By: Mayank Shandilya, SVKM’s Pravin Gandhi College of Law
Nani Palkhivala, in the celebrated Keshavnanda Bharati case, cited an anecdote of momentous historical significance- the Battle of Chausa. The Afghan forces had out maneuvered the Mughal army. Surprised by the sudden attack, the Mughal forces dispersed like a herd of petrified fawns upon the advent of a pack of lions. With the fear of death looming large, Humayun dived into the river Ganges hoping to escape, but was caught in the strong water currents and was on the brink of drowning. By sheer serendipity (for the mughal ruler, that is), a bhishti (tribal who carried water in goatskin satchels for the Mughal troops) happened to be there. He inflated his goatskin satchel and used it as a float to help Humayun cross the river. 
In gratitude, Humayun granted Nizam the throne of Agra for a day. During his diurnal reign, to record his name and date of coronation in the annals of history, Nizam issued currency minted out of, what else, the goat skin of the satchel his tribe carried. Thus proclaiming to the world, a bhisti was the sovereign even if for only a day.
That currency has been an inextricable part of expressing sovereignty is trite knowledge. In fact, a meticulous scrutiny of money which is retrieved by archaeologists can reveal so much about ancient polities that there is an entire field of study dedicated to it- numismatics.
- Conceptual Underpinnings
The conventional wisdom seems to dictate that monetary sovereignty is an integral part, and in some sense subservient to the idea of political sovereignty, that fiscal sovereignty flows out from political sovereignty.
This proposition is however too simplistic and perhaps fallacious. Simplistic because it collates two discrete concepts. Fallacious because a skewed importance is bestowed upon political sovereignty over monetary sovereignty. The two are co-extensive and complementary in the view of the present author, one cannot sustain without the other.
Determining The True Holders of Monetary Sovereignty
Now that we have established that monetary and fiscal sovereignty are not the same, it begs the question, who is the ultimate repository of monetary sovereignty? Is it the-
- National governments with the ruler having the unfettered freedom to exercise full discretion; or
- The people who have merely entrusted the power to take the financial decisions to the government.
- Philosophical Underpinnings
The works of Jean Bodin are the earliest examples of a systematic incorporation of the right to coin money as a royal prerogative. Bodin and his contemporary French philosophers were of the view that the state alone has the power to mint money and stamp a value on it.
This unfettered right of the monarch to exercise control over fiscal matters was impugned by later political philosophers. Most notably, Jesuit Juan de Mariana, who questioned the right of the monarch to arbitrarily reduce the weight of coins, and in essence, depriving the subjects of their very own fortune. Emmerich de Vattel argued that monetary sovereignty entails not only the rights but also corresponding duties for the monarch.
Samuel van Pufendorf opined that the value of a coin should be deprecated only in cases of grave danger, and such a diminution should be commensurate to the danger sought to be tackled. Moreover, the monarch was obliged to reinstate the status quo ante.
Picture this, you find yourself in a fifteenth century kingdom, faced with severe scarcity of necessary resources in the face of a foreign invasion. In lieu of this, the king decreases the amount of say, silver, in the coins. Thus the inherent value of the coins would decrease, thereby causing a pecuniary loss to the masses, including time travellers like yourself. Since the inherent value of the coin has deprecated. Earlier philosophers would tell you that the monarch was entitled to do so. However, the later jurists and political philosophers like Vattel and Pufendorf would have told you that albeit the monarch was entitled to do so, they could not take such a decision merely in accordance to their whims and fancies, only when the danger absolutely necessitated such a decision.
Further, once the danger was parried off (in the foregoing example, the enemy troops defeated) the monarch was obliged to reinstate the amount of silver/metal that had earlier been used. Thus, initially, the unfettered power of the monarch was gradually diluted, subsequently the monarch was enjoined to safeguard the financial interests of the populace. Much like how the Contract theorists had done in the field of political sovereignty by extinguishing the Divine Rights Theory.
- Present Day Constrictions on Fiscal Sovereignty
In a world where globalisation has led to the integration of financial markets and liberalisation has interconnected global supply chains, the present day nation states are faced with much more nuanced issues than merely warding off the attack of a foreign army. The fiscal volatility was amply displayed during the 2008 financial crisis. Such a crisis sends ripples throughout the global economy, thanks to the highly integrated nature of the financial markets. No nation state can claim to be truly isolated from the global economy, and hence the vacillations and fluctuations accruing from it.
More concerning is the hierarchical nature of the financial system. A global crisis would unproportionately exacerbate smaller economies vis-a-vis the larger ones. Albeit the 2008 crisis was different in the sense that the developed nations suffered the greatest tangible loss, the truth is that these countries were able to recuperate due to the presence of robust banking systems which were able to bail out many corporations. By contrast such a disaster would have spelled the end of a developing economy, compelling it to lend from international banking systems. Such loans come with ancillary terms and conditions, directly constricting the financial sovereignty of the nation state.
