 Hello, you are watching People's Dispatch and today we are going to be talking about cryptocurrencies. Now this is following the bust in many of these cryptocurrencies, a massive decline in their value over the last month. A lot of people wondering what their future will be, we heard terms like Terra, Luna in addition to the usual ones like Bitcoin and there's been a lot of criticism off late especially about the whole model through which they function and talking about why they are really bad for society. We have with us to talk about is Baba Sinha who is written a very categorical article which says with the title why cryptocurrencies was dying. Baba, so first of all let's go into the context, like I said one of the main factors that happened to place last month was the crash of Terra and Luna which are two cryptocurrencies. So could you maybe take us through that and why that was one of the factors that caused this panic? So the panic was all across the cryptocurrency space, right? The biggest one of the cryptocurrencies has been Bitcoin which fell, which is fallen by about 55% but there were two of these cryptocurrencies from, there is a single organization called the Terra Foundation and they issue two cryptocurrencies. One is called Luna, the other one is called Terra USD which is a stable coin and both of them collapsed and finally collapsed all the way to zero. So between the two, their combined market cap at their peak was close to 50 to 60 billion dollars, right? So almost like over a weekend 50 billion dollars evaporated and which obviously has its impact across the space. So that's really the context. Now why they collapsed is interesting. It's interesting because why they were worth 50 billion dollars is the real question. They are just a classic Ponzi scheme, there is really no other way to describe them. What they are, Terra USD is a stable coin. So what is a stable coin is that it guarantees a peg to the US dollar. So one Terra USD is equivalent to one US dollar, at least that was the promise that the Terra Foundation made. Now when such pegs are done, there's typically some, you need to have some asset to back that peg, right? But incredibly, there was no asset backing the peg. It was supposed to be done purely algorithmically. And so there are two coins and what they promised they made was that the Terra USD would be inter convertible with Luna at $1. So that the Luna Foundation would exchange one Terra USD for $1 equivalent of Luna, right? And so, I mean, as ridiculous as it may sound, it's like I, let's say, say that, okay, I'm going to give you two chits of paper, like a blue chit and a yellow chit. I'm going to say that I will guarantee that the blue chit is for, let's say, worth 100 rupees, each of those chits. And I'm going to guarantee a inter convertibility between the two at the rate. That is a blue chit and the yellow chit, right? And I'm going to say that with the blue chip at 100 rupees, right? So that's the guarantee. Now, if I were to make this guarantee and then how does it work, right? So if it goes, let's say, the blue chit in the open market starts selling for 105 rupees, then people will, what they will do is they will take the yellow chit, they will come to me and say, oh, convert it for blue chip at 100 rupees and then sell it in the open market for 105 rupees, make up 5 rupee profit. And so if enough people do it, the supply of blue chits will go up, the price will go down to 100 rupees, right? And the reverse is true also. But you have to wonder why would the yellow chits be worth anything or why would I mean just me saying that this is worth 100 rupees doesn't make it worth 100 rupees. But that was what the Terra Foundation was doing. Now, as long as enough people were buying into this, it worked. Now, once people stopped buying into it, it just collapsed, right? Why would you want to invest in something which is going to be stable, right? The whole point is it's fixed to $1, right? So why would you want to hold something with the stable? I mean, typically you buy these things because they're going to appreciate. Well, you were incentivized to do this because there was yet another scheme they launched which was called Anchor. So you could take your Terra stable coins and put it in Anchor and they were giving you 20% return, guaranteed returns. Now, think of it in a global world where getting any yield is kind of difficult, right? I mean, in a developing country like India, you were getting like 5%, 6% FD rates in the US being close to zero and the Europe you're going to close to zero. And suddenly somebody comes and says we're going to give you 20% guaranteed yield, that has an attraction, right? And there are a lot of people, unfortunately, who fell for that. But the question is if somebody is promising 20% yield, there is some way for them to make it up. Now, with the way they were making it up, the Anchor protocol was basically a lending scheme. Clearly, this is- So this is basically an interconnected web of promises which are not really backed by anything. Which are classic Ponzi and as long as everybody believes in it, it works. So the basic model was that there was a hype built around it. People started investing money based on that they kept fulfilling their promises. And then at some point, the investment stopped and then everything crashed. That's what it basically sounds like. That's what all Ponzi schemes work. How do Ponzi schemes work? If I say, okay, I'm going to give 20% returns to everybody. That's an attractive return. Every people start putting that money in. So then I take money from the new investors, give it to the old investors. And as long as I keep on getting