The government of India is closer than ever to inflict a blanket ban on cryptocurrency investment, trading, and mining in the country. It would include the much talked about Bitcoin and other popular cryptocurrencies.
A week ago, Finance Minister Nirmal Sitharam had already proposed a bill and stated in the Rajya Sabha that a high-level IMC, Inter-Ministerial Committee, is constituted under the Chairmanship of Economic Affairs Secretary to study issues related to virtual currencies. Moreover, the committee would also propose actions through which all private cryptocurrencies, except any state-issued virtual currencies, would be prohibited in the country (1).
The Indian government has also proposed to launch RBI, Reserve Bank of India backed CBDC, Central Bank-backed Digital Currency. It leaves the industry and investors dubious about the future of virtual currencies in India.
However, it isn’t the first time when the Indian government attempted to act against currencies. Read on to know all you need about investing in cryptocurrencies, risks, legal status, and the future in India.
Cryptocurrency Struggles in India
Cryptocurrency is the generic name given to any virtual currency. People use it as a digital asset to work as a medium of exchange. They work through Blockchain, a decentralized technology spread across most computers that manage and record transactions.
There are more than 6700 different types of cryptocurrencies being publicly traded, according to CoinMarketCap, a market research platform (2). Some of the popular virtual currencies include Bitcoin, Dogecoin, Ethereum, and XRP.
It is worth highlighting that none of these cryptocurrencies are issued by any central bank of any nation. However, CBDC would be different since it would hold the same value as fiat currencies issued by any country’s central bank. People’s Bank of China was among the first major central banks to announce its CBDC experiment.
India had been long trying to find viable solutions to protect the investors. In December 2013, the RBI had cautioned people about the risks of virtual currencies for the first time. It stated that any virtual currency’s value is a matter of speculation and not underpinned by a good or an asset. Since then, there has been a sensational change in the market.
In April 2018, the RBI had issued circular barring banks from dealing with virtual currencies and crypto firms (3). The circular stated that such services include ‘maintaining accounts, settling, registering, trading, giving loans against virtual tokens, accepting virtual tokens as collateral, opening accounts of exchanges dealing with cryptocurrencies, and transfer, receipt of money in accounts relating to sale or purchase of virtual currencies.’
The Finance Ministry committee recommended a ban on virtual currencies in February 2019 and suggested that India create a digital rupee instead. The committee also drafted a bill banning all crypto-related activities in the country, punishable with a fine of up to 25 crore INR and an imprisonment term of one to ten years. However, it didn’t receive Parliament approval (4).
This month, the central government introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, during the Parliament Budget session. Moreover, the RBI also suggested that it plans to bring a digital version of Indian rupees and explore the possibilities as there is a requirement for a digital version of fiat currency. And in case if there is, then how the country can operationalize it.
While further clarifying the government’s stance against cryptocurrency, the Finance Minister, Nirmala Sitharam (5), stated in the Rajya Sabha that a high-level IMC, Inter-Ministerial Committee, is constituted under the Chairmanship of Economic Affairs Secretary to study issues related to virtual currencies. Moreover, the committee would also propose actions through which all private cryptocurrencies, except any state-issued virtual currencies, would be prohibited in the country (6).
Anurag Thakur, the Minister of State for Finance (7), also expressed his concerns about regulating these virtual currencies. He stated that cryptocurrencies are neither currencies nor assets and placing them outside the direct regulatory ambit of RBI or the SEBI, Securities and Exchange Board of India. Therefore, the Indian government would bring a bill on the matter.
While India talks about a possible cryptocurrency ban, Elon Musk Musk endorsed and gave it a fresh boost when his car firm Tesla bought about 1.5 billion Bitcoin (8). The investment helped Bitcoin to jump 17% to 44,220 USD, a record height. Moreover, Musk has also talked about Bitcoin and other virtual currencies, including Dogecoin, which surged 50% after his endorsement.
It is also worth highlighting that India is not the only country that is considering the possibility of launching its own virtual currency. Other countries are also doing it or considering their options. For instance, countries such as China, Ecuador, Venezuela, Tunisia, Singapore, and Senegal have also issued their own virtual currencies.
Other countries such as Estonia, Russia, Japan, and Sweden are exploring options to launch their own digital assets. Moreover, Thailand has already approved about 13 legal crypto businesses to operate legally. China is also aggressively pushing its efforts on cryptocurrencies. It would issue 40 million yuan, about 6.2 million USD, as part of its latest digital currency trials to boost consumption amid the upcoming Lunar New Year holiday (9).
Fiddles of Indian Crypto Stakeholders
The crypto paranoia of the Indian government found expression in the letter again with the new bill. Everyone knew it was coming since 2019 when a panel, headed by the finance secretary Subhash Garg had proposed a draft bill (10) titled, ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.’
