  Exploring the transformation of value in the digital age By Michael J. Casey, Chief Content Officer Feb. 4, 2022 If you were forwarded this newsletter and would like to receive it, sign up here. Supported by 
Surveying regulatory efforts worldwide, it seems like no government – perhaps with the exception of El Salvador – is entirely comfortable with cryptocurrencies. Yes, some have encouraged investment and innovation in certain elements of the technology in a bid to spur growth and capture revenue, but nearly all try to curtail perceived risks such as rampant market speculation and money laundering. Yet, I’ve come to believe that government regulation favoring central bank digital currencies over crypto is, ironically, likely to spur Web 3 innovation and create a more volatile, competitive multi-currency international system in which cryptocurrencies (and bitcoin in particular) will themselves emerge as viable competitors. We explore that today through the lens of India’s latest foray into regulation.
Meanwhile, in this week’s episode of our “Money Reimagined” podcast, my co-host Sheila Warren and I talk to an Ethereum OG who has long since broken off on his own: Gavin Wood, the founder of Parity Technologies and the inventor of Polkadot. We talk about that protocol’s model for interoperability and his vision for Web 3, an idea he has done much to popularize. 
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How India's CBDC Could Spur Web 3  Rachel Sun/CoinDesk When the Indian government this week announced plans to tax cryptocurrency and launch a central bank digital currency, the news drew a mixed response. Some in the Indian crypto community gave it a glass-half-full reading while others reported their drinking vessels as half empty.
The former were relieved Narendra Modi’s government didn’t ban cryptocurrencies, as was previously threatened. The latter were angered they’d now have to shave 30% off each crypto trading profit they make.
Both missed the bigger picture, one that goes beyond India to the wider world. That is, in betting on a digital monetary future, the financial authorities of the world’s second-most populous nation are joining those of other nations to hasten the arrival of a multi-currency international monetary system – whether they want that outcome or not. In that world, cryptocurrencies will inevitably occupy a key place.
There are important messages here for the U.S. government, the steward of the current, mono-currency international monetary system, which, according to a report in Barron’s last week, is viewing the need for new crypto regulations as a “matter of national security.”
How the U.S. approaches this national security issue will be key. With an openness that encourages a global free market model of financial innovation? Or with a defensive posture aimed at protecting the existing centralized system and the dollar’s reserve status? It’s hard to overstate how much rests on that choice.
Taxation vs. legitimacy
First, let’s acknowledge that India’s move imposing taxation on cryptocurrencies and postponing a more detailed regulatory step that could yet include some kind of prohibition, is less than ideal for the domestic crypto industry’s short-term outlook.
Policy 4.0 founder Tanvi Ratna tweeted that “taxation does not imply legality” because even illegal transactions are taxed in India.
Still, there was no real hostility in the statement from Finance Minister Nirmala Sitharaman, who spoke only of “a phenomenal increase in transactions in virtual digital assets,” which “made it imperative to provide for a specific tax regime.”
Regardless, moves to tax an activity are often seen as de facto legitimation of that activity. (It was one reason I took my own glass-half-full reading of last year’s battle over the crypto provision in the U.S. infrastructure bill.) So, on balance, it seems crypto has a moderately clearer pathway to adoption in India. That pathway will be laid, in part, by the other development to emerge from Sitharaman’s announcement: plans for a central bank digital currency (CBDC).
Read the rest of this column here.
Off the Charts Inflation Vs. Deflation  Rising inflation – or more to the point, expectations of the U.S. Federal Reserve’s monetary responses to rising inflation – is the cause of the past month’s ugly performance in global markets, including for crypto assets. For now, the old “don’t fight the Fed” adage seems like the right approach, but can we really assume the next year will see persistently rising interest rates and diminished returns on financial assets?
It’s worth remembering that, especially for crypto assets, which are not bound by geography, the monetary conditions that drive markets are global in nature. It behooves us to look outside the U.S. and the Federal Reserve to consider the long-term direction of prices and policy. Other players such as the People’s Bank of China, the European Central Bank or the Bank of Japan have influence on global monetary conditions that, in turn, shape how the Fed acts. So, here’s a back-of-the-envelope look at how different countries are faring versus their inflation targets to determine what their respective impact on global policy might be.
The chart here is based on OECD data about the Group of 20 countries, with France, Germany and Italy replaced with the 19-country eurozone to which they belong. (I also removed Argentina and Saudi Arabia from the G20 list as neither applies formal inflation-targeting policies.) Let’s call this amended list the G18+ group.
As a proxy for their influence on global monetary conditions, I marked each country’s or zone’s gross domestic product as a percentage of the total group’s GDP. And then, in comparing their 2021 inflation measures with their central banks’ target ranges, I grouped them according to those that are below target (yellow), within target (green) and above target (red).
The first thing to note, of course, is that, yes, we are in an inflationary environment, with the majority of the G18+ experiencing price growth faster than their central banks’ targets. But it’s also striking that three of the biggest economies – China, India and Japan, accounting for 39% of total GDP – continue to run far below target. Even the higher inflation in the countries accounting for 59% of total GDP must be understood in the context of COVID-19. At least some of this inflation is “transitory” inflation, caused by pandemic-driven supply chain disruptions. Those problems will continue to be a drag on the global economy and give policymakers pause before coming in too heavy with their inflation-busting measures.
Across the world, I see the continued potential for competitive policymaking. The Fed’s rate-hiking mission will become increasingly difficult to sustain if, in contrast, China and Japan are intent on maintaining easy monetary policy to combat deflationary pressures. This mismatch can create stark differences in exchange rates, with U.S. exporters likely to carry a higher burden vis-à-vis those of China, Japan or India.
The upshot: The monetary tightening the Fed has signaled might not be so set in stone.
The Conversation ‘A Matter of National Security’  It was just five words, uttered by an unattributed source in a single news outlet’s story, but they sure packed a punch. When Barron’s cited an official from the Biden Administration saying that new regulations would be drawn up that treated crypto as “a matter of national security,” it struck a nerve on Crypto Twitter.
Prominent NFT and Web 3 commentator @Punk6529 advised his followers that they “should always turn your antennas up when the main framework is ‘national security’ – it is usually not great.”
Cryptographer Ian Grigg, also implying something drastic, cited some historical patterns in which the U.S. government had used this phrase when it “wants to take something over.”
Rainey Reitman, a writer with the Electronic Frontier Foundation, noted that “a matter of national security” is “one of the government's favorite justifications for undermining civil liberties.”
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Relevant Reads It's Called 'Wormhole' For a Reason  Another day, another massive exploit of a Layer 2 blockchain protocol. This one was made for wags on Twitter who pointed out that the name “Wormhole” (as the hacked project calls itself), really should have alerted investors.
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