ETtech Morning Dispatch on Feb 15, 2021: India at crypto crossroads

Good morning,

With a ban on all cryptocurrencies on the horizon, we take a (very brief) look at the history of the crypto phenomenon in India to understand how we arrived at our present circumstance. We also speak to crypto exchanges and investors about their plans in case of a blanket ban, which would cut India off from what is now a $214 billion global market, not to mention numerous other benefits that access to the technology would bring.

1. India at crypto crossroads


No one knows exactly when, but the government is expected to ban all “private” cryptocurrencies in India and simultaneously announce a sovereign digital currency sometime “soon”. This despite numerous appeals from the industry, and a failed attempt by the Reserve Bank of India at sneaking in a ban in 2018 by preventing banks from touching crypto. The Supreme Court ruled this ban was unconstitutional last March.

Also Read:
Crypto Exchanges, Experts may Move out

To understand the ongoing controversy over cryptocurrencies in India, we need to examine how we got here.

2008: A paper titled ‘Bitcoin: A Peer to Peer Electronic Cash System’ is published by a pseudonymous developer by the name of Satoshi Nakamoto.

2010: The first sale of an item using Bitcoin takes place, with a customer swapping 10,000 Bitcoin for two pizzas. This attaches a cash value to the cryptocurrency for the first time.

2011: Other cryptocurrencies began to emerge, including Litecoin, Namecoin and Swiftcoin.

  • Bitcoin becomes embroiled in a controversy over claims it is being used on the dark web to pay for guns and drugs among quite a lot else.

2012-2017: Cryptocurrencies steadily gain traction. The price of Bitcoin shoots up from around $5 at the start of 2012 to almost $1,000 at the end of 2017.

  • This period also sees cryptocurrency exchanges mushroom in India, including Zebpay, Coinsecure, Unocoin, Koinex and Pocket Bits.
  • It is also almost perfectly bookended by two RBI press releases on cryptocurrencies. The first, dated December 24, 2013, says:
  1. Virtual currencies are not backed by a central bank.
  2. Their value isn’t underpinned by an asset and thus a matter of speculation.

The second, dated February 1, 2017 repeats these concerns.

  • It’s thus safe to assume that the crypto boom that followed 2016’s demonetisation was an unintended consequence of that particular experiment. The emphasis on digital payments led to a search for alternatives to traditional online banking and drove tech-savvy customers to cryptocurrency exchanges.

Oct-Nov 2017: Two PILs are filed in the Supreme Court, one asking it to ban buying and selling cryptocurrencies in India, the other asking for them to be regulated.

  • In November, the government forms a committee to study issues around virtual currencies and propose actions.

Dec 2017: The RBI and the Ministry of Finance issue statements on cryptocurrencies. The ministry compares them to ponzi schemes.

They issue more such statements but the status quo remains.

April 6, 2018: Suddenly, everything changes. The RBI issues a circular preventing commercial and co-operative banks, payments banks, small finance banks, NBFCs and payment system providers from:

  • Dealing in virtual currencies
  • Providing services to all entities which deal with them
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Crypto exchanges, unable to access banking services in India, find their businesses crippled overnight.
Trading volumes fall by 99% and by August 2018 about 95% of jobs vanish.

May 15, 2018: Faced with an existential threat, several exchanges filed a writ petition in the Supreme Court.

July 2019: The committee submits its report, recommending a ban on “private cryptocurrencies” in India.

March 4, 2020: Hope at last. The
Supreme Court strikes down RBI’s banking ban on crypto, terming the April 6 circular unconstitutional. One of the SC’s reasons for overturning the ban is that cryptocurrencies are unregulated but not illegal in India. A decaying crypto market is jolted back to life.

  • Exchanges see a sharp increase in interest as the SC ruling coincides with a crypto boom. The price of Bitcoin jumps more than 700% between April 2020 and February 2021. However, rumours of an impending ban persist.

Jan 29, 2021: The government says it will introduce a bill to create a sovereign digital currency and simultaneously ban all private cryptocurrencies. The recently-revived industry realises it faces a second existential threat.

  • “The bill seeks to prohibit all private cryptocurrencies in India. However, it would allow certain exceptions to promote the underlying technology of cryptocurrency and its uses,” the government says.

We previously explained why the government’s categorising of cryptocurrencies as “public” (government-backed) or “private” (all others) is inaccurate and misleading.
Click here to read that.