new investors, the scheme works. The moment the new investors stop coming, I don't have enough cash to give and write the whole scheme collapses, which is what happened in this case. Right, so Vapa, this is a very complicated scheme backed by nothing. It's all air, no substance at all. That's what it sounds like. But is this just something that Terra and Luna were doing? Or is this generally a theme of the whole cryptocurrency system itself? Because there's so much hype and all that. That is what it looks like. I mean, to a large extent, this is based on hype and Ponzi schemes and fraud. Terra is still a relatively smaller stablecoin. The biggest stablecoin is called Tether, right? Now, Tether claims to have real assets backing it up, right? But look, when somebody says I'm pegged to a dollar, it's like a mutual fund, right? You give me money and I can guarantee you that your money will not depreciate what you give me and I can give you a small return, right? That's what mutual funds, fixed deposits, that's what, not mutual funds, that's what fixed deposits do, right? But fixed deposits by law in various countries have to disclose what they're investing in. Now, incredibly, Tether claims that it has actual real assets backing its Tether coin, but they are held in trust in Bahamas and they have not disclosed what those assets are, right? And that's the biggest stablecoin in the crypto space. So now, I mean, it's up for discussion. Is that also a fraud? Who knows, right? I mean, the problem is that there aren't enough regulations. Like if you open a fixed deposit, if a bank gives a fixed deposit, there are banking regulations. If you do a security, you do bonds, stocks, whatever, mutual funds, there are regulations in every country which enforce a certain level of transparency. Now, because the crypto space is new and the governments have been slow to act, there is no regulation in the space. And effectively, what they're trying to do is, they're trying to replace the traditional functionality which these older asset classes provide. They are trying to say that, oh, we have this great technology and we will provide it to you cheaper, whatever, more secure and all that. But with no regulations, it's basically, it's crazy what's going on, right? Then they pretty much- Wild West, so to speak. But let's come back to that point you're talking about in the sense that the promise of Bitcoin initially when it came out and all cryptocurrencies for that matter was that it would be a decentralized system, like you said, that there would be peer to peer as in you and I could have an interaction without some kind of third entity which is monitoring our transactions, etc., etc. And there would be a democratic financial system which is not under the control of the big banks, where individuals could have more freedom. So that was the argument that was posed to all of us, many people bought it. Many people benefited as well. But what is the flip side of this argument? Does the argument actually work? Is it a practical argument, especially when you scale it up? Is it something that can actually replace the traditional financial system? Right, now, so we need to go, I think we should look at what basically a currency is, right? Now, traditionally, currencies have been either backed by a hard asset, right? Like gold usually. Like gold, earlier used to have gold and silver coins. The coin itself would be worth like a $1 gold coin or a 100 rupee gold coin would actually work that much of gold, right? Or very close to that. So that was the hard asset backing it, right? And later there was a convertibility between the government notes. So when the government's initially started issued notes, they would be backed by a hard asset, right? So the note would typically say the government promises to pay you so much, right? And the promise was because they are a hard asset. At some point, they changed it that they didn't need to have the full hard asset, but they needed to have a percentage of that, right? Eventually, like over time, the countries got rid of the hard asset. It was just a promise from the government. Now, so what does that mean? That this really what is backing the currency is the sovereign. It's the state which backs the currency, right? Now, if you are then saying that, okay, you don't like the state or you don't trust the state, so you will have effectively an algorithm back the asset, back the currency. So one, there are no assets backing the currency. And there is no sovereign or no state backing the currency, right? Then is the currency, what is the currency really worth, right? And who then is responsible for creating the currency? Now, the thing is that we may not like states we live under, but at the end of the day, the state is the sovereign, right? The state is theoretically supposed to at least represent its people. Now, if you take the power of creating the currency and controlling the money supply away from the state and give it to private entities, you have effectively given up even a pretense of independence, a pretense of like your sovereignty to private hands and then they then control your currency and your money supply, which I think is far more tyrannical than any tyrannical state controlling you. Yes, but isn't the cryptocurrency argument also that it's not a private company or a corporate which is doing that but it is peer to peer or in the sense that there is no, it's ultimately between like for instance, if you and I are having a transaction, it is between you and me as and without a third person. So where does a private thing come in? Well, the thing is that one is, yeah, me and you can exchange currencies, but