OPINION

From jugaad to rise of cryptocurrencies

CHINA-FINANCE/DIGITAL-ICO

It was mid-November, evening was chaotic and loathed as business and financial world were paralyzed in the wake of scraping of Rs 500 and Rs 1000 notes - almost 86 per cent of cash in circulation. There was widespread chaos in the first few days after demonetisation. Long queues in front of banks, skepticism about household savings and fear of taxmen, grappled the general sentiment. Trade, business and commerce were completely jolted. However in the midst of all the trauma and chaos, Indian jugaad, turned super active.

Bullion sector was the first to make the smart move. Some shrews bullion traders sold gold at a premium of 50-100 per cent against the acceptance of scrapped note. This opened an easy way for the unaccounted money to enter the formal system amidst all the confusion. Even though many of such transactions invited scrutiny, the details about volume of transactions are not yet unravelled.

Soon after the bullion jugaad, agricultural market players went on a biggest ever monitory arbitrage. The trick was too simple. Those who wanted to dispose old notes will have to contact a middle man or commission agent in a mandi. They will sell you agricultural commodities like soybean, castor, cotton, wheat, cumin and numerous such commodities at a mutually agreed premium (normally 15-25 per cent of prevailing market rate) and would later on help you liquidate these commodities through formal payment options like cheque or with newly issued legal tender of Rs 2000 or Rs 500.

Then there was some super smart and super risk-takers. It was towards late November, a person whose name I cannot recollect called and made a strange offer. He aggressively marketed Bitcoins, a cryptocurrency which is now the talk of the town. He was selling bitcoin at Rs 45000 per unit and was ready to accept check or cash. He extended me an irresistible offer to exchange the banned notes. I had refused his offer as I don't believe in vague or potentially illegal activity. However, several risk taking punters cashed in this new asset class to park their black money and experiment the new investment route. When the deadline of acceptance of old notes was over, the value of Bitcoin rose by 40 per cent in just a month. One year later, bitcoin trades at Rs 4.50 lakh a unit. Some of the cash got parked in real estate and some of it moved elsewhere.

The above said examples highlight how the street-smart, juggad, bypassed the formal system in place and made note ban a futile exercise.

Cash remains king, digital transaction just 5 per cent of total transaction

Despite initial troubles and cash shortage, and the hard push for digital payments, India still remain a cash centric economy. Digital transactions are just 5 per cent of the total transactions. Security concerns, hidden transaction costs like convenience fees and connectivity, and ease issues remain key constraints for people to shift to cashless payments. Banks have become extra cautious on credit card defaults and have cut down credit limits which further curtailed spending abilities. Farmers are still reluctant to accept any non-cash transactions.

Money in circulation is still sizeable. Currency notes in circulation is around 15 lakh crore, almost equivalent to scrapped notes. Public FDs are approximately Rs 10 lakh crore. Total number credit and debit cards issued are about 10 crore. Digital transactions had shown considerable increase just after demonetisation, but the numbers still remain far short of government's ambitious target of 2.5 crore transactions a year.

The bright side - Boom time in mutual funds and IPO market

The huge outflow of cash from parallel economy to formal economy has given an unprecedented boost to the equity markets. Demonetisation and GST has drastically impaired parallel investments in land, bullion and other conventional parking options for black money.

The household savings in the form of cash in lockers were forced to be deposited in the bank as savings account or business account. Some of these capital are now channelised into mutual funds and capital markets, and have resulted in a virtual cycle or a positive feedback loop. Indian equity indices traded at all time high and household wealth have hit a record peak. The soaring household wealth may propel consumption, boost investment and may lead to broad based recovery.

Doctrine of demonetisation- Rise of equity and virtual cash

The demonetisation drive by the government has been observed by the rich and elite in detail. The move is considered to be a wake up call as it illustrated the readiness of government to confiscate private wealth. The move in fact flaunted the brutal power of the state, to take any extreme measures if needed. This prompted the super rich and those who are worried about their wealth to find alternative parking shores that are beyond the reach of the state.

Crypto currencies like bitcoin, feathercoin are based on blockchain technology. A public digital ledger can maintain secrecy and once created cannot be unchanged. Thanks to its unique character, the governments across the globe are watching its growth helplessly. China had issued some controls on initial coin offerings but failed to control the rise of cryptocurrencies. Japan, Korea and many other countries are promoting such virtual currencies as it is the ultimate solace to park their hard earned money. Bitcoin has just crossed $100 billion market cap. Bitcoin prices posted multifold gains, from $10 to $7000 in just 7 years.

Cash hunt and the push towards a cashless economy, which is a broader global phenomena, has enlightened the elites and affluent classes. Nordic countries are experimenting with cashless society. Recently, Maldives issued a smart card which is multi-purpose that can be used as passport, license and credit card among other things. The doctrine of the cash hunt era is that - cash can be eliminated, gold can be confiscated, bonds can be defaulted and equities (and may be cryptocurrencies) are the new safe havens.

(Author is CEO of Paradigm Commodity Advisors, a research boutique which provides strategic consulting and risk management solutions in major markets. The views expressed are his own.)

This browser settings will not support to add bookmarks programmatically. Please press Ctrl+D or change settings to bookmark this page.

Related Reading