Politics of Teleonomies of Blockchain…Thought of the Day 155.0

All of this starts with the dictum, “There are no men at work”.

The notion of blockchain is a decentralized polity. Blockchain is immutable, for once written on to the block, it is practically un-erasable. And most importantly, it is collateralized, in that, even if there is a lack thereof of physical assets, the digital ownership could be traded as a collateral. So, once you have a blockchain, you create a stack that could be database controlled using a Virtual Machine, think of it as some sort of digital twin. So, what exactly are the benefits of this decentralized digital polity? One crucial is getting rid of intermediaries (unless, one considers escrow accounts as an invisible intermediary!, which seldom fulfills the definitional criteria). So, in short, digital twinning helps further social scalability by getting intermediaries o to an invisible mode. Now, when blockchains are juxtaposed with algorithmically run machines (AI is just one branch of it), one gets the benefits of social scalability with analytics, the ever-increasing ocean of raw data hermeneutically sealed into information for utilitarian purposes. The advantages of decentralized polity and social scalability compiles for a true democratic experience in an open-sourced modeling, where netizens (since we still are mired in the controversy of net neutrality) experience participatory democracy.

How would these combine with exigencies of scarce nature or resources? It is here that such hackathons combine the ingenuity of blockchain with AI in a process generally referred to as “mining”. This launch from the nature as we know is Nature 2.0. To repeat, decentralized polity and social scalability creates a self-sustaining ecosystem in a sense of Anti-Fragility (yes, Taleb’s anti-fragile is a feedback into this) with autonomously created machine learning systems that are largely correctional in nature on one hand and improving learning capacities from the environment on the other. These two hands coordinate giving rise to resource manipulation in lending a synthetic definition of materialities taken straight from physics textbooks and scared-to-apprehend materialities as thermodynamic quotients. And this is where AI steams up in a grand globalized alliance of machines embodying agencies always looking for cognitive enhancements to fulfill teleonomic life derived from the above stated thermodynamic quotient of randomness and disorder into gratifying sensibilities of self-sustenance. Synthetic biologists (of the Craig Venter and CRISPR-like lines) call this genetic programming, whereas singularitarians term it as evolution, a break away from simulated evolution that defined initial days of AI. The synthetic life is capable of decision making, the more it is subjected to the whims and fancies of surrounding environment via the process of machine learning leading to autonomous materialities with cognitive capabilities. These are parthenogenetic machines with unencumbered networking capacities. Such is the advent of self-ownership, and taking it to mean to nature as we have hitherto known is a cathectic fallacy in ethics. Taking to mean it differently in a sense of establishing a symbiotic relationship between biology and machines to yield bio machines with characteristics of biomachinations, replication (reproduction, CC and CV to be thrown open for editing via genetic programming) and self-actualization is what blockchain in composite with AI and Synthetic Biology is Nature 2.0.

Yes, there are downsides to traditional mannerisms of thought, man playing god with nature and so on and so on…these are ethical constraints and thus political in undertones, but with conservative theoretics and thus unable to come to terms with the politics of resource abundance that the machinic promulgates…

Cryptocurrency and Efficient Market Hypothesis. Drunken Risibility.

According to the traditional definition, a currency has three main properties: (i) it serves as a medium of exchange, (ii) it is used as a unit of account and (iii) it allows to store value. Along economic history, monies were related to political power. In the beginning, coins were minted in precious metals. Therefore, the value of a coin was intrinsically determined by the value of the metal itself. Later, money was printed in paper bank notes, but its value was linked somewhat to a quantity in gold, guarded in the vault of a central bank. Nation states have been using their political power to regulate the use of currencies and impose one currency (usually the one issued by the same nation state) as legal tender for obligations within their territory. In the twentieth century, a major change took place: abandoning gold standard. The detachment of the currencies (specially the US dollar) from the gold standard meant a recognition that the value of a currency (specially in a world of fractional banking) was not related to its content or representation in gold, but to a broader concept as the confidence in the economy in which such currency is based. In this moment, the value of a currency reflects the best judgment about the monetary policy and the “health” of its economy.

In recent years, a new type of currency, a synthetic one, emerged. We name this new type as “synthetic” because it is not the decision of a nation state, nor represents any underlying asset or tangible wealth source. It appears as a new tradable asset resulting from a private agreement and facilitated by the anonymity of internet. Among this synthetic currencies, Bitcoin (BTC) emerges as the most important one, with a market capitalization of a few hundred million short of $80 billions.

