India’s Bitcoin love story to end in break-up?

India is home to a large bitcoin community and the country has a long history with gold. To the disappointment of the India crypto industry, the crypto asset regulatory climate in India has long been uncertain, however.

**A series of warnings **

The Reserve Bank of India (RBI), the country’s central bank first released a statement on December 23, 2013, warning citizens about the potential legal and security risks associated with transacting in digital assets such as bitcoin.

The RBI updated its position in February 2017, now firmly adopting an unfavorable stance. Through its Chief General Manager Jose J. Kattoor, the bank reiterated its 2013 warning and stated that the crypto sector was on shaky legal grounds in the country. The statement said: “The Reserve Bank of India advises that it has not given any license/authorization to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.”

In April 2017, the Indian government set up the first committee designed to create and propose a set of cryptocurrency regulations. According to a piece by Quartz, its initial report, submitted in July 2017 leaned towards a strong regulatory approach. The report was later benched in favor of a new committee.

In December 2017, the RBI issued one more statement. Despite not issuing any new information, the regulator alluded to concern regarding the increasing growth of crypto asset trading in India. Globally, 2017 was a boom year for the crypto markets. As the market rallied, the sector attracted a large number of new investors and the exploding ICO market attracted large numbers of new and unsophisticated investors. The boom also attracted a number of bad actors seeking to defraud investors new to the space. This became a cause of concern for regulators in India, and around the world.

The Indian government again attempted to create a set of regulations for the crypto asset sector, in December 2017. The government set up a new panel tasked with considering local regulations in a global context.

The new committee is headed by the secretary of Economic Affairs in the Finance Ministry, Subhash Garg. Other members of the committee include Ajay Tyagi, the chairman of the Securities and Exchange Board of India (SEBI) as well as the Deputy Governor of the RBI, B.P. Kanungo. On February 3, 2018, Garg revealed that the committee was hoping to table a complete set of regulations by the end of 2018.

The 2018 escalation

On April 6, 2018, the RBI released an extremely unfavorable ruling for the crypto asset sector in India. The RBI issued regulatory guidance to all financial institutions under its jurisdiction, barring them from providing their services to any entities associated with crypto assets.

The April ruling stated: “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs.”

The central bank further indicated that all affected parties, for instance, banks, NBFCs, and Payment System Providers, were to cease providing services just three months after publication of the regulatory diktat. The ban went into effect on July 6, 2018. Thereafter, both private individuals and businesses such as exchanges were unable to interact with the crypto asset sector through Indian bank accounts. Many banks shut down any accounts associated with cryptocurrency exchanges.

The fallout

In a response to a Right To Information (RTI) request by a New Delhi lawyer, the RBI revealed that the RBI directive was published without much in the way of stakeholder insight or regulator research. Varun Sethi filed his request in April 2018 and revealed the received response in June. Speaking to Quartz, Sethi explained: “It seems as if the ban was arbitrary and it came into effect without any thought from the RBI. It has either answered in the negative or given conflicting answers to our questions asking what led to this ban.”

In response to the ruling, which many considered punitive, disruptive and unfair, a number of parties took the issue to the Indian high court. Several exchanges and other interested groups named the RBI, SEBI, India’s Finance Ministry and the Narendra Modi government as respondents in their petitions against the ruling. Initially, the courts ruled in the government’s favor, refusing to grant interim relief for exchanges and other affected parties. Consolidating all exchange petitions against the government in May, as well as sitting for the initial hearings, the court stated that the matter would be heard in a final hearing in September 2018.

In November 2018, as part of the documents made public through the court proceedings, it became clear that the government was drafting a bill for the digital asset sector. Revealed to be the creation of the Garg-led committee, the documents did not provide a specific timeline for the tabling of the bill.

Following a number of delays, the Indian supreme court ordered the government to create a clear regulatory framework regarding the digital asset sector on February 25, 2019. According to_ Kanoon_, an India-focused crypto publication, the “Supreme Court has granted four weeks to the Indian government as the final opportunity to bring about a policy (rules and regulations) on cryptocurrencies.”

However, a month later on 29 March 2019, when the case was set for a hearing, the court adjourned the hearing on the request of the government, signalling an incomplete regulatory document. _Kanoon _explained that the court stated that the matter would be finalized on a yet to be determined date in July 2019, with final arguments to be heard on that date.

On April 26, 2019, Economic Times India reported that the government was about to table a bill to ban all crypto assets. The bill is currently being discussed between ministries as the government seriously considers banning digital assets. In a draft called the “Banning of Cryptocurrencies and Regulation of Official Digital Currencies Bill 2019", relevant government officials have been mulling over the decision.

Departments involved in the decision include the Department of Economic Affairs (DEA), Central Board of Direct Taxes (CBDT), Central Board of Indirect Taxes and Customs (CBIC) as well as the Investor Education and Protection Fund Authority (IEPFA).

As a result of Indian authorities cracking down on crypto, a number of exchanges, such as ZebPay and Coindelta have closed their doors in the country while Unocoin was forced to lay off half its employees as lack of access to traditional financial services further stifle growth.

India’s proposed ban on cryptocurrencies is somewhat at odds with Modi’s plan for the country to become a cashless society. Nonetheless, India may become the first major economy to attempt to ban bitcoin outright. While Indian authorities are succeeding at shutting down major bitcoin startups, the recent rise in BTC/INR trading volumes on P2P exchanges LocalBitcoins and Paxful suggests that India’s love for digital gold is unlikely to disappear.