how does the currency come into existence? The currency comes into existing through a process called digital mining. Now, what does it mean to do digital mining? Effectively, it means solving these cryptographic problems using a huge amount of computing power, which means having big computers. And then you need electricity to power these big computers. Now, the more powerful your computer is, the more electricity you can afford to spend, the more mining you can do and the more Bitcoins you can, or any crypto coins you can create. Now, that necessarily means that the more powerful people will have a monopoly over this money creation and also people who are the early movers. So the people who got these Bitcoins or Ethereum or whatever for cheap originally and they're hoarding all these coins, they then suddenly have all this wealth while the masses of people have nothing. So it's effectively a kind of this feudal system where you have a very small set of people who control all the wealth and the vast majority of people have nothing. Now, if you come back to the more basic question. So one is this question of, it's a political question, right? Who controls money supply and who controls currency? But for the other talking points about Bitcoin or any of the cryptos was one that it's a store of value and it's a transaction medium. And it's a hedge against inflation. Now, we have seen that all of these things have not been met, right? One, as a store of value, its prices have fluctuated so dramatically, right? It's like, for example, Bitcoin in the last, whatever, from the start of the pandemic, let's say from March of 2020 to the end of 2021. It had gone up like 16 times, as a store of value that is ridiculous. And then from that point to now, in a matter of six months, it has dropped by 55%. So if you bought Bitcoin at 64,000 and sometime in end of 2021, you have lost like 55%, that's no store of value. Now, as a medium of exchange, when I'm exchanging something with you, I have to have a certain guarantee that, look, let's say I'm selling you whatever, my service or let's say I'm selling you a car, a house, a bag of potatoes, and I'm getting a currency in return. The assumption is that I'm getting an equivalent value in return, which then I can use to buy something else. But if that thing fluctuates so much, then I mean, it doesn't work that way. The other problem is that in terms of the number of transactions it can do, right? So all this is really to, I mean, you can't really hold bitcoins. These are not physical things, these are digital things. So really the use of them is to transact digitally. Now, but the problem is like, for example, Bitcoin, the number of transactions it supports at a global level is like less than 10. It's like four to seven transactions per second. Now, most of the credit cards which have existed, I mean, the credit cards in the US and the West have existed for 30, 40 years, right? They can do tens of thousands of transactions per second. So if this is the next, the future of currency, you can't have a future of currency which is incredibly inefficient. It hogs electricity like anything, like Bitcoin alone hogs as much electricity as a mid-sized country or a few small countries. And it does like many orders of magnitude less than what systems which are 30, 40 year old support. That's not going to be your transaction medium for of the future, right? And then the third thing is inflation hedge. Because all this thing was like, oh, the central banks are printing money, the fiat money has no value, and the central banks will devalue fiat money. And so we need something which will hold on in presence of this massive money printing. Well, since the pandemic, the central banks have printed like crazy, right? And yet in the last six months, Bitcoin has gone down by 55%. It's like, forget about like hedging, like keeping pace with inflation. The nominally it has gone down, so it doesn't even work that way. And see, these are not just rhetorical points being made. This is not like theory. There are people to whom this was sold, right? And vulnerable people in countries with high inflation, like relatively developing countries, Argentina, Nigeria, Pakistan, and the people who invested their life savings because they were given this promise, their inflation hedge. It's an investment vehicle and all. And they have literally lost everything. So it has very human consequences. Absolutely. And upon that case, final question, then what really is all the hype about? Why is it so celebrated even despite all these massive crashes that we saw last month? We still see people saying, you know, don't be too worried. We haven't lost hope. Various agencies and institutions saying that, you know, we're not, we're still sanguine or okay about it. So what drives the media or the cultural aspect about it so to speak? So see, I think like you should look at it over a fairly long period of time, right? Over 10 years, you've tracked the history of this. It started around the 2007, 2008 time frame when the 2008 financial crisis hit. And with that, there was a crisis of confidence in the banks because like pretty much the entire banking sector of the West had collapsed, right? And it needed state support to revive. And it needed huge amount of money printing by all the big central banks to revive, right? So that collapse in confidence of the banks and the collapse in confidence in the central bank basically had people thinking that, okay, we need a currency where the banks are not involved and where the central bank is not involved. But this is also driven by a very like almost an ultra-right viewpoint, right? A libertarian viewpoint