payments and investments, but also to exert even greater control over its population: “Virtual control: the agenda behind China’s new digital currency”

(Article on Financial Times; may be paywalled; consider supporting good journalism)

China is intent on becoming the first large economy to introduce a digital currency, showcasing its position as the global leader in payments technology to the world at next year’s Winter Olympics.

Cryptocurrencies are often decentralised; they are not issued or backed by governments. The “e-yuan”, by contrast, is part of China’s top-down design… the digital currency project is tied up in the Communist party’s drive to maintain control over society and the economy. The technology is partly designed to reinforce its surveillance state.

Its digital format enables the central bank to track all transactions at the individual level in real time. “we will give those people who demand it [paper money and coins] anonymity in their transactions… but at the same time, we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF [counter-terrorist financing], and also tax issues, online gambling and any electronic criminal activities”

If current statements by the government are any measure, it’s a pretty big blow to privacy. The e-yuan is also seen

as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent… the digital renminbi is distributed directly to the e-wallets of users by state-owned banks, thus setting up payments channels that circumvent Alipay and WeChat Pay.