Bitcoin Price Chart from Bitstamp

There are other cryptocurrencies, based on blockchain technology, such as Litecoin (LTC), Ethereum (ETH), Ripple (XRP). The website https://coinmarketcap.com/currencies/ counts up to 641 of such monies. However, as we can observe in the figure below, Bitcoin represents 89% of the capitalization of the market of all cryptocurrencies.

Cryptocurrencies. Share of market capitalization of each currency.

One open question today is if Bitcoin is in fact a, or may be considered as a, currency. Until now, we cannot observe that Bitcoin fulfills the main properties of a standard currency. It is barely (though increasingly so!) accepted as a medium of exchange (e.g. to buy some products online), it is not used as unit of account (there are no financial statements valued in Bitcoins), and we can hardly believe that, given the great swings in price, anyone can consider Bitcoin as a suitable option to store value. Given these characteristics, Bitcoin could fit as an ideal asset for speculative purposes. There is no underlying asset to relate its value to and there is an open platform to operate round the clock.

Bitcoin returns, sampled every 5 hours.

Speculation has a long history and it seems inherent to capitalism. One common feature of speculative assets in history has been the difficulty in valuation. Tulipmania, the South Sea bubble, and more others, reflect on one side human greedy behavior, and on the other side, the difficulty to set an objective value to an asset. All speculative behaviors were reflected in a super-exponential growth of the time series.

Cryptocurrencies can be seen as the libertarian response to central bank failure to manage financial crises, as the one occurred in 2008. Also cryptocurrencies can bypass national restrictions to international transfers, probably at a cheaper cost. Bitcoin was created by a person or group of persons under the pseudonym Satoshi Nakamoto. The discussion of Bitcoin has several perspectives. The computer science perspective deals with the strengths and weaknesses of blockchain technology. In fact, according to R. Ali et. al., the introduction of a “distributed ledger” is the key innovation. Traditional means of payments (e.g. a credit card), rely on a central clearing house that validate operations, acting as “middleman” between buyer and seller. On contrary, the payment validation system of Bitcoin is decentralized. There is a growing army of miners, who put their computer power at disposal of the network, validating transactions by gathering together blocks, adding them to the ledger and forming a ’block chain’. This work is remunerated by giving the miners Bitcoins, what makes (until now) the validating costs cheaper than in a centralized system. The validation is made by solving some kind of algorithm. With the time solving the algorithm becomes harder, since the whole ledger must be validated. Consequently it takes more time to solve it. Contrary to traditional currencies, the total number of Bitcoins to be issued is beforehand fixed: 21 million. In fact, the issuance rate of Bitcoins is expected to diminish over time. According to Laursen and Kyed, validating the public ledger was initially rewarded with 50 Bitcoins, but the protocol foresaw halving this quantity every four years. At the current pace, the maximum number of Bitcoins will be reached in 2140. Taking into account the decentralized character, Bitcoin transactions seem secure. All transactions are recorded in several computer servers around the world. In order to commit fraud, a person should change and validate (simultaneously) several ledgers, which is almost impossible. Additional, ledgers are public, with encrypted identities of parties, making transactions “pseudonymous, not anonymous”. The legal perspective of Bitcoin is fuzzy. Bitcoin is not issued, nor endorsed by a nation state. It is not an illegal substance. As such, its transaction is not regulated.

In particular, given the nonexistence of saving accounts in Bitcoin, and consequently the absense of a Bitcoin interest rate, precludes the idea of studying the price behavior in relation with cash flows generated by Bitcoins. As a consequence, the underlying dynamics of the price signal, finds the Efficient Market Hypothesis as a theoretical framework. The Efficient Market Hypothesis (EMH) is the cornerstone of financial economics. One of the seminal works on the stochastic dynamics of speculative prices is due to L Bachelier, who in his doctoral thesis developed the first mathematical model concerning the behavior of stock prices. The systematic study of informational efficiency begun in the 1960s, when financial economics was born as a new area within economics. The classical definition due to Eugene Fama (Foundations of Finance_ Portfolio Decisions and Securities Prices 1976-06) says that a market is informationally efficient if it “fully reflects all available information”. Therefore, the key element in assessing efficiency is to determine the appropriate set of information that impels prices. Following Efficient Capital Markets, informational efficiency can be divided into three categories: (i) weak efficiency, if prices reflect the information contained in the past series of prices, (ii) semi-strong efficiency, if prices reflect all public information and (iii) strong efficiency, if prices reflect all public and private information. As a corollary of the EMH, one cannot accept the presence of long memory in financial time series, since its existence would allow a riskless profitable trading strategy. If markets are informationally efficient, arbitrage prevent the possibility of such strategies. If we consider the financial market as a dynamical structure, short term memory can exist (to some extent) without contradicting the EMH. In fact, the presence of some mispriced assets is the necessary stimulus for individuals to trade and reach an (almost) arbitrage free situation. However, the presence of long range memory is at odds with the EMH, because it would allow stable trading rules to beat the market.