Legal and economic restrictions arising from multilateral fora like the World Trade Organisation and the like have greatly stifled the scope of financial sovereignty, but they do have elements of accountability, however the most recent menace has been in the form of a new digital money called cryptocurrency. Being completely delocalised and anonymous, there is not a scintilla of any accountability making it a potent threat.
- What is Cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services.  Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. One needs to exchange fiat currency for the cryptocurrency to access the good or service. Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. They are transferred directly through the internet from one computer to another without ANY intermediary.
- Fiat Money v. Representative Money
Fiat money has intrinsic value lower than its face value. Example coins and paper currency. Fiat money derives its value from a government order (i.e. fiat). Ergo, the government declares fiat money to be legal tender, which requires all people and firms within the territorial limits of that country to accept it as a means of payment. Aliter, fiat money is backed by a nation’s government.
Representative money is backed by a physical commodity such as precious metals like gold.
Prior to 1971, the world’s currencies were representative. They were backed by gold. This was on account of the Bretton Woods System under which, every currency was pegged to the US Dollar which was in turn backed by gold. However, after the end of the Bretton Woods system post 1971, all the currencies in the world are fiat currencies.
- Is Cryptocurrency Fiat or Representative Money
Cryptocurrencies aren’t backed by commodities, so they’re not necessarily a form of representative currency. They are, though, backed by the faith of investors and—to some degree—governments, so they may be considered in a very loose sense to be a variant of fiat currency. Which begs the question, why do investors repose their trust in a bunch of virtual token money.
The answer is simple. Trust in cryptocurrency arises from the mathematical and game-theoretic properties of the system. This obviates the need for trustworthiness of individual network participants since the entire system is algorithmic and highly immune to individual’s manipulation.
- Cryptocurrency as a challenge to state sovereignty
Cryptocurrency by its very design debilitates financial sovereignty of a state. It is decentralised i.e. it is stored in the computer systems of the users and can be traded directly using a simple internet connection. This leaves no scope for governmental regulation.
- Enables trans-border crime: Transactions in cryptocurrency are not monitored by any regulatory entity. This renders flagging of any suspicious transactions impossible, furthermore obviating the possibility of freezing the accounts- giving terrorist organisations a free go in funding cross border crimes.
- Encourages anarchy: In the absence of any regulatory authority overlooking the entire system, there is an absence of any credible system of checks and balances.
- Diminishes the authority of official fiat money: Being an unregulated currency. It can also be used to solicit goods and services which have been outlawed.
- Case Studies
Case Study 1. Facebook’s audacious attempt at establishing a new financial system.
The already tumultuous relationship between nation states and non-state actors assumed a new dimension in 2019 when the tech giants- Facebook announced release of a new cryptocurrency named Libra. 
The user can buy Libra using fiat currencies. This fiat money would go into Libra’s reserve, and would be used to keep the Libra stable vis-a-vis the currency basket as a whole, though it might not be stable against individual currencies.
The project would have elephantine ramifications on the global financial markets. Currently, Facebook and its subsidiary services like Instagram and WhatsApp have an estimated of whopping 2.7 billion people users!
If these people were encouraged to adopt Libra as their primary medium of exchange, the user base would equate to a third of the world’s population.
The Libra reserve would be the largest investment fund on earth, eclipsing even the sovereign wealth funds of oil-producing nations. Buying and selling assets to keep Libra’s value stable would move currency and government bond markets.
Due to the added convenience, consumers might start exchanging their fiat currencies for Libra in order to pay for goods and services provided by Facebook and its partners, in essence establishing a new financial system owned by private entities, run according to its own whims and fancies, allowing them a dangerous amount of bargaining power on the government.
If Libra became the world’s transaction currency, and its reserve became the dominant player in financial markets, the Libra Association would have the power to allow or deny people the right to transact – something that is currently a government prerogative limited by democratic safeguards. It could exert that power not only over individuals, but other companies and even governments. The Libra Association could break a company that refuses to use Libra, or punish a recalcitrant government by denying its citizens access to the transaction services enjoyed by a third of the world’s people. This would further complicate the already complicated relationship between the nation states and non-state actors.
- Case Study Two: Advanced Economies Exploring New Avenues
Financial Institutions of advanced economies like the US Federal Reserve, European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) have been actively scrutinizing the potential impact of Central Bank Digital Currencies (hereinafter ‘CBCD’).
In contrast to other decentralised digital currencies, CBCDs are issued and tracked by central banks. They are intended to be coextensive with fiat currencies and merely be the digital form of fiat currencies. Thus, there is an attempt to upgrade the existing payment infrastructure, and infuse the novel element of digital fiat currencies backed by the government. As opposed to virtual currencies like bitcoin which attempt to alter the very fabric of how the concept of money functions.
Case Study Three: The Chinese Contradiction
China accounted for nearly eighty percent of the global bitcoin mining. The Communist Party came down heavily on all such activities and all virtual currencies were outlawed.
