India’s Regulatory Dodgeball with Bitcoin

Government warnings have hardly restrained one of the world’s most active cryptocurrency markets.

This article was first published in the Global Association of Risk Professionals on April 13, 2018. Co-author: Anisha Sircar

http://www.garp.org/#!/risk-intelligence/technology/disruptive-technologies/a1Z1W000003IWo9UAG

One in every 10 bitcoin transactions in the world takes place in India, according to cryptocurrency payment company Pundi X. https://pundix.com/  Indian trading in bitcoin grew substantially in 2017, with over 2,500 people trading daily.
Demonetization of high-denomination Indian currency in November 2016 triggered an explosion of interest in alternative currencies. According to some estimates, the volume of rupee-denominated bitcoin trades is third in the world, behind only U.S. dollars and Japanese yen.

However, on February 1, Finance Minister Arun Jaitley announced – after similar warning statements by the central bank in 2013 and twice in 2017 – that the state does not consider cryptocurrencies legal tender. The already-slumping value of bitcoin plummeted further, by an estimated 6.5%.

Still, cryptocurrency operators remain positive about the future of virtual currency, and some economists are convinced that this evolving technology will determine the future of the global economy.

Not Explicitly Illegal

The Reserve Bank of India has taken a stance against licensing any entity to operate with bitcoin and other virtual currencies, and frequently communicates warnings to users, holders, and traders about the risks that they are exposing themselves to.

On December 29, 2017, the Ministry of Finance issued a statement http://pib.nic.in/newsite/PrintRelease.aspx?relid=174985 emphasizing that virtual currencies had no legal tender in India, equating them to Ponzi schemes, and saying that transactions, because they are encrypted, are “likely being used to carry out illegal/subversive activities, such as terror-funding, smuggling, drug trafficking and other money-laundering acts.”

By not declaring virtual currencies legal, and by choosing not to regulate them without actually declaring them illegal, the government placed bitcoin in a troublingly grey area. (This is in contrast to Japan, Canada, Australia, Estonia and Chile, which have legalized it; and Bolivia, Iceland, Vietnam, Venezuela and others that have either banned it or imposed punitive measures.)

Moreover, at the beginning of 2018, Indian cryptocurrency exchanges and payment gateways received notifications from banks to make immediate changes to the way money flowed into their platforms, and warning them of account closure if they didn’t comply.

Koinex, India’s largest cryptocurrency exchange, posted a statement https://medium.com/koinex-crunch/inr-withdrawals-update-january-7-2018-6279bbe42bd2  on January 7: “A tussle between our payment service partner and their bank has caused an indefinite delay in the settlement of a large portion of deposits to Koinex in the past 2 weeks . .

While we have taken firm action, we are also in constant touch with the payment service provider and are providing our complete cooperation to help resolve the matter at the earliest.”

Vague Authority

The rationale behind Indian banks’ moves to suspend virtual currencies in India remains unclear, but hint at a directive from the central bank, which, as noted earlier, has shared an uneasy relationship with the traction of bitcoin in India. 

This directive would fall in line with the general pattern of task forces, nationwide surveys, and notices to traders and financial intermediaries to rein in what governments and banks believe to be a dangerous emerging phenomenon.

However, despite statements and actions discouraging people from trading and investing in bitcoin, several Indian investors began doubling down on the cryptocurrency market, driving bitcoin prices in the country even higher than global market trends.

The number of registrations across exchanges in India surged; bitcoin prices jumped nearly 14-fold in 2017, hitting an all-time high of $19,500 by mid-December (before plummeting to $12,000 and then recovering to $17,000 early in 2018). Trading volumes began doubling in the first weeks of 2018 (see figure 1).

Figure 1

Source: Coin Dance

This general rise in Indian bitcoin trading volume occurred despite the backdrop of a tumultuous global cryptocurrency market. Its popularity in India, particularly among celebrities and entertainers, is due to its appeal primarily as a financial asset, according to Zebpay, India’s first bitcoin exchange, as well as a market for remittances.

The drop in bitcoin trading volumes, from INR 83,214,245 to INR 11,637,525 between January 27 and February 10, seems to owe itself to the budget announcement. on February 1, in which Finance Minister Jaitley stated, “The Government does not consider cryptocurrencies legal tender or coin, and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system.”

Citi India, the only multinational bank among primary card issuers in India, on February 14 banned its customers from using the bank’s cards in purchasing cryptocurrencies:
 “Given concerns, both globally and locally including from the Reserve Bank of India, cautioning members of the public regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with bitcoins, cryptocurrencies and virtual currencies, Citi India has decided to not permit usage of its credit and debit cards towards purchase or trading of such bitcoins, cryptocurrencies and virtual currencies.”

At the same time, it was reported https://news.bitcoin.com/more-crypto-jobs-in-india-despite-delhis-stance-on-bitcoin/   that jobs and applicants for employment in the country’s cryptocurrency sector have increased.

Allure Despite Volatility

During one period in 2013, bitcoin’s price increased 85-fold; the following year, it crashed. By the end of 2017, the big U.S. bitcoin exchange Coinbase said that it had signed 12 million customers, surpassing the accounts of several established financial institutions and brokerages, and became the most downloaded iPhone app. https://www.recode.net/2017/12/7/16749536/coinbase-bitcoin-most-downloaded-app-iphone  In early February, talk of government and bank bans caused bitcoin market capitalization to fall 14% in a week. http://fortune.com/2018/02/05/bitcoin-price-crash/ as major international banks stated their plans or actions of banning customers from using their cards to purchase it.

A bitcoin user should invariably tread carefully given the wild price swings.

Source: CoinGecko

Nonetheless, strong interest stoked by geopolitical unease and distrust in traditional financial institutions will perhaps continue to add to the allure of a decentralized, volatile currency outside the control of banks and governments. This has been happening in India amidst flailing international prices, representing an increasing demand in India that supply, particularly with institutional forces working against it, may not be able to handle.

With platforms such as WhatsApp and Telegram making it even easier to connect sellers and buyers of virtual currencies (through the means of the platforms themselves, or through cryptocurrency wallets), the government could be at a loss for ways to stop the spread of cryptocurrency – because if they prohibit exchanges on platforms, the transactions will find a way to migrate elsewhere.

Perhaps the overarching lack of clarity from India’s leadership regarding the legality and mechanics of virtual currencies in India remains a determinant of their survival in the country. 

The larger question for the global economy, however, perhaps extends beyond the regulation of bitcoin – and seems to stem from that of decentralized technology itself, with its power to replace financial transactions, systems of power and meaning, and the very nature of our tomorrow.