The Future of Money: How the Digital Revolution is Transforming Currencies and Finance. Eswar S Prasad. The Belknap Press. 2021. Pages 496. Rs 2,522.

Forgive me for being a conservative, a party-pooper as some would call in the age of fast-money, or an Ebenezer Scrooge like bear in the language of the Wall Street, but why would any sovereign nation, in the age of digital wallets, money, and transfers, allow for a parallel system of payments to exist that is not only without the regulation of any central bank or government, but also a safe haven for illicit transfers, laundering, and financing of questionable activities ranging from frauds to terrorism.

The question is for the bulls in the cryptomarkets, starting with Bitcoin, who come across as the Don Quixote, that are too utopian for their own good.

If questioned about the efficiency of the payment systems in the crypto realm, they have all the right ideas about technology and decentralisation. If questioned about the problem with anonymity, they quote cases, truthfully though, where the likes of FBI were able to nab criminals using Bitcoins, even if it contradicts their point about crypto transfers being completely anonymous.

If questioned about the environmental impact and scaling issues, they say it’ll get better with time, and lastly, when questioned about the volatility in value, they throw the 21-million Bitcoin threshold aspect on you. If nothing else, the melodramatic chest-thumping about the perils of a central bank-backed currency, like the dollar or euro or rupee, is always on display.

Rarely does one come across books that deserve to be reviewed in parts. The Future of Money: How the Digital Revolution is Transforming Currencies and Finance is one such book. While the book digs deep into the basics of finance, fintech innovations, central bank digital currencies, and the resulting consequences for the international monetary system, this analysis, first of a few, will focus on two chapters, that on Bitcoin and cryptocurrencies.

The author, Eswar S Prasad, offers a short but much-needed history of the Bitcoin revolution, starting with the white paper by Satoshi Nakamoto. The author focuses on bitcoin, for even with about seventeen-hundred cryptocurrencies as on May 2021, each with a market cap of a million dollars each, and another five-hundred with a market cap in excess of a $100,000, the former remains the dominant currency and indicator of the crypto markets.

The book posts some important questions regarding the crypto phenomenon. Firstly, around the workings of Bitcoin itself which it describes as almost wizardry. However, it would be incorrect to assume that the book is about bashing Bitcoin bulls, for it gives enough information about the problems related to cryptomarkets and transfers and how they are addressed, especially around data integrity and double-spending.

The book stresses on two key protocols in the crypto world that are critical to its success, that is ‘Proof of Work’ and ‘Proof of Stake’ and how these computational and conceptual innovations solve many problems.

The author then stresses on the usual questions around Bitcoin, and other cryptocurrencies, starting with its unstable value. Every Bitcoin bull bets on the idea of cryptocurrencies scaling to a point where they would be used for micropayments in routine activities. Thus, if you are looking to purchase milk from a local store in the hours of dawn, or pay for a subway ticket, or your afternoon drink, or your evening dinner, you would use Bitcoin (or any other cryptocurrency).

However, the world has seen and known cryptomarkets enough that the value of these currencies is not that stable. For instance, what if the Bitcoin equals a dollar one day, and 50-cents on the following day, and then two dollars the day post that, and within a week, had gone from being equal to 10 cents to 10 dollars. Would the Bitcoin enthusiasts be alright with their currency buying them a slice of pizza on Monday, an entire pizza on Wednesday, and then being so devalued that they can’t even afford to have an empty pizza box on Saturday?

The author backs this concern with some data. On Christmas Day in 2015, Bitcoin was trading around $419. Almost a hundred-weeks later, the value of Bitcoin was around $19,650, a mammoth 47 fold increase in value that wouldn’t even be possible with gold perhaps if the global markets crashed together. A year later, in 2018, the value was around $3,183, and then a year later, around $24,400. The author missed factoring an additional expense for the cardiologist here.

Two, for Bitcoin to be the medium of exchange. Bitcoin bulls claim that crypto is the future but they have little to show for when it comes to transaction costs and transaction validation time. The author makes two important observations here. One, the built-in decline in the block reward reduces miners’ revenue over a period of time, thus reducing the incentive for them to validate new blocks on the blockchain unless there is a separate fee for offering the service. Two, the rise in bitcoin transaction volume, coupled with temporal limits on the number of blocks that can be posted to the blockchain might prevent some transactions from ever being validated and posted, especially the ones with lower transaction fee. There goes the dream about scale and micropayments.

The author also elaborates on the faultlines and unaddressed issues pertaining to hacking and double spending, the myth of anonymity, and the elaborate hardware that has both a monetary and environmental cost attached to it.

Finally, the author asks a million-dollar question (pun intended) as to why the price of Bitcoin is not zero.

In the history of finance, Bitcoin has to be the best PR job, followed by credit default swaps at a distant second position. However, even those swaps could be traced back to mortgages which could be traced back to tangible houses, that is physical infrastructure, but what about Bitcoin or any other cryptocurrency? What is the difference between a cult coming up with their tokens or barter system and bitcoin, one wonders, and the author asks the same question, but in far more polite words, stressing on the cost of keeping this madness going.

It is terribly unfair and unjust to have an extreme position on technology, but when it comes to crypto, one can either be a devotee or the devil’s lawyer. While my scepticism for Bitcoin and the universe of crypto may not be as brutal as that of the author’s, I do believe it resembles the 1992 scam in the Indian stock market. Simply put, it’s Harshad Mehta Pro Max on steroids and countess protein shakes. It’s a cult, one legislation away from being rendered bankrupt and baseless. The bulls are not always right, but this author is.

You may or may not want to buy Bitcoin but do buy this book. For the long-term, relatively, it's a better investment.

Eswar S Prasad

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