India has the seventh largest economy in the world and its population is particularly fond of gold. Not surprisingly, therefore, the popularity of the “digital gold” bitcoin is on the rise as Indians are increasingly starting to see the value of this new digital asset class.
Bitcoin adoption took a little longer to reach India than other major economies. Bitcoin adoption grew substantially towards to end of 2016 given that India’s Prime Minister Narendra Modi announced the demonetization of 1000 and 500 rupee notes on November 9, 2016, to combat corruption, terrorist financing, and black money.
This move was the first step of Modi’s vision for India to become a cashless society and lead to an increase in the use of electronic payment systems. Naturally, as an online peer-to-peer payment system, bitcoin benefited from this and it was no coincidence that Indian bitcoin exchanges ZebPay, Coinsecure, and Unocoin experienced a surge in new users at this time - kickstarting India’s wave of bitcoin adoption.
India’s local Bitcoin economy
Zebpay, Coinsecure, Unocoin, Bitxoxo, and BTCXIndia are India’s five largest exchanges and enable locals to purchase bitcoin using rupees. International peer-to-peer bitcoin exchanges are also popular among the local bitcoin community as can be witnessed by LocalBitcoins’ trading volumes, which have continuously increased since mid-2016.
With the latest rally in bitcoin, local bitcoin exchanges are seeing yet another surge in users. “Every three months our volumes have been doubling and that trend is continuing,” says Zebpay co-founder Saurabh Agrawal. Unocoin reports similar increases, reporting 5,000 new signs up per day in late November, up from 3,000 per day two months prior.
Much like in most parts of the world, bitcoin is mainly being bought as an investment as opposed to being used as a day-to-day spending currency. However, many Indian freelancer and remote workers have started to receive their salaries in bitcoin thanks to a partnership between bitcoin payroll company BitWage and Unocoin, which has also helped the local bitcoin economy to grow.
The Reserve Bank of India and cryptocurrencies
While the Reserve Bank of India (RBI) is testing blockchain technology to improve efficiencies in its financial system, it appears that the central bank is still undecided about how it intends to regulate cryptocurrencies. To date, there has been a range of mixed statements ranging from a complete ban of decentralized digital currencies to the RBI contemplating issuing its own cryptocurrency.
The latest news declaring the RBI’s stance on bitcoin came on December 5, when the RBI issued a statement in which it reiterated its previous warnings about the risks of investing in cryptocurrencies.
“In the wake of significant spurt in the valuation of many VCs [virtual currencies] and rapid growth in Initial Coin Offerings (ICOs), RBI reiterates the concerns conveyed in the earlier press releases,” the statement reads.
These warnings on the use of bitcoin have become standard among central banks around the world and despite the RBI’s more bitcoin-unfriendly comments in the past few months, no specific regulation covering crypto assets has been issued to date.
Crackdown on Bitcoin investors and ICOs
While the central bank is still making up its mind about how it will manage cryptocurrencies going forward, India’s Income Tax Department has taken clear action against bitcoin users who they suspect are not appropriately taxing their bitcoin returns.
In light of the recent exuberant bitcoin price surge, the tax authority believes that many bitcoin traders are not reporting their earnings as they are legally required to. Under section 133 A of the Income Tax Act, the authority has reportedly raided nine bitcoin exchanges as part of its investigation. “The income tax officials are gathering evidence to establish the identity of investors and traders, the transactions undertaken by them, the identity of counterparties, and the related bank accounts used, among other things,” an ITDI official told the Press Trust of India (PTI).
Furthermore, a Securities and Exchange Board of India (SEBI) official has told NDTV that while it has so far taken a hands-off approach to cryptocurrency regulation, the “SEBI cannot allow gullible investors to be taken for a ride with unlawful promises by these exchanges and those claiming to ‘mint’ cryptocurrencies. A number of them are suspected to be indulging in fraudulent activities without actually minting any such virtual currencies that require very complex algorithms.”
More specifically, the SEBI intends to crack down on initial coin offerings that are taking advantage of investors who have little understanding of the risks of investing in such cryptocurrency ventures and those who are running outright fraudulent operations.
While ensuring that exchanges adhere to KYC/AML guidelines and bitcoin investors declare their earnings is nothing out of the ordinary it does seem like bitcoin-unfriendly regulations could be just around the corner for one of the most promising bitcoin economies in the world.
India’s Bitcoin economy and its wider implications
Bitcoin demand out of India has been one of the driving forces behind bitcoin’s surge in value over the past twelve months. Furthermore, the potential for India - due to its huge population - to continue to be a key driver is substantial.
Hence, a crackdown on India’s cryptocurrency community combined with tougher regulations could not only slow down India’s bitcoin uptake but global adoption as a whole.