Bhit this was counterpoised by a perceptible shift, Beijing, on October 24, 2019, a day now called “China Blockchain Day,” President Xi Jinping announced the rollout of the country’s state-sanctioned cryptocurrency called the Digital Currency and Electronic Payment (DCEP), linked to the yuan on a 1-to-1 basis. 
The contrast was clear. While Libra sought to challenge government authority over legal tender, China’s DCEP reinforces state control, discarding the use for paper currency without discarding the supreme regulatory authority of the central banks.
In late April, China trialled the digital yuan in four cities: Shenzhen, Suzhou, Chengdu and Xiong’an. The trial was adopted into the cities’ monetary systems, with some government employees and public servants receiving salaries in the digital currency and selected food and retail outlets accepting the payment.
This begs the question what led to the radical shift in the Chinese outlook on crypto?
Firstly, Beijing understood the potential of cryptocurrencies in usurping the state’s fiat currencies. Despite understanding the ill effects, the Chinese officials were prudent enough to appreciate how virtual currency could subserve their national interests-
1. reducing transaction costs for business and friction in P2P payment;
2. easier cross-border payments; and
3. potentially bringing millions of unbanked Chinese citizens into the system.
4. a more sanitary payment option in the pandemic, since the transactions are largely contact-less.
Secondly, by developing a sovereign digital currency administered by the People Bank of China (PBOC), a supervisory architecture would be in place to stem capital flight, which China considers high risk despite extensive capital controls currently in place.
More importantly, China has the foresight of setting an ambitious long-term goal: internationalisation of the yuan. If widely implemented, the informed opinion seems to be that a digital yuan would compete with the US dollar-denominated financial order and make attacks on and speculation of the yuan harder.
The possibility of internationalisation of the digital yuan is hardly exaggerated. To accelerate adoption, Beijing could impel the recipient countries taking loans to accept the payment in digital yuan. Furthering the ‘clout’ of the digital currency.
- Case Study Four: Cryptocurrency as a Tool to Evade Economic Embargoes
Cryptocurrencies have unprecedented anonymity, as discussed in this article earlier, unlike the traditional transactions wherein the donors and recipients can be traced; such a possibility is elusive in cases of cryptocurrency. Trying to exploit this loophole, Venezuela launched its own cryptocurrency-the petro, in hopes of circumventing the sanctions imposed by the United States on the country’s oil trade business and secure liquidity for the Maduro regime in the face of exorbitant inflation and a collapsing economy.
The US reaction was stern, Donald Trump’s passed an executive order banning Petro,  dissuading at the very least its bona fide allies from partaking in financial transactions using Petro
However, more belligerent nations can still circumvent the international economic sanctions, hence posing a new problem for the international community to be resolved.
- Case Study Five: The Journey of Cryptocurrency in India.
Around the time when China launched the digital yuan and was making commendable strides in a territory hitherto uncharted; the Reserve Bank of India banned cryptocurrency, citing the potential financial, legal and security-related risks.
It highlighted problems such as losses arising out of hacking, no sources of customer recourse and the general financial volatility surrounding.
The aspersions of the RBI about stability of cryptocurrencies are not unfounded. Cryptocurrencies are notoriously volatile – in December 2017 Bitcoin hit an all-time-high of $19,783 only to lose 84 percent of its value by the same time next year.
However, a blanket ban on the commodity instead of trying to evolve ways to adapt to the evolving scenario seems retrograde.
Fortunately, the Indian Apex Court struck down the Reserve Banks’ decision in Internet and Mobile Association of India v. Reserve Bank of India on the grounds of lacking proof of the “proportional damage” suffered by RBI regulated entities while dealing with businesses operating in cryptocurrencies. 
This year during the Budget Session, the Indian Finance Minister Nirmala Sitharaman said that the government was holding talks with the Reserve Bank of India and will take a very calibrated position on the matter.  No tangible statute has materialised yet.
Centralised digital currencies do pose a formidable challenge to the existing canons of financial sovereignty but they also present nation states with the unique opportunity to evolve and upgrade their payment infrastructures in order to retain and perhaps ameliorate (as in the Chinese example) their fiscal sovereignty.
If the digital fiat money is able to move beyond the current phase of speculation and volatility, and formulate more formidable institutional structures, virtual currencies have the potential to play a pivotal role in buttressing a new financial and economic architecture.
New laws have to tender succour to the new financial institutions. The existing arcane municipal laws are at best, ill-equipped to regulate such radically new technologies, the financial sovereignty of nation states would suffer a serious setback with the onset of crypto currencies like Libra. Technological giants already enjoy great bargaining leverage especially vis-a-vis the developing and underdeveloped nations, the creation of such virtual currencies would further exacerbate the situation. Diluting the legitimacy of fiat money, attempts at substantially altering the fiscal policy of the nation and manipulating the exchange rates of currencies in order to keep the value of commercially owned virtual currency stable. However, the redressal of such contingencies does not lie in enacting blanket bans but enacting comprehensive legislations, as in the case of South Korea and partake in measures ensuring capacity building.
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