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Cryptocurrency could potentially provide RBI with a more sustainable low-cost domestic payments system than UPI or debit cards.istock
Cryptocurrency could potentially provide RBI with a more sustainable low-cost domestic payments system than UPI or debit cards.istock

How crypto is now making a comeback

In India, not only has RBI’s 2018 ban been reversed by the Supreme Court through a ruling in March 2020, but also the country’s famously conservative banking system is making nascent forays into the crypto space

K.S., a 33-year-old financial services professional in Bengaluