The state of cryptocurrency regulation in India
With over a billion inhabitants, many unbanked, and high computer literacy crypto should be booming in India, but isn't. So what is the status of cryptocurrency regulation in India?
The Supreme Court of India has given the Indian government a four-week deadline for an official stance on crypto and a clearer regulatory framework. However, without further details or a clear timeline for results, commentators seem to believe that the court's ultimatum is likely to fall short of achieving any concrete goals. Moreover, given the government's track record on such agreements around cryptocurrencies, it's very unlikely that four weeks would be enough. No official response from the government was given so far.
Cryptocurrencies took their time to spawn a full-fledged market and community in India. They weren’t even a talking point in the country until late 2013, when bitcoin experienced its first bull run.
One of the major reasons for this is because at the time there was a lot of misrepresentation of bitcoin in the media. At that point, the first-ever cryptocurrency in the world - bitcoin - was basically synonymous with crime, as portrayed by the dark web’s infamous market, the Silk Road, while the economic backdrop behind the first digitally native currency was sadly overlooked.
Even if there were a few who believed that cryptocurrencies and blockchain technology were the break the country had been waiting for, at that time, most people in India believed that bitcoin was nothing but a bubble waiting to burst under the pressure of speculation.
Because of the lack of consensus, the government and its regulatory bodies put out disjointed warnings and announcements that sent out mixed signals to the population. At one point, after the cryptocurrency market picked up in the country, almost all banks were lending support for Rupee-Crypto and Crypto-Rupee pairs on almost all exchanges functioning in the country.
The cryptocurrency market then started booming in the country, and it was estimated that over Rs 500 crore (five billion Rupees) were added into the market per year, with almost 50,000 bitcoin wallets and over 800 bitcoin being traded on a daily basis. In 2017, the Bitcoin fever peaked with over 2,500 users trading Bitcoin daily and the trading volume rising close to $20 billion in that year.
The only problem was that this fledgling financial market was effectively unregulated, as the government had no official stance on the matter of cryptocurrencies.
That is, until the Reserve Bank of India (RBI) took quite a strong first step by issuing a decree for banks and enterprises to withdraw support for the cryptocurrency market, which essentially banned banks from providing services to crypto-related ventures. This was said to protect Indian investors and hence the Indian economy from the wild volatility of cryptocurrencies.
Officially, not much has changed since that instruction. There is still no regulation on cryptocurrency trading, only more official warnings against risks associated with it. To mitigate the uncertainty surrounding the lack of an official stance and preempt against potentially strict future actions, crypto businesses have started ‘self-regulating’ by implementing things like KYC compliance, while getting around the RBI decree using a clever peer-to-peer mechanism that avoids direct banking.
Indian Government on crypto
On the 6th of April, 2018, the decree issued by the RBI gave all banks, business and enterprises a deadline of three months to withdraw support for the cryptocurrency market. Any above-mentioned entity found in violation of this decree would no longer be a registered enterprise with the RBI.
This decision sent shockwaves throughout the market and everyone took it as a sign of a nationwide ban on crypto. The central bank's reasons for the decision included alleged concerns about "consumer protection, market integrity and money laundering."
Amidst the ensuing chaos, a lot of exchanges and community members were determined to fight the decree. Groups got together and raised a petition on public interest in various courts across the nation against the decree released by RBI, saying it was violating the protected constitutional right to an equal trade opportunity. In light of the stalling employed by the government and the judiciary, the people filed for a stay order on the enforcement of the decree.
The stay order request, however, was denied almost immediately after the filing. And after the deadline lapsed, banks withdrew support, making it a lot harder for the community to buy cryptocurrencies in India, although there are some loopholes that are still being exploited to go around this partial ban.
A couple of months ago, a new hope emerged, as the government came out and announced that the decree was a little premature and that they would strive to figure out ways to integrate the technology into the country’s existing financial setup with “caution.”
Essentially, they seem to have decided that they will try to use of blockchain – a public ledger that serves as the backbone of bitcoin – in financial services for strengthening transparency and improving inclusion.
Demonetisation and crypto
On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2000 banknotes in exchange for the demonetised banknotes. The government claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.
According to economist Jean Dreze, “demonetisation in a booming economy like India, is like shooting at the tires of a racing car.” Though it’s a bit of an exaggeration, this has turned out to become a harsh reality for India; international ratings agency Fitch reported a lowered GDP growth forecast of 6.9%, down from the earlier forecasted 7.4%. The report also stated that consumers do not have the cash needed to complete purchases, and time spent queuing in banks is also likely to have affected general productivity; the impact on GDP growth is likely to increase as the disruption continues for a longer period of time.
Even if it probably didn’t have a massive impact on crypto worldwide, this experiment has definitely triggered interest in all things cashless in India, including bitcoin and cryptocurrencies. People started buying bitcoin ‘on the street’.