Regardless, the crypto industry remained optimistic or bound by compulsions that came with being a startup in Indian in an unregulated space.
In September last year, when there were speculations about a possible crypto ban during the Parliament monsoon session were doing the rounds, several Indian crypto companies were confident that the Indian government would bring in positive regulations for virtual currencies. They were actively engaged with the officials and government agencies to help assuage their concerns regarding the technology’s negative usage.
At that time, these companies had a reason to shrug off the speculations since the bill was not listed in the Lok Sabha bulletin, listing the bills to be taken up in a Parliament session. The speculations didn’t see day’s light of the day and the remainder of the year saw the Bitcoin bull run. It further solidified stakeholders’ claim that cryptocurrencies are the new age asset class with better returns than gold or mutual funds.
Last month, before the beginning of the ongoing budget session, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was mentioned in the Lok Sabha bulletin.
“To create a facilitative framework for building the official digital currency to be issued by the Reserve Bank of India. It also seeks to prohibit all private cryptocurrencies in the country. However, it would allow for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” read the synopsis of the bill.
While we know that Bitcoin and Ethereum, the leading cryptocurrencies are not private but public, and hence they can be exempted from the bill. However, we also realize that the Reserve Bank of India doesn’t agree with the theoretical classification and has also deemed Bitcoin as a private cryptocurrency in official communication with stakeholders in 2018.
According to recent reports, compounding the fears of a crypto ban, the Indian government would ban holding, trading, and mining all cryptocurrencies. However, they would give investors a three-to-six-month transition period, allowing them to sell their digital assets.
Market experts also seemed to be puzzled over the government’s intention to ban cryptocurrencies since agencies could earn a sizable amount in GST and tax by regulating the sector. It is also making the industry assert and urge the government to bring regulation in the sector instead of banning it.
Besides the fear of nefarious usage of cryptocurrencies, there are also fears of their increased use blunting the monetary policy of RBI and the rupee’s value. Hence, the government proposed the ban and a plan to introduce a CBDC.
There are also reports suggesting that the Indian government could also use an ordinance route to ensure a smooth passage for the bill. Making the future of crypto in India look bleak.
Buzzing Crypto Trades Despite Ban Fears
Even though Indian investors are looking at a looming ban, they continue their investments in crypto assets, including Bitcoin, Ethereum, and others.
As per WazirX, the largest crypto exchange in the country, it only took 11 days to hit the billion-dollar trading value mark in February compared with 25 to 30 days in January. The company expects to hit about 2.5 times, about 1.84 billion USD in total trading value hit in January this month (11).
“Crypto is a global phenomenon. The moment a Tesla spends $1.5 billion, your wealth in India has increased. Most investments are very local, but anyone anywhere in the world can affect your wealth in crypto. People in India have been joining based on all of this positive news that’s been coming.”
– Nischal Shetty, Founder of WazirX (12).
Shetty added that the only time they witnessed some negativity was when the Parliament’s online portal posted the bill. The prices and activities returned to normal within the next two days.
CoinDCX, another crypto exchanges platform in India, stated no drop in trading volumes in February. Quite the opposite, the platform is witnessing a continuous rise in interest because of the international market’s recent developments.
Tesla’s investment of 1.5 billion USD in Bitcoin and its announcement about expecting to start accepting Bitcoins in payment led to a 17% jump in a cryptocurrency price. Moreover, the global payments firm, Mastercards’ announcement about supporting cryptocurrencies on its network from this year made a bigger impact on Indian crypto trading than ban reports.
On February 8, Crypto exchanges launched a campaign to convince the Indian government to rethink their plans. They formed a platform called Indiawantsbitcoin.org, allowing anyone to send emails to respective Parliament members showing support for crypto in India (13).
According to industry estimates, the trading volume in India also grew sixfold in the past year.
Protecting Crypto Holding in India
The prospect of a new ban on cryptocurrencies in the country has also sent an army of crypto investors thinking of ways to protect or liquidate their holdings. The Indian government appears to be in the final stages to bring new legislation governing digital currencies like Bitcoin in India.
While there are no official data regarding the new bill, the three largest crypto exchange platforms of India, WazirX, CoinDCX, and Unocoin, claim that there is about 60 lakh to one crore cryptocurrency holders in India with holdings of more than 10,000 crore INR.
Crypto investors are coming up with options ranging from ‘self-custody wallets’ to transferring and even selling their tokens. We believe that the provisions in the upcoming legislation, once detailed, would eventually offer a guide for these choices (14).
One option crypto investors are considering is to move their holdings into a ‘self-custody wallet.’ It means that investors could either store their digital wealth in a hardware wallet, a small digital device like a USB drive, smart card, or a microSD. It would store their private bitcoin, lock it at a safe place, or send it to a friend or relative. Some of the popular hardware wallets for bitcoins storage include Ledger, SafePal, Trezor, and BitLox.