The presence of long range dependence in financial time series generates a vivid debate. Whereas the presence of short term memory can stimulate investors to exploit small extra returns, making them disappear, long range correlations poses a challenge to the established financial model. As recognized by Ciaian et. al., Bitcoin price is not driven by macro-financial indicators. Consequently a detailed analysis of the underlying dynamics (Hurst exponent) becomes important to understand its emerging behavior. There are several methods (both parametric and non parametric) to calculate the Hurst exponent, which become a mandatory framework to tackle BTC trading.

Data Governance, FinTech, #Blockchain and Audits (Upcoming Bangalore Talk)

This is skeletal and I am febrile, and absolutely nowhere near being punctilious. The idea is to note if this economic/financial revolution, (could it even be called that?) could politically be an overtone window? So, let this be otiose and information disseminating, for a paper is on its way forcing down greater attention to detail and vastly different from here. 

Data Governance and Audit Trail

Data Governance specifies the framework for decision rights and accountabilities encouraging desirable behavior in data usage

Main aim of Data Governance is to ensure that data asset are overseen in a cohesive and consistent enterprise-wide manner

Why is there a need for Data governance? 

Evolving regulatory mechanisms and requirements

Could integrity of data be trusted?

Centralized versus decentralized documentation as regards use, hermeneutics and meaning of data

Multiplicity of data silos with exponentially rising data

Architecture

Information Owner: approving power towards internal + external data transfers + business plans prioritizing data integrity and data governance

Data steward: create/maintain/define data access, data mapping and data aggregation rules

Application steward: maintain application inventory, validating testing of outbound data and assist master data management

Analytics steward: maintain a solutions inventory, reduce redundant solutions, define rules for use of standard definitions and report documentation guidelines, and define data release processes and guidelines

What could an audit be?

It starts as a comprehensive and effective program encompassing people, processes, policies, controls, and technology. Additionally, it involves educating key stakeholders about the benefits and risks associated with poor data quality, integrity and security.

What should be audit invested with?

Apart from IT knowledge and operational aspects of the organization, PR skills, dealing with data-related risks and managing a push-back or a cultural drift handling skills are sine qua non. As we continue to operate in one of the toughest and most uneven economic climates in modern times, the relevance of the role of auditors in the financial markets is more important than ever before. While the profession has long recognized the impact of data analysis on enhancing the quality and relevance of the audit, mainstream use of this technique has been hampered due to a lack of efficient technology solutions, problems with data capture and concerns about privacy. However, recent technology advancements in big data and analytics are providing an opportunity to rethink the way in which an audit is executed. The transformed audit will expand beyond sample-based testing to include analysis of entire populations of audit-relevant data (transaction activity and master data from key business processes), using intelligent analytics to deliver a higher quality of audit evidence and more relevant business insights. Big data and analytics are enabling auditors to better identify financial reporting, fraud and operational business risks and tailor their approach to deliver a more relevant audit. While we are making significant progress and are beginning to see the benefits of big data and analytics in the audit, this is only part of a journey. What we really want is to have intelligent audit appliances that reside within companies’ data centers and stream the results of our proprietary analytics to audit teams. But the technology to accomplish this vision is still in its infancy and, in the interim, what is transpiring is delivering audit analytics by processing large client data sets within a set and systemic environment, integrating analytics into audit approach and getting companies comfortable with the future of audit. The transition to this future won’t happen overnight. It’s a massive leap to go from traditional audit approaches to one that fully integrates big data and analytics in a seamless manner.

Three key areas the audit committee and finance leadership should be thinking about now when it comes to big data and analytics:

External audit: develop a better understanding of how analytics is being used in the audit today. Since data capture is a key barrier, determine the scope of data currently being captured, and the steps being taken by the company’s IT function and its auditor to streamline data capture.

