Analysis: Crypto Backlash in India – Can the Industry Survive?

India, the country once responsible for 10 percent of all Bitcoin transactions worldwide, is going through massive turmoil. The central bank’s official notice to all the banking institutions last week to end their businesses with cryptocurrency-related firms within three months has created a havoc among the exchanges as well as the investors.

Earlier this year, the Finance Minister of the country raised the topic of cryptocurrency in his annual budget speech and discouraged investments on digital assets, calling them ‘illegal tender’. However, despite many warnings by both the government and the central bank, there was no outright action taken on the booming sector until recently.

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Exchanges’ plans

Many native exchanges are exploring various options to stay in the lucrative crypto business. According to a report by Economic Times, some exchanges are considering to move their base from India to other crypto friendly jurisdictions like Singapore, Delaware or Belarus.

Economic Times quoted Shivam Thakral, CEO of BuyUcoin, a cryptocurrency wallet, and exchange: “We have to move our company to some foreign country where regulations allow opening of bank accounts plus we won’t be dealing in fiat currency. It will become a global operation rather than an India centric operation.”

However, even with the international settlements, offering trades against INR will not be a viable option.

Another Indian cryptocurrency exchange, called Bitbns, has started an online petition against the RBI decision. The petition, which is aiming to get 25,000 signatures from the public, has already gained over 22,000 supporters in a mere five days.

Ajeet Khurana, CEO of Zebpay, one of the widely used crypto buying and selling platforms in India, tweeted:

No way I am stopping. We will continue to do what is best for our customers, and what is best for our country. Am studying the present situation and will react shortly. and we will emerge stronger.

— Ajeet Khurana (@AjeetK) April 5, 2018

The exchanges are also blaming the Reserve bank of India (RBI) for becoming an obstacle in their progressive path, as cryptocurrency has seen a widespread acceptance worldwide.

Immediately after the central bank’s decision, WazirX Bitcoin Exchange wrote in an official post on Medium: “The announcement today mandating banks to not allow people or businesses in India to deal with cryptos may push us back in time and make us all miss this golden opportunity. Knee-jerk reactions like these are what can cause the future generation to be left behind when the rest of the world moves ahead.”

Its co-founder Nischal Shetty personally tweeted:

US, Japan, South Korea go towards regulating Cryptos so that their country progresses while RBI decides to block Indians from getting involved in the crypto revolution. We need to think progressively, @RBI please reconsider this and let’s take a positive step forward 🙏🏻

— Nischal (WazirX) (@NischalShetty) April 5, 2018

Many exchanges are even accusing the RBI of violating their democratic right, as the central bank’s decision was abrupt and without any consultation with the massive community. All the crypto businesses have come together to fight against the massive decision of the RBI.

Benson Samuel, co-founder and CTO of Coinsecure, told Inc42: “We are in talks with IAMAI and BACC along with the other industry players to try and seek help in this regard.”

“While we can hope that the RBI will re-consider their stance, it would be helpful for them to understand, that this decision can impact the millions of people who have already invested in various cryptos. Also, this decision will prompt users to move to the cash market, thus limiting regular legitimate businesses and individuals who have been using banking channels to transact/ trade in cryptos and convert them to fiat,” he added.

Investors’ woes

The retail investors of the country are also in a major confusion following last weeks decision. Cryptocurrency exchanges in India have seen a mass migration of investors towards the sector in 2017. It than 5 million cryptocurrency investors and since last six months, 12 exchanges operating in the country has seen daily volume between INR 2-3 billion. Though lured by the insane profits, many decided to retain their digital investments even though the market is declining since January.

Now if the banks terminate the exchange’s accounts, the digital funds will be stuck on the exchanges with a very few complex options for fiat withdrawal. Moreover, Indian markets do not have merchants accepting cryptocurrencies due to previous warnings by the government and central bank.

A 23-year old software professional and crypto investor told Business Standard: “As an investor, I either have to exit my investments in the next three months or use dark pools or cash to transact. For a normal investor, it will be almost impossible to transact in bitcoin and other digital currencies.”

However, for retail investors without much knowledge of the sector and dark pools, private securities exchanges where investors trade anonymously, the only options remains is to exit in a bear market incurring a loss.

Response of the market

The prices of Bitcoin and other altcoins always remained premium on the Indian exchanges compared to their overseas counterpart. However, the RBI notice has turned the table entirely. Due to massive distress selling, BTC’s price took a massive hit last Thursday on all Indian exchanges including the popular Zebpay and Koinex.

While Bitcoin was trading at around INR 430,000 ($6,650) in international exchanges after RBI’s announcement, it was available at INR 375,000 on Indian exchanges. This was odd as Indian investors always had to pay a premium of around 5-10 percent while buying Bitcoin.

After a distress sale of Bitcoin last Thursday, a Mumbai-based retail investor told Business Standard: “I have no other recourse if banks don’t allow sale proceeds from bitcoin exchanges to get transferred to my account in the future.”

However, the price was restored soon to the global level due to the influx of arbitrageurs in the discounted market.

What’s next?

There is an outrage among both the exchanges and the investors as the government already instated a committee to study the new sector, which is very complex in nature.

“The understanding in the market was that the government has set up the Subhash Garg committee to regulate cryptocurrencies. But now, the RBI has gone ahead and said that all banking transactions will cease after three months. You cannot ban something when so many people have invested in it. This is tantamount to demonetization of cryptocurrencies,” said Vishal Gupta, founder of binex.trade, to Business Standard.

Unlike China, which banned all cryptocurrency exchanges last year, India is a democracy and as a large pool of investors and business are already involved with cryptocurrencies, a decision like this is very odd.

It is interesting to note that Indian banks did not come out in the limelight of the media to go for or against cryptocurrencies. They, however, have a reputation to be against digital coins, as many banks barred their customers from purchasing cryptocurrencies using their credit or debit card.

According to tax experts, this decision will affect the pockets of the government as well if the exchanges finally decide to move abroad. Riaz Thingna, Director of Grant Thornton Advisory, told the Economic Times: “Even after such a move, Indian investors may be able to continue to invest with the platforms through innovative structures. Volumes from India will surely go down but profits from business originating from India may escape tax in India as the exchanges would not have a permanent establishment in India after the move.”