Indian govt proposes total crypto ban

On January 29th the Indian government tabled The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in its lower House of Parliament, the Lok Sabha. The Bill proposes banning all private cryptocurrency in the country including blue-chip assets like bitcoin (BTC) and Ethereum (ETH). At the same time, the Bill would create the foundations of an official digital currency issued by the Reserve Bank of India (RBI), and included some exceptions to promote the “underlying technology behind cryptocurrencies and its usage.”

The bulletin for the bill, however, did not contain any detailed terms and left the Indian crypto community nervously speculating what it may entail. While there is no official data available, according to India’s biggest spot cryptocurrency exchanges—Wazirx, Unocoin, and CoinDCX— there are 6 to 10 million investors with digital asset holdings worth at least INR 100 million(~USD 1.37 million) in India.

Responding to a question in India’s higher House of Parliament, the Rajya Sabha, Minister of State for Finance Anurag Thakur took a typical ‘anti money laundering, anti crime’ position on crypto in general – while leaving the door open for a government sanctioned digital currency. “The Government does not consider cryptocurrencies legal tender or coins,” he said, “and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The government will explore use of blockchain technology proactively for ushering in the digital economy.”

What now for Indian crypto investors?

On February 11th, Bloomberg Quint reported that a senior finance ministry official speaking anonymously told them that the Indian government is set to move forward with the bill. The official says the bill will entail a complete ban on investment in cryptocurrencies but investors will have a 3 to 6 month period to liquidate their crypto holdings. Bloomberg Quint also reports that the bill will include blanket bans on transacting with both Indian and foreign exchanges.

The official said the bill is modeled on China’s crypto regulation model. China banned both ICOs and shut down local cryptocurrency exchanges in 2017.All cryptocurrency exchanges remain banned in China and the country has begun dress rehearsals to launch its own Central Bank Digital Currency (CBDC). However, unlike India’s proposed bill, China has not made the possession of cryptocurrency illegal.

Options for crypto holders in India include moving their assets into self-custody private wallets, transferring their tokens to partners overseas, or simply selling their tokens and moving on. In a statement provided to Brave New Coin, Kumar Gaurav, the CEO of blockchain-based fintech startup Cashaa says. “Overall, banning crypto will not be a win for anybody. And I trust even the government understands that very well. A harsh step like that might cost a huge loss of investment to the country, considering crypto startups in India have raised over USD 50 million from foreign investors despite the hostile situation in India. Also, in terms of security, not announcing regulations might give rise to the black market. People might still trade but it will become difficult within the country to track.”

Echoing Kumar’s sentiment, in a note written to his followers, former Coinbase CTO and tech space thought leader Balaji Srinivasan explains why he believes India should buy Bitcoin. His argument consists of 10 key points

• Crypto is now a trillion dollar Industry,
• National Security: Crypto means India can’t be de-platformed,
• Foreign Investment: Crypto brings capital to India,
• Remittances & Remote: Crypto enables the remote economy,
• Strengthened Monetary Policy: A digital rupee backed by digital gold,
• Deterring Financial Fraud: Crypto means mathematically provable accounting,
• Technological Development: Crypto is the financial internet,
• Digital Independence: Crypto is the open-source alternative to foreign corporations,
• Foreign Policy: India Should Back Neutral Crypto Platforms,
• India should buy Bitcoin, build a stockchain, attract crypto, and encourage decentralization.

This isn’t the first time the digital asset industry has been demonized by regulators in India. In April 2018 the Reserve Bank of India (RBI), India’s central bank, had ordered financial institutions to cut ties with individuals or businesses dealing in cryptocurrencies like Bitcoin.

For the two years that the Indian cryptocurrency ban was in place virtual currency trading volumes in India tanked and a number of local exchanges were forced to close their doors. Then in March 2020, the three-judge Supreme Court bench said that while the RBI had the powers to take pre-emptive actions in the financial market, they questioned the proportionality of the crypto ban and issued a ruling allowing exchanges to resume rupee transactions.

The decision permitted customers to once again freely swap back and forth between cryptocurrencies and India’s native currency. The news whetted the appetite of Indian crypto fans, and local exchanges including Zebpay, WazirX, and CoinDCX quickly enabled bank transfers for the rupee. In response, buyers rushed in – Zebpay reported server overload immediately following the verdict – and daily trading volumes on Wazirx, India’s largest spot exchange have risen by ~4653% in the last year.

Cryptocurrency in India during Covid-19

Cryptocurrency has thrived in India during the pandemic. India temporarily surpassed Brazil in coronavirus case totals to become the second-worst affected country in the world after the United States. There have been 10.9 million cases of COVID-19 in India so far.

Economically, the period when the pandemic was ravaging the country translated to a sizable GDP contraction of 24.9% in the second quarter of 2020 with the construction, manufacturing & trade, hotels, and transport sectors being the most severely affected. The grim economic data has resulted in a depreciating Indian Rupee and a sliding domestic stock market. In contrast with the struggling economy, demand for cryptocurrency solutions and infrastructure to service this demand has grown despite the economic contraction.

In the second half of 2020, India recovered more quickly than first expected from its Pandemic struggles. “With Covid cases in India now 88 percent off their peak amid growing hopes of herd immunity, India looks right now like Asia’s best post-Covid recovery story,” said Christopher Wood, global head of equity strategy at Jefferies, in a recent weekly note to investors.

Nomura’s India Business Resumption Index (NIBRI), which measures the extent to which the Indian economy is normalizing, hit 98.1 points during the two weeks ended February 14. The measure reaching 100 points, would signify full recovery for the country which was going through a technical recession just six months ago.Google trends search interest for the term “cryptocurrency “ in India spiked in March last year and has been rising sharply since October.

The largest trading pair by volume on India’s most popular cryptocurrency exchange, WazirX, is BTC/INR – suggesting there is significant internal demand in India to trade domestic currency for crypto’s largest asset. The next most popular pairs are the USDT/INR, XRP/INR, and DOGE/INR pairs.Peer-to-peer Bitcoin exchange service Paxful has seen a huge surge in demand for INR to BTC trading

While the India cryptocurrency ban has been lifted, crypto infrastructure in the country has expanded on an injection of new investment capital. Cryptocurrency exchange startup CoinDCX raised a total of US$5.5 million from two funding rounds in March and May last year attracting several global investors, including Bain Capital. Launched in July and May respectively, new Bangalore-based exchanges TradeHorn and BitPolo Technologies are targeting Indian crypto newcomers.

Also last July, Indian IT giant Tata Consultancy Services, announced the Quartz Smart Solution for Crypto Services. The service offers enterprise trading solutions and is targeted at banks and financial services firms. In May its rival, Infosys, began a partnership supporting Bangalore financial transactions platform developer Matic Network.

Internet penetration in the country has also surged thanks to COVID-19 enforced lockdowns. An ICUBE data report prepared by insights and consulting company Kantar estimates that there are currently 574 million internet users in India. The number of monthly active internet users has grown by 24% since 2019, indicating an overall penetration of 41% last year. India has some of the cheapest internet rates in the world and its smartphone user base is expected to hit 820 million by 2022.

Another macro headwind that may be driving crypto adoption in India is the country’s growing demand for remittance services. According to The United Nations Migrant Stock report in 2019, India was the highest recipient of foreign remittances at US$79 billion. India also sends around US$18.75 billion offshore every year for education, healthcare, and other purposes. Cryptocurrency-based remittances services are being utilized in countries like the Philippines, Mexico, and Egypt for faster, cheaper, and more transparent cross-border FX transfers. They utilize technology like on-demand liquidity that eliminates the need to pre-fund accounts in destination currencies.