Compliance and risk management: understand how internal audit and compliance functions are using big data and analytics today, and management’s future plans. These techniques can have a significant impact on identifying key risks and automating the monitoring processes.

Competency development: the success of any investments in big data and analytics will be determined by the human element. Focus should not be limited to developing technical competencies, but should extend to creating the analytical mindset within the finance, risk and compliance functions to consume the analytics produced effectively.

What is the India Stack?

A paperless and cashless delivery system; a paradigm that is intended to handle massive data inflows enabling entrepreneurs, citizens and government to interact with each other transparently; an open system to verify businesses, people and services.

This is an open API policy that was conceived in 2012 to build upon Aadhaar. The word open in the policy signifies that other application could access data. It is here that the affair starts getting a bit murky, as India Stack gives the data to the concerned individual and lets him/her decide who the data can be shared with.

So, is this a Fintech? Fintech is usually applies to the segment of technology startup scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset management. And what is the guarantee that Fintech would help prevent fraud that traditional banking couldn’t? No technology can completely eradicate fraud and human deceit, but I believe technology can make operations more transparent and systems more accountable. To illustrate this point, let’s look back at the mortgage crisis of 2008.

Traditional banks make loans the old fashioned way: they take money from people at certain rates (savings deposits) and lend it out the community at a higher rate. The margin constitutes the bank’s profit. As the bank’s assets grow, so do their loans, enabling them to grow organically.

Large investment banks bundle assets into securities that they can sell on open markets all over the world. Investors trust these securities because they are rated by third party agencies such as Moody’s and Standard & Poor’s. Buyers include pension funds, hedge funds, and many other retail investment instruments.

The ratings agencies are paid by investment banks to rate them. Unfortunately, they determine these ratings not so much by the merits of the securities themselves, but according to the stipulations of the banks. If a rating fails to meet the investment banks’ expectations, they can take their business to another rating agency. If a security does not perform as per the rating, the agency has no liability! How insane is that?

Most surprisingly, investment banks can hedge against the performance of these securities (perhaps because they know that the rating is total BS?) through a complex process that I will not get into here.

Investment banks and giant insurance firms such as AIG were the major dominoes that nearly caused the whole financial system to topple in 2008. Today we face an entirely different lending industry, thanks to FinTech. What is FinTech? FinTech refers to a financial services company (not a technology company) that uses superior technology to bring newer and better financial products to consumers. Many of today’s FinTech companies call themselves technology companies or big data companies, but I respectfully disagree. To an outsider, a company is defined by its balance sheet and a FinTech company’s balance sheet will tell you that it makes money from the fees, interest, and service charges on their assets—not by selling or licensing technology. FinTech is good news not only for the investors, borrowers and banks collectively, but also for the financial services industry as a whole because it ensures greater transparency and accountability while removing risk from the entire system. In the past four to five years a number of FinTech companies have gained notoriety for their impact on the industry. I firmly believe that this trend has just begun. FinTech companies are ushering in new digital business models such as auto-decisioning. These models are sweeping through thousands of usual and not-so-usual data sources for KYC and Credit Scoring.

But already a new market of innovative financial products has entered into mainstream finance. As their market share grows these FinTech companies will gradually “de-risk” the system by mitigating the impact of large, traditional, single points of failure. And how will the future look? A small business might take its next business loan from Lending Club, OnDeck, Kabbage, or DealStruck, instead of a traditional bank. Rather than raising funds from a venture capital firm or other traditional investor, small businesses can now look to Kickstarter or CircleUp. Sales transactions can be processed with fewer headaches by Square or Stripe. You can invest your money at Betterment or Wealthfront and not have to pay advisors who have questionable track records outperforming the market. You can even replace money with bitcoin using Coinbase, Circle, or another digital-currency option. These are the by-products of the FinTech revolution. We are surrounded by a growing ecosystem of highly efficient FinTech companies that deliver next-generation financial products in a simple, hassle-free manner. Admittedly, today’s emerging FinTech companies have not had to work through a credit cycle or contend with rising interest rates. But those FinTech companies that have technology in their DNA will learn to ‘pivot’ when the time comes and figure it all out. We have just seen the tip of this iceberg. Technically speaking, the FinTech companies aren’t bringing anything revolutionary to the table. Mostly it feels like ‘an efficiency gain’ play and a case of capitalizing on the regulatory arbitrage that non-banks enjoy. Some call themselves big data companies—but any major bank can look into its data center and make the same claim. Some say that they use 1,000 data points. Banks are doing that too, albeit manually and behind closed walls, just as they have done for centuries. FinTechs simplify financial processes, reduce administrative drag, and deliver better customer service. They bring new technology to an old and complacent industry. Is there anything on the horizon that can truly revolutionize how this industry works? Answering this question brings us back to 2008 as we try to understand what really happened. What if there was a system that did not rely on Moody’s and S&P to rate the bonds, corporations, and securities. What if technology could provide this information in an accurate and transparent manner. What if Bitcoin principles were adopted widely in this industry? What if the underlying database protocol, Blockchain, could be used to track all financial transactions all over the globe to tell you the ‘real’ rating of a security.

