By Durba Ghosh
In a move that can potentially outlaw virtual currencies in India, the Supreme Court has upheld Reserve Bank of India’s ban on banks and any financial related entity to deal with cryptocurrencies.
The verdict follows a public interest litigation asking the court to review RBI’s circular dated April 6, allowing banks three months to exit operations dealing with virtual currencies.
“Till last year, India was an attractive market for crypto-currencies. Several players entered India because it was a lucrative market considering the huge demand. The government’s stand during the budget, then RBI’s circular, has been a big blow to the industry,” said Vajahaath Hussain, CEO of the only Cryptocurrency investment bank – Almora.
Prices of cryptocurrencies fell by almost 50% on a single day after RBI released the circular.
India’s stand against cryptocurrencies is in excess of most countries such as Abu Dhabi and South Korea, which are taking a cautious route by regulating the virtual coins. India’s crackdown on companies dealing with cryptocurrencies, in comparison, is not a well-thought out move, according to several industry players The Passage spoke to.
In fact, RBI in response to an RTI query had replied that the apex bank has not set up a committee to understand the usage of virtual currencies, and replied ‘No’ to a question asking if the government did any research before reaching the stand.
The finance ministry is yet to make a final ruling on a formal ban, but the recent volatility in crypto-currency markets has already left the industry spiraling down.
“The business model of Indian companies in the crypto space revolved around accepting bank transfers for crypto trading and investment. Obviously, it will take a major hit post the verdict. Indian crypto exchanges would then be left with two options, either to facilitate crypto-to-crypto transfers or take the P2P route wherein exchanges would escrow the crypto and release the same once a buyer has transferred the amount into seller’s account,” Ashish Singhal, Co-Founder & CEO of CoinSwitch.Co said.
Several companies have already started pivoting their business model. WazirX, for example, has turned to Peer-to-Peer transfers allowing users to seamlessly buy and sell crypto for INR directly with each other. The seller deposits the crypto with WazirX, which the brand escrows for safekeeping during the transaction. On the other end of the spectrum, the buyer pays INR to the seller and as soon as the seller confirms receipt of the payment, WazirX releases the crypto to the buyer.
However, Hussain of Crypto investment bank Almora warns that P2P trading will also lead to illegal trades, which can be done using cash since the banks are no longer allowed to deal with crypto-currencies. The primary concern the government has had with cryptocurrency is the lack of transparency, which makes detection of illegal transactions difficult.
Companies in India, however, had created closed systems to ply with RBI’s concern. “Blockchain nodes can be chosen, so the government can actually monitor it. We can also filter these assets in terms of credibility. We, for example, don’t allow trading of certain assets. We can work with the government in determining such caveats,” Rahul Raj, Co-founder and CEO of Koinex said.
Zebpay, another startup dealing in virtual currency, has put in checks and balances by adopting KYC verification of all its users. Unocoin’s transactions also levy service tax, which means every transaction is in government’s data, making discovery and detection easier.
India is not the only country suffering regulatory uncertainties regarding cryptocurrencies. The connections between crypto-currencies and scams, tax evasion, money laundering and funding terrorism have raised several concerns for most countries.
South Korea, which has opted for regulation of virtual currencies, had previously considered shutting down local exchanges. The news from South Korea threw the crypto market into turmoil and hammered Bitcoin prices, which dived about 31 percent in January.
“While the feature allows users to still build their digital assets, we are also hopeful that the authorities will acknowledge the impact crypto is having on global economies and would work closely with the private players like us to better regulate this space, instead of simply banning the same,” Nischal Shetty, Co-Founder and CEO of WazirX said.
Sandeep Phogat, Founder and CEO of Panaesha Capital, on the other hand, says, that even though the Supreme court did not grant a temporary stay against RBI’s directive restricting banks to provide services to exchanges, this is far from the end of crypto markets in India.
“The Economic Affairs Secretary is already quoted saying that a regulatory framework is being built in relation to the crypto-currency market in India. This framework would not have in the process of development if the government had the intention to ban crypto-currencies entirely," he added. Panaesha Capital is a leading Singapore based fin-tech startup team of expert professionals dealing in crypto-currency.
Notwithstanding the enthusiasm, Indian entities are already rushing to crypto-currency heavens to bypass the uncertainty in the domestic market. Countries such as Malta and Estonia saw a major boost to their slowing economy after they adopted crypto-currencies.
Estonia launched its e-residency programme in December 2014 making it easy to register a company. Its representatives have been holding sessions in India to attract entrepreneurs there with a goal of 200 registered Indian startups.
Indium, an Ethereum-compatible blockchain network with a focus on utility apps and public goods, is one of the many examples who have registered in Estonia.
There are alternatives that these companies can pivot to. But the verdict would fundamentally take away the convenience that Indian crypto traders and investors used to enjoy. Previously, they could simply invest in a crypto of their liking through Indian currency and opt for a trusted exchange for the same, based on its media presence, user reviews and ratings. “Moving forward post the verdict, crypto investors would either have to rely on a stranger or a friend who wish to sell their digital assets for Indian rupees. That, in turn, warrants a lot of effort and would make crypto trade a harrowing experience,” Hussain says.
Apart from trading, crypto-currency was also emerging as a good funding option for startups.
According to a research report by Ernst & Young, investors are now betting capital onto initial coin offerings at an average rate of USD 300,000 per second across the world. The research studied 372 initial Coin Offerings (ICOs) around the world, which collectively raised USD 3.7 billion in funds, twice the volume of venture capital (VC) investment in blockchain projects.
In fact, about 10% of all worldwide Bitcoin transactions are accounted for in India alone. The US leads the investments into the ICOs with USD 1 billion, followed by Russia and China with investments of over USD 300 million each.
“ICOs are going to face a lot of problem going forward since liquidity of digital assets will now have minimum prospects in India. The irony is that the verdict will also impact product-based blockchain companies raising funds via ICOs. This completely goes against the government’s previously stated intention of supporting blockchain technology and solutions in the country,” Singhal of CoinSwitch says.