What happens next?

Apprehensive of a blanket ban, crypto exchanges and investors are fearing an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.

Back then, blockchain experts moved to countries where crypto was regulated, such as Switzerland, Singapore, Estonia and the US.

An outright ban will have a similar effect, according to Mathew Chacko, partner at Spice Route Legal. He said with a blanket ban, blockchain innovation, which has uses in governance, data economy and energy, will come to a halt in India.

2. Equalisation Levy & Double Taxation

The Central Board of Direct Taxes
may relook at the ‘equalisation levy’ for purchases where Indian businesses use overseas e-commerce platforms to sell goods and services to Indian consumers. The 2% levy paid by foreign ‘e-commerce operator’ on gross consideration attempts to address tax challenges in an increasingly digital economy.

What is an equalisation levy?

  • Equalisation levy applies when an Indian buyer uses a foreign e-commerce platform.
  • Though the levy has been in effect since April 1, 2020, the law is silent on the status of the seller.
  • If both participants are Indians, a foreign e-commerce company pays 2% levy on total consideration.
  • Also, the Indian seller has to pay income tax on profits earned by him on such sale.
  • This leads to double taxation.

At present, the language of the law or the amendments proposed in the Finance Bill, 2021, makes no exception or offers a carve-out to avoid double taxation.

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3. ETtech Done Deals

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■ Digital lending startup
has secured an investment of $75 million (Rs 544 crore) in a Series C funding round which saw participation of Azim Premji’s PremjiInvest and South Korea’s Mirae Asset Venture. The equity round also saw participation of US-based Alpine Capital and Arkam Ventures at an undisclosed amount, the company said in a statement shared with ET.

Notably, Chinese smartphone maker Xiaomi — an existing investor in the company — has now made a complete exit. Other investors from the Asian neighbour including Shunwei Capital and Kunlun reduced their holding in the company, the person said, without divulging specifics.

■ Content publishing platform
has raised $1 million in a pre-Series A funding round led by US-based venture capital fund SOSV, with participation from Inflection Point Ventures (IPV). Other investors who participated are Artesian and existing investors — Mumbai Angels and SucSEED. Funds raised will be used to scale up the tech team as the company is working on launching a reader app, the company said.

4. Browserstack’s first ESOP buyback

recently completed its first ESOP buyback, rewarding workers after the software products company posted strong growth during the Covid-19 pandemic and nearly doubled its headcount during the year 2020.

Employees who had been with the company for over two years were eligible to participate in the buyback, and 50% of that eligible base took part in the exercise.

“This is the first time we did it (ESOP buyback) and we plan to do it more regularly, going forward,” said Nakul Aggarwal, co-founder at Browserstack. “The business is pretty strong, growing well and profitable, so there’s an opportunity for us to keep doing it. We don’t need external validation or external money to do it.”

Infographic Insight

Consumer sentimentETtech

5. IT firms’ B2B2C model comes at a premium

ITservices firms
are charging a premium for a new business model that focuses on developing solutions for the end users of their clients.

The B2B2C, or business-to-business-to-consumer, model has seen a huge jump in demand after the coronavirus outbreak disrupted operations of businesses globally. Such opportunities to co-develop technology platforms for their clients’ end-users across various sectors is allowing technology services providers, such as Tata Consultancy Services Ltd. (TCS) and Cognizant Technology Solutions Corp., a major stake in how companies interact with end customers.

“In the last nine months, everybody wants everything online. Online has kind of become the lifeline,” TCS Chief Operating Officer N. Ganapathy Subramaniam said. “In that context, if you want to look at simplifying the customer journey through digitisation, then you need to really understand the end customers; it’s not just B2B, but you really look at B2B2C.”

6. Log9 develops fast-charging EV battery


Log9 Materials, a Bengaluru-based deep tech startup,
has developed a rapid charging battery technology that may just be a game-changer for India’s electric vehicle fleet operators.

The indigenously developed supercapacitor technology boasts of charging EV batteries in less than 15 minutes and promises a range of 70 km for two-wheelers and up to 60 km for three- wheelers.

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The nanotechnology company that works on varied applications of graphene, is now in talks with some well-known fleet operators like Delhivery, Shadowfax, Vogo and Zoom cars to deploy these batteries. The firm has planned to deploy batteries in at least 3,000 vehicles by March 2022 and scale it up to 20,000 vehicles a year later.

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