Blockchain can be defined as a peer-to-peer operated public digital ledger that records all transactions executed for a particular asset (…) “The Blockchain maintains this record across a network of computers, and anyone on the network can access the ledger. Blockchain is ‘decentralised’ meaning people on the network maintain the ledger, requiring no central or third party intermediary involvement.” “Users known as ‘miners’ use specialised software to look for these time stamped ‘blocks’, verify their accuracy using a special algorithm, and add the block to the chain. The chain maintains chronological order for all blocks added because of these time-stamps.” The digitalisation of financial service opens room for new opportunity such as to propose new kind of consumer’s experience as well as the use of new technologies and improve business data analysis. The ACPR, the French banking and insurance regulatory authority, has  classified the opportunities and risks linked to the Fintech such as the new services for uses, better resilience versus the difficulty to establish effective supervision, the risks of regulation dumping and regarding clients interest protection such as data misuse and security. The French Central Bank is currently studying blockchain in cooperation with two start-ups, the “Labo Blockchain” and “Blockchain France”. In that context, blockchain is a true financial service disruption, according to Piper Alderman “Blockchain can perform the intermediating function in a cheaper and more secure way, and disrupt the role of Banks.”

Hence, leading bank wants to seize that financial service opportunity. They are currently working on blockchain project with financial innovation firm, R3 CEV. The objective is that the project delivers a “more efficient and cost-effective international settlement network and possibly eliminate the need to rely on central bank”. R3 CEV has announced that 40 peer banks, including HSBC, Citigroup, and BNP Paribas, started an initiative to test new kind of transaction through blockchain. This consortium is the most important ever organized to test this new technology.

And what of security? According to the experts “the design of the blockchain means there is the possibility of malware being injected and permanently hosted with no methods currently available to wipe this data. This could affect ‘cyber hygiene’ as well as the sharing of child sexual abuse images where the blockchain could become a safe haven for hosting such data.” Further, according to the research, “it could also enable crime scenarios in the future such as the deployment of modular malware, a reshaping of the distribution of zero-day attacks, as well as the creation of illegal underground marketplaces dealing in private keys which would allow access to this data.” The issue of cyber-security for financial institutions is very strategic. Firstly, as these institutions rely on customer confidence they are particularly vulnerable to data loss and fraud. Secondly, banks represent a key sector for national security. Thirdly they are exposed to credit crisis given their role to finance economy. Lastly, data protection is a key challenge given financial security legal requirements.

As regard cyber security risks, on of the core legal challenge will be the accountability issue. As Blockchain is grounded on anonymity the question is who would be accountable for the actions pursued? Should it be the users, the Blockchain owner, or software engineer? Regulation will address the issue of blockchain governance. According to Hubert de Vauplane, “the more the Blockchain is open and public, less the Blockchain is governed”, “while in a private Blockchain, the governance is managed by the institution” as regard “access conditions, working, security and legal approval of transactions”. Where as in the public Blockchain, there is no other rules that Blockchain, or in other words “Code is Law” to quote US legal expert Lawrence Lessing. First issue: who is the block chain user? Two situations must be addressed depending if the Blockchain is private or public. Unlike public blockchain, the private blockchain – even though grounded in a public source code – is protected by intellectual property rights in favour of the organism that manages it, but still exposed to cyber security risks. Moreover, a new contractual documentation provided by financial institutions and disclosure duty could be necessary when consumers may simply not understand the information on how their data may be used through this new technology.

‘Disruption’ has turned into a Silicon Valley cliché, something not only welcomed, but often listed as a primary goal. But disruption in the private sector can have remarkably different effects than in the political system. While capital forces may allow for relatively rapid adaptation in the market, complex political institutions can be slower to react. Moreover, while disruption in an economic market can involve the loss of some jobs and the creation of others, disruption in politics can result in political instability, armed conflict, increased refugee flows and humanitarian crises. It nevertheless is the path undertaken….

