Cryptocurrency enthusiasts in India are a beleaguered bunch. At the height of a crypto craze early last year, about 5m Indians traded the virtual currencies in about two dozen exchanges, participating in a burgeoning market worth billions of dollars.
In April 2018, the Reserve Bank of India, the central bank, ordered banks and other financial institutions to stop dealing with anyone involved in cryptocurrencies. That cut off access to the country’s financial system, forcing some of the largest crypto exchanges to pull down the shutters.
What remains of India’s cryptocurrency industry is now hoping for respite as a long-running Supreme Court case comes to a head. After recent hearings, the high court has given the RBI until next week to explain its rationale in detail before a final judgment expected in coming weeks.
Any relief may be shortlived, however. In a report recently made public, a government committee went much further and proposed an outright ban that would have anyone so much as holding a digital currency go to prison for up to 10 years.
The rise of cryptocurrencies has caused concern among governments around the world. Among G20 members, the US, UK and most others have sought to regulate digital currencies to varying degrees to ensure, for example, they are covered by money laundering laws and can be taxed.
India, however, is joining the likes of China, Saudi Arabia and Indonesia in seeking to severely restrict the trade, not to mention impose a blanket ban.
The Indian committee noted “with serious concern mushrooming of cryptocurrencies almost invariably issued abroad”, and “numerous” people in India investing in them.
It said unsuspecting buyers were vulnerable to fraud, pointing to a $300m bitcoin scam in the country last year. It argued that prices are too volatile, mining is too energy-intensive and the degree of anonymity the currencies afford can be a vehicle for terrorist financing.
The proposed ban has sparked alarm, with opponents questioning its compatibility with the country’s constitutional freedoms. “If this draft bill banning it comes into place, it would possibly be the most extreme step by any significantly sized economy,” said Jaideep Reddy, a lawyer at Nishith Desai Associates who is contesting the RBI order.
In a letter to the finance ministry last year, Mr Reddy and his colleagues listed sardonically some other technologies whose arrival upset the powers that be: electricity, cars, mobile phones, the internet. Their conclusion was blunt: “No developed and democratic country has banned crypto-assets.”
To be sure, the draft bill would have to go through a series of hurdles before becoming law, and could be scrapped or walked back in the process. But in the meantime, India’s budding crypto companies are surviving in whatever ways they can.
Unocoin has cut its staff from 130 in early 2018 to about 15 now, according to Sathvik Vishwanath, chief executive, in order to get by on funding it raised before the RBI’s directive. Activity has largely dried up as a result. Trading volumes “are so minuscule that they don’t even matter”, he said.
Nischal Shetty, who launched WazirX (“India’s most trusted bitcoin exchange”) a month before the RBI’s order, has also scaled down his operation. Meanwhile, he has been petitioning the government on Twitter every day for almost a year, but has yet to receive a response. “There’s not been enough deep research to understand crypto,” he said of the proposed ban.
Crypto enthusiasts argue that hostility stems in part from the fact that the government treats cryptocurrencies as money, and therefore a threat to the Indian rupee. In practice, they say, they are traded as a class of assets, much like commodities.
Raj Chowdhury, managing director of HashCash, which supplies blockchain technology to companies internationally, said non-crypto clients in India are interested in digital currencies with a view to setting up exchanges and other infrastructure in the future. “They have done their homework; this is a market that’s not going away,” he said. “The rest of the world is adopting it and India is taking a bit more time.”
One concern is that a ban and other heavy-handed measures will push the market underground. The RBI itself noted the risk that digital currency trading will shift from exchanges to private forums and offshore, apparently increasing the chance that they will be used for illicit activities.
India, under Prime Minister Narendra Modi, has embarked on an ambitious project to embrace technologies that can help digitise the economy, promoting mobile payments and raving about the transformative potential of blockchain. The government’s policies have led large numbers of Indians to start investing in financial markets for the first time.
The stance on crypto, though, seems to be at odds with that. Attempts to suffocate the industry could well be doomed to failure.