Other global firms such as MetaMask, Blockchain, and Electrum offer online self-custody wallet services. While there are several ways to store cryptocurrency, the easiest is to take the wallet’s custody.
Worried investors who believe that it could be the end of the road for cryptocurrencies in India are also looking at shifting their virtual currencies from exchange custody to self-custody online or hardware wallets.
However, a caveat is that if a cryptocurrency is transferred via a wallet existing on an Indian exchange, authorities can track it down.
Even though the blockchain system is decentralized, the KYC norms the country’s exchanges follow require users to reveal their identity. It could be a way for the officials to trace it back to the person holding cryptocurrency in the exchange’s wallet (15).
Transfer to Family/Friends Overseas
Another option cryptocurrency investors can also explore is transferring their crypto tokens from their wallets to their friends or family living abroad before the ban.
It should not be an issue since investors can easily transfer bitcoins from their wallet and send it as a gift to their relatives or friends before the ban is enforced.
However, it could happen if the Indian investor gives up his ownership of those bitcoins. Once the transfer is completed, the receiver of those cryptocurrencies would become liable to pay tax on those assets in their home country (16).
However, the ability would depend on the bill’s provisions. While we need to review the draft to clarify whether it is allowed or not, we can expect that cryptocurrency investors would have to liquidate their holdings one way or another.
Sell and Exit
Another option is quite simple, sell and exit. However, there is not much evidence yet of panic selling. Presently, only new crypto investors are panic-selling who recently began investing during the Bitcoin rally and have only done it speculatively.
While there has been some increase in wallet withdrawals this month, it is not significant.
There is no way to determine how the end-use is storing his cryptocurrencies. There has been no significant increase in withdrawals.
Investors are in for the long haul, and till now, we have not seen any big increase in wallet withdrawals except for a case or two.
According to Shetty, if India imposes a ban, it would only result in an underground cryptocurrency market, forcing genuine investors to function in an unregulated environment and serve nobody’s purpose (17).
Crypto Investments Despite Risks
Like gold, people see cryptocurrency as a hedge to protect fiat portfolios, and its value lies in its inflation-beating qualities.
Traditionally, people used gold as protection against stock volatility. However, today, crypto is gradually emerging as a mainstream investment class, especially among millennials (18).
Moreover, even though India does not consider cryptocurrencies legal tender, buying and selling them is legal. No law prohibits Indians from buying or selling cryptocurrencies in the country. However, there is also no legal guarantee of the invested amount’s safety like traditional investment avenues.
Other risks with cryptocurrencies include storage in an electronic or a digital format, which exposes them to the risks of loss of password, hacking, malware attack, and many other risks that could further result in a permanent loss of users’ money.
Since cryptocurrency transactions occur online and are encrypted, they are also vulnerable to subversive and illegal activities such as smuggling, terror-funding, drug trafficking, and other money-laundering acts. Most users have limited knowledge of these cases and may or may not know about them since they are completely encrypted (19).
However, the market expects to see crypto go mainstream in the upcoming months as more retail investors and first-timers enter the space.
If one wishes to start investing in cryptocurrency even after knowing all the risks, the most important thing one must bear in mind is that crypto is high risk and high reward investment option.
One should only invest according to his risk appetite and after doing their due diligence on the project. It is also recommended to use legitimate exchanges that follow KYC and AML guidelines. Like any other industry, it is also important to vary from get-rich-quick scams and people who promise to double investments.
Bitcoin has generated tremendous curiosity among the youth in India. The country’s startup sector is particularly fond of cryptocurrencies since they facilitate cross-border transactions with ease. It offers many opportunities to small and medium enterprises to expand their presence across the global market.
India sees cryptocurrency as an asset underserved by the banking system. And because of the factors such as inherent security, low transaction fees, lack of banking system interference, easy use and access, and universal recognition, it is gaining ground in the country even though the government is consistently attempting to ban it (20).
The Future of Cryptocurrency in India
The Indian government and officials have been skeptical about virtual currencies and are apprehensive regarding the associated risks.
Since the new cryptocurrency bill is already in the pipeline to create a facilitative framework to build an official digital currency, issued by the RBI, the road ahead would be tumultuous for private cryptocurrency as the bill would prohibit all private cryptocurrencies in the country but would allow a certain exception to promote the underlying cryptocurrency technology and its usage.
However, there is also a positive and exciting future from cryptocurrency in India since we have seen our Prime Minister, Narendra Modi, talking positively about Blockchain. Shetty is also positive that he would ensure that our youth don’t stay behind the global phenomenon. And as more and more people are gradually becoming aware of crypto, they want to pursue a Blockchain career.
Positive regulations would boost crypto adoption in the country with more startups building projects on Blockchain. With tech giants such as Facebook and JP Morgan jumping on the crypto bandwagon, crypto would become mainstream in the upcoming few years, and people will see and use more of crypto coming to life.