India’s Cashlessness Drive or A Rudderless Cacophony

Is there a plus out of going less-cash dependent rather than  going cashless? Yes, on the negative interest rates issue, these appear to be better than Quantitative Easing to turbocharge an economy from a recession, BUT only in cases of advanced economies and definitely not in the case of an economy that is purportedly to be the fasting growing emerging one according to the whims, fancies and vagaries of WB/IMF statistics. Why is the case?

Presently, the interest rates are zero bound (though India is largely outside the bracket meaning all the more vociferously that this sudden sweep has been misplaced at the very top trickling down to the bottom in treacherous wringing. but imagine for a moment that India too faces this movement of rates towards the ignominious ‘0’), i.e. cannot fall below zero. And then there’s the sacred rule of

Real term interest rate = Nominal Interest Rate – Rate of Inflation

In 2008, with advanced economies like US having less rate of inflation the room to cut interest rates was pretty much restricted considering the US Fed had set a target rate of inflation as 2%. With a less-cash society the Central Bankers can set interest rates to negative which basically means that you need to pay the bank to hold your deposit. Now keep in mind that the debate is still out over whether the three tranches of QE actually did good.

The author (KR) acknowledges that negative interest rates might give rise to strange situations like for example in case of a bond holder – the borrower needs to pay the lender. Legal and administrative issues can arise but they can be handled as the payments due can be deducted from the principal in this case.

There’s one interesting alternative to negative interest rates shared in the book from the academic economic circles – the two currency system.

It calls for identifying as paper currency and currency in electronic form in banking system as two different. And it calls for an exchange rate when a person goes to the bank to deposit his paper currency which will ultimately be recorded in the banking system as an electronic form. This will give rise to three monetary instruments which the Central Bankers can then play with –

1. Interest rates on electronic currency
2. Exchange rate b/w Electronic and Paper Currency
3. Forward (future) exchange rate

As these days the chatter increases about digital or crypto-currencies, Rogoff is of the view that these innovations are admirable but these currencies are at a major disadvantage as the govt. has tremendous power at its disposal to impose its will over them. But eventually, the technology like public ledger will be adopted, and that would eventually be taking off from #Blockchain.

Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.

BUT SETTING AND IMPLEMENTATION IS VASTLY DIFFERENT

On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States. Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.

MY PLAN IS EXPLICITLY TAILORED TO ADVANCED ECONOMIES

The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.

THE GOAL IS A LESS-CASH SOCIETY NOT A CASHLESS ONE

In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

The long quote is by none other than Rogoff himself on the viability of the Indian drive.

Shock therapy: Escaping the Karl Polanyi matrix: The impact of fictitious commodities: money, land, and labor on consumer welfare

Things have kept me on the hook for a while, ranging from complexity of economics and finance to math to physics and obviously philosophical heres and theres. But, seriously getting back on to the bitcoin, blockchain and its political consequences have been in the lurch for a while now and would still remain there for some time to come. Yes, I have been on the lookout for such a nexus and who better than Nick Land to get me there, but his books on the Kindle are still pending to be read. But, time would have its way on these for sure. In the meanwhile, I am sharing a paper that was a talk of the group I belong to some while back in my professional capacity, and which has pummeled me to once again discover economies of the right-wing finding adequate subscription and where those on the other side of the spectrum, the left find it efficiently adequate to ignore as usual, thus slipping and sliding away into the economies of the scalar as against any directed-ness to taking the same headlong.

When economists address the issue of the production of goods they begin with the concept of ‘factors of production’: these can be thought of as akin to resources, but fundamental productive resources that are necessary to make anything that can later be sold in a market. This is important because, as Karl Polanyi pointed out, labour is not labour until there is a labour-market. Before this momentous transformation people are people or citizens or even workers, but not labour.

Land also undergoes a transformation when it becomes available for sale in a market, although it does not undergo a change of name. What an economist means by land, however, is not what the layman means by land. As a factor production land includes everything that can usefully be extracted from land (including from deep beneath it) to become part of a productive process. Thus ‘the economic notion of resources is strictly anthropocentric. That is, the economic value of any resource is defined by human needs and nothing else’. There is no space in this definition for land to have a spiritual or relational importance, what economists would call an ‘intrinsic value’, as it does for many indigenous people, who see the land as their mother.