where the state has really no role other than maintaining law and order and enforcing private property, right? So where money creation itself has been now outsourced to private entities. So it is that which the like lot of the initial movement was driven by these hardcore libertarians, tech libertarians who adopted this. Then we get into this phase when the hype was driven by this crazy run up, right? Bitcoin went from like just in the last 20 months before the current crash. It went up by 16 times. Some of these others like Luna, which went to zero, had before that gone up 1000 times and like Ethereum had gone up some 50 times. Like all these had like so that kind of drove a lot of attention to it. A lot of people invested and made tons of money. So that was the kind of the second phase. Once this happened that lot of people made tons of money, after that the institutional money moves in, right? Which is the hedge funds, the venture capital funds. And they see this as a vehicle for making quick bucks. Now if you look at it like, if you look at the evolution of finance, right? So initially when you look at finance was meant to fund industrial production, right? Now then the West kind of got rid of its industries. They were shipped to East Asia and then the finance became a means to itself, right? So you would do stock deals, you would do bond deals. You would have these big banks doing all kinds of esoteric products, right? And that would generate huge profits, much more profits than production would. But even those things have regulations, right? And especially after the 2008 financial crisis, there was an attempt in the West to regulate banking, right? And so some of the wild speculation in the banking sector with the mortgage crisis had been curtailed. And so then you move to this tech boom, right? So you invested in this tech IPOs and they became big. And initially these were like really companies which were which had which were providing which have which had revenue flows and profits, right? You move from there to companies which were had no revenue or no profits to speak of and they were going IPO. Now, but even at that level, to get your IPO, if you are a VC to get your company listed for an IPO, you have to go through some amount of regulatory oversight. Now, look at crypto, it's a perfect market. There's no regulation, you can make your investment and you have all these people who will pump up your crypto coins. I mean, there was a coin called Dodge coin, which was actually a parody. It was like, okay, this is so ridiculous that we will make a parody coin and that went up ridiculously in value. So if you're a VC or if you are a venture cap, you are like, this is great, right? You can pump in money, get very quick returns, no regulatory oversight. And you get to suck in people like using like through this highly speculative Ponzi scheme type of things, and you can make a killing. And that's what drove the institutional money in. With the collapse of Luna and Terra, there has been a shock and a loss of confidence. We need to see that going forward, do people get suckered back into this? Or do governments step in for that matter? Or do governments step in for that matter? And some governments have, right? China has stepped in and banned all crypto, both mining as well as transactions. India for a while toyed with it, right? But then backed off, because there are powerful financial interests which are entrenched in this space. And then backed off, now India is talking about regulating it and taxing it and all that. We will see where it goes. The other aspect I think to think about is there are central banks which are now, like for example, the Chinese central bank has said that they will introduce this digital yuan, right? The Indian central bank has announced that they're looking into creating a central bank reserve currency and many other central banks who are at least looking into that. Now that, there is a really a confusion between that and the crypto space and really they're very separate things. This one is backed by the central bank digital currencies. They're backed by the state, right? They're fully under the state control. And the central bank really acts as the intermediary. So they can then support far more transactions. They're not electricity hog and all of that. And that may very well be the answer to the problem that there is exploding increase in digital transactions. And you probably need new innovations in that space. And the central bank digital currencies probably could fill that space in a more, in a way which is politically more palatable to us. At the same time, it has a central bank. And safer also. Safer also. I mean look, one of the questions I think we should ask is if, like we've discussed so many like drawbacks, right? Now what are they good for? Well, they're good for if you want to do money transaction without being tracked, right? If you want to do, they're great for tax evasion, for money laundering, for funding drugs and illegal weapons and for collecting ransom. It's great, right? So for all the, there are many of these ransomware attacks where the attackers wanted the ransom money paid in Bitcoin or some other cryptocurrency so that it can't be tracked. And so that is a great use for them. And I mean really, that's why my article was, Why Crypto Must Die, it serves no useful purpose. It's been used for illegal activities. It's an electricity hog in times of great climate crisis. It needs to go, right? Thank you so much Vapa, you've given your verdict once again. So that's all your time for today. Keep watching People's Dispatch for more such interviews and news on important issues.