Book Review: Smarak Swain's 'Digital Fortunes: A Value Investor’s Guide to the New Economy'

By Meghan Bal

Career taxman Smarak Swain's book, 'Digital Fortunes: A Value Investor’s Guide to the New Economy', offers an excellent examination of the digital economy. Swain uncovers how regulators view value creation and market disruption in the digital age. Packed with examples and analogies, he discusses the story of nearly all the apps on your smartphone, contextualising their place and role in the global market.

The reader remains situated in the Indian context, which is refreshing. Swain traces the disruption of traditional 'pipeline' business models by digital platforms and breaks down the 'new' market fundamentals, such as network effects. As disruptors and traditional businesses compete for efficiency and margins, Swain highlights the implications for gig work, valuation metrics, and accounting practices. Swain's experience in government provides insight into the ideas and concerns that shaped platform regulation in India. He also zooms out to discuss the inevitability of monopolies in network-driven businesses and how these factors interplay with geopolitics.

Addressed to investors, the themes of fundamental value and speculation run throughout the book. After discussing digital platforms, Swain turns to crypto or virtual assets as a category of disruptive digital innovation. He categorises different types of virtual assets based on their underlying authority structures and provides frameworks to help investors understand the market risks. Just as traditional supply chain gatekeepers were disrupted by marketplace platforms, Swain remarks that platforms are the new gatekeepers poised to be disrupted by automated applications on blockchains such as decentralised finance, where financial transactions like loans can be issued out based on pre-programmed rules and conditions termed as ‘smart contracts’. Platforms like Amazon and Flipkart disrupted the traditional supply chains of physical wholesalers and retailers during the 2010s. Government-backed blockchain networks like the Open Network for Digital Commerce (ONDC), aim to wrest control away from these siloed platforms and ‘unbundle’ e-commerce supply chains.

Everything hinges on public trust. Swain notes how crypto's promise of a 'decentralised trustless system' was ironically used by swindlers to gain the trust of innocent people. Intermediaries in crypto markets have themselves become repositories of trust. Crypto evangelists promote their vision of a society where trust is placed in ‘cryptography’ rather than centralised institutions like governments and banks. They however fail to specify that coders and system designers must first be trusted to create fair systems. For instance, FTX – once a leading crypto exchange which crumbled and filed for bankruptcy – had loopholes in its code which allowed its founder to siphon depositors’ funds for his personal expenses. Swain flags that the success of automated applications on blockchains depends on trust in the coders who develop and administer the underlying algorithms.

Swain's discussion on trust dynamics in crypto is accompanied by important regulatory perspectives from India. The book sheds light on why Indian regulators have tried to keep the crypto sector on life support. Developing countries with capital controls cannot afford to encourage unchecked channels of fund movement.

Foreign exchange currently moves in and out of India within specified limits and for specified purposes. Capital movements must be recorded and reported by banks and account holders, and must not be from blacklisted countries. With crypto, however, these checks and limits are easy to circumvent. People could potentially pump money in and create speculative bubbles, or take money out and create panic runs on the domestic financial system. These fears echo within the halls of government and regulatory institutions but may not be entirely justified. The reaction to these fears in the form of high taxes on investors and inaction on the regulatory framework is even harder to justify.

Swain argues that existing anti-money laundering controls and taxes in India have made speculative trading unviable. He suggests that regulation over digital platforms that operate as points of centralisation in the crypto ecosystem may be a way forward. This approach can work only if all countries implement uniform rules for identifying and recording cross-border crypto transfers and coordinate for law enforcement – a far cry at this juncture, as Swain would likely agree. The Financial Action Task Force's (FATF) ‘travel rule’ is one international standard that requires countries mandate crypto exchanges to record the origins and destinations of transactions.

The book looks away from the alarming impact of high crypto taxes in India. KYC-compliant Indian exchanges lost approximately 90 percent of their trading volumes to offshore exchanges due to high taxes. Perhaps there is a need for regulators to incentivise investors to stay within the centralised and 'visible' sections of the crypto ecosystem, rather than the 'invisible', offshore exchanges and peer-to-peer networks.

That said, much is clearly happening behind the scenes, and Swain's book perhaps reveals a small glimpse of this. The Department of Economic Affairs will reportedly release a consultation paper in September-October 2024, seeking to determine the contours of crypto regulation. Swain's book will certainly equip the public to engage in a more informed discussion on the issue in the coming weeks.

The book will remain an excellent guide on India's digital economy. It is a must-read for anyone looking to understand tech innovation, disruption, and the crypto world as it relates to India without getting tangled in technicalities. The insights Swain shares about the regulatory world will remain valuable for policy wonks.

The author is the Director of the Esya Centre, a tech-policy focussed think tank. Views are personal.