Polanyi referred to land and labour as ‘fictitious commodities’. Real commodities are ‘objects produced for sale on the market’. Land, by contrast, ‘is only another name for nature, which is not produced by man’ while labour ‘is only another name for a human activity’. To refer to these basic economic elements as equivalent to goods that were produced specifically to be sold he considered to be a fiction.

Commodity land, money, and labor remain a largely unseen matrix as they have been part of the market economy since “The Great Transformation” from a feudal to market society. Market competition raises the price of land and money through increased demand for fixed assets, rather than lowering it through increasing supply as in the case of microchips or other competitive product. Commodity labor in flexible labor markets normally results in wages being driven down due to the oversupply of labor. Labor is also subject to periodic unemployment and loss of income during recessions resulting from booms and busts in commodity land and financial products. Therefore commodifying land, money, and labor reduces consumer surplus, and lowers economic welfare…..

The rest is the paper, which should at least be attempted @reading.

Escaping the Polanyi matrix: the impact of fictitious commodities: money, land, and labor on consumer welfare by Gary Flomenhoft

Demonetising and Cashless Economy: a difficult alliance rooted in compromise

This is a brief intervention on the aspect of Demonetisation and India likely to go a cashless economy. Though, a lot of oral debates and narratives are being featured around the topic, what saddens is the fact that cashless economy is hardly understood and then used as a tool to pare this whole exercise. The disclaimer from me is to be once again stamped: Demonetisation undertaken is a huge implementation failure, whereas the mechanism itself has pros weighed in favour. Anyways, the pros have been discussed elsewhere and in plenty and thus I feel no need to get to it at the moment, while a post on it could be in the making in the near future. On to cashless economising then….

The thing with cashless economy is it is rarely understood in its complexity. And what really goes missing from discursive narratives about it are what governments do about the loss of seigniorage: the profit the government makes from making money. To a large extent it is thought through as letting gone of, which is what governments would rarely engage in due to fiat currencies. Minting coins and printing money is an expensive affair and is further aggravated with circulation costs. These things are to be carefully thought out:

1. Getting rid of fiat currencies and thereafter bringing on cashless economising means governments ridding themselves of fiscal policy responsibilities and rippling through central bank that would be ridden off setting of monetary policy frameworks. This is extricating the government of its sovereign rights and it is a bit hard to believe minimum government maximum governance would be a realisation of it. Thus going cashless is expensive and hence best avoided.

2. Going cashless is beneficial as a chimerical thought process from tech and now fin-tech companies. Well, chimerical is a strong word here and thus needs moderation. What such industries conceive of, and google wallet is a prime example of it is economising through taking paper (and mint) out of circulation by minimising it evolutionarily. They think success comes through transaction costs and network permeability, which is indeed a revolutionary thought in itself as both networking and permeability are the pillars of such companies. Moving aside from such mundane as-a-matter-of-fact propositions, cashless transactions are built upon security systems enacted through multi-layered secured biometrics (strangely, these are effective as escrow) enabling remote logins and logoffs when threatened securely. They have their logic and it works like a charm, and the best example I can cite here is Blockchain technology, the template behind bitcoins or even diversified into humanistic sciences. Such escrows are secure and breaching them is difficult or impossible precisely due to labour that goes into it and the prospects of technological archiving that is humanly impossible to achieve as it would disturb the entire foundation of going cashless and no one really has the resources to go behind it.

India is a cash-strapped economy and keeping it that way is an expensive affair. Going cashless would in fact mean reducing paper + mint in circulation, which is done or at least imagined to be brought in via demonetisation. Value of volume in circulation remains the same, while the carrying capacity or carriers in the form of paper + metal (mint) is reduced. This would retain the status of fiat currencies and still have governments + central banks decide fiscal + monetary policies respectively.

Would this be achieved through demonetisation in our case is debatable as what is seemingly the case at present is the process has stimulated calling upon orgs like Paytm circumventing a sudden cash shrinkage in the economy. But, with payment banks no more remaining a distant reality, a tie up between such could spell a further cash crunch to be effectuated. That’d be getting us closer still to the ultimate Platonic idea of cashless-ness, which still needs to have its Aristotelian content (Sorry guys, philosophy still is my dying language). Add to that the spice of Aadhar and we would inch closer to cashless-ness, but never into pure digital economy. This is my bold claim and I’d only defend it vehemently.