Indian Prime Minister Modi’s demonetisation scheme had the forethought of a gnat. But chaos may have been the plan all along.When you remove 86% of notes in circulation in a country where 90% of all transactions happen in cash, there will be blood. Indians were promised that new 1,000 and 2,000 notes would be given. However, most ATMs cannot handle the new bills, not enough have been produced, and due to an unfamiliarity with the new notes counterfeit bills are common.
Banks pleading for more cash have been rebuffed by the Reserve Bank of India.
“We had sought a hearing with RBI as we were not allocated enough cash, but we were told that rationing of cash may continue for some time,” said a banker who was present at one of several meetings with central bank officials.
“Reserve Bank has asked us to push the use of digital channels to all our customers and ensure that we bring down use of cash in the economy,” said a banker. [Economic Times]
Black INR is all 500 and 1,000 notes previously held under mattresses that cannot be deposited into the banking system without arousing the suspicion of the tax man. To turn their black INR white, many wealthier Indians are pre-paying workers’ wages for months. Rs. 250,000, approximately $3,500, per person can be deposited with no questions asked. Some households give their low paid domestic workers cash to deposit in their personal accounts and let them “keep” 10% to 20%.
Poor Indians who perform the menial tasks that enrich the lives of their betters, are treated worse than dogs. However, now they are sought after as mules for black cash. Understandably, some refuse to help their masters launder money.
The fabled new 1,000 and 2,000 notes may never come. I believe the new notes are just a ruse, come 2017, the large denomination bills will not materialise and eINR will remain. People realise this and that is why gold purchases and prices are soaring. Even Bitcoin is trading at a 10% to 15% premium in India.
The question is how to clean soon to be worthless black INR. Bitcoin mining represents one the most elegant solutions.
Imagine you have $10 million worth of black INR cash. Through Bitcoin mining you can produce money with no history (a coinbase), and sell this newly minted Bitcoin for clean INR or USD.
First you will need to rent a facility. You will attempt to pay as many months of rent upfront as you can in cash. This is a valid business transaction with a proper accounting trail. The landlord will be able to take your cash and properly declare it.
India has plenty of cheap labor for hire. Next your farm will need cooling systems added, and electrical work done. The contractors will accept cash, as this is a valid and taxable business transaction.
Then you must import your mining equipment. Importing computer equipment is nothing new. Again this is a normal business transaction that can be declared and taxed.
Assume that you take a haircut of 50% on the cash because you will overpay for all equipment and services. Sellers of goods and services know that those paying in cash have to spend it. It’s worthless in under a month. They will mark up prices aggressively.
India has cheap industrial power. Bitcoin mining is profitable for Chinese miners. One large miner told me his marginal cost of production is 2,900 CNY. At a current spot price of 5,200 CNY, that equates to almost 80% gross margins.
Let’s assume your operation has a profit margin of 20%, and you are 5% of the global hashrate. 1,800 coins are rewarded per day. You mine 5% of those. That equals 90 coins per day. At a spot price of $740, your total daily revenue is $66,600; your profit is 20% of that, $13,320. It takes 375 days to recoup the $5 million fixed asset investment. For any miners reading this, I know I am oversimplifying the process and probability of successfully mining a block.
80% of each block reward you earn will go towards paying rent, electricity, and wages in INR. You can sell Bitcoin domestically to realise INR. The remaining 20% you sell abroad for USD in a foreign bank account.
You have turned your $10 million of black INR that will be worthless in under 30 days into clean USD outside of India.
In the extreme, some miners may operate at a marginal loss. If they can pre-pay their expected utility bills with black INR today, they can build massive farms and not care if they “lose” money on every coin produced. The “loss” is an acceptable haircut for them to turn black into white INR.
Gresham’s law will stand in India regardless of how hard Modi tries to defeat it. Bad money will be spent through various schemes. And good money such as gold, USD, and now Bitcoin will be hoarded.