This meant that, in some cases, arbitrage traders would buy bitcoin and sell it for very high premium for cash, which was no longer legal tender. This cash would be exchanged for new valid notes by the agents and deposited into their accounts.
Demonetisation had a mixed response from the people. The future looks bright as the negative effect of demonetisation has been gradually fading, while positive outlook for cryptocurrencies are starting to sprout here and there.
How can Indian people get into crypto
After restrictions came into force, India’s cryptocurrency exchanges started reinventing their businesses to circumvent the ban and try to survive. Many of the platforms have shifted to exclusive crypto-to-crypto trade, wherein customers can exchange units of one digital currency for another. However, this means that the scope of these platforms is limited to the businesses of existing investors, significantly shrinking their customer pool.
Investors nowadays are relying on peer-to-peer (P2P) exchanges that connect individual buyers and sellers. After a while, almost all of the exchanges came up with a clever system where no bank is involved in a transaction, similar to Localbitcoins or to other such P2P platforms. For buying and selling cryptocurrencies in India nowadays there are many domestic exchanges. Some of the main ones include Coindelta, Koinex, and Pocketbits
In these exchanges, anyone in India can create an account - after going through KYC - with their email and phone number. By updating his/her documents in their profile, they can get their identity verified and start buying and selling cryptocurrencies. The KYC requirements are mostly Aadhaar card proof and a utility bill. The verification process can take up to a couple of days.
After getting verified they can make their first deposit by Adding Rupee (INR) to their wallets via UPI and IMPS/NEFT/RTGS by visiting wallet page. Then the deposit will get credited and they can buy and sell and the market where all cryptocurrencies are paired with INR (Rupee).
Most of the exchanges have come up with a kind of system where no bank is involved in the transaction. They have introduced an engine to guide peer-to-peer deposit and withdrawal for Indian rupees just like the crypto P2P platforms - basically, matching depositors to withdrawals. As all the action happens between two individual bank accounts, legally it’s only a personal transaction.
That’s how the exchanges managed to work around the deadlock caused by RBI’s directive. It works - but the trade-off is speed of transactions. This system takes a considerable amount of time to get it done and confirmed.
The future of crypto in India
This current mode of indecisiveness and reactionary moves won’t hold for much longer. Yes, the past events have negatively affected the crypto evolution in India. If this state continues, India risks falling behind as the crypto economy will take an even longer time to develop. This situation is not tenable for long. The best course of action is to decisively lean towards a model of innovation with sandboxed regulation rather than stay paralysed by fear of the future. In the near future, the Indian government will probably regulate the space and the whole crypto-economy will start to boom just like it did in 2017.
Despite the seemingly negative trend, good projects are still present in the landscape pushing out innovation in India. Private Bitcoin companies have also launched an association, called the Digital Assets and Blockchain Foundation India (BFI), to educate lay people on Bitcoin benefits and usage. The government has started to work on understanding how blockchain and cryptocurrencies work. They need to work more to understand the technology.
India is still a developing country. All said and done, the economy could use a boost and would greatly benefit from a (reasonably and sensibly) regulated environment. The cryptocurrency market runs atop one of the most disruptive technologies the world has ever seen. Many people believe that this technology is the future of the global financial market and well, frankly, it very well may be. The technology has been maturing and blocking it out at this point is not the best way forward. While there is a chance that blockchain and cryptocurrencies may not be the winning solutions, the scales seem tipped in their favour, at least for now.
As this market is highly speculative in nature, governments needed a little more time to see how the market is reacting with the traditional markets. It was a tough choice for governments to wait in the sidelines. Now the time seems appropriate for the Government of India to start making progress in this space by implementing necessary regulations and enable the people to bootstrap an Indian Crypto-Economy for the future.
The minister explained that the government has constituted an inter-ministerial committee “under the chairmanship of Secretary, Department of Economic Affairs, with representatives from concerned departments to study all aspects of cryptocurrencies and crypto-assets including bitcoin.”
The committee includes representation from the Ministry of Electronics and Information Technology, the Reserve Bank of India (RBI), the Securities and Exchange Board of India, and the Central Board of Direct Taxes. India is just getting started with cryptocurrencies, and over time I believe that we will see more and more Indians getting involved in it.
What’s on the horizon
There is currently no open ban on crypto per se, and retailers can accept it as payment, but with the government discouraging investors and no real institutional backing from India’s banks, the road ahead remains murky.
Blockchain technology, on the other hand, is positioned to flourish. The future of cryptocurrencies and the blockchain industry look bright and profitable for the Indian government and the country as a whole, too.
But having said that, the Indian government has put itself in difficult position. Turning back on the decree would be admitting that they were wrong all along, and not doing so might be shooting themselves in the foot and stifling innovation.
I believe a positive framework is on the way and my guess is it will be close to the measures of USA model of regulation. Even with tight taxation and attempts at stricter control, I believe there is a lot of potential hidden behind the world's seventh-largest economy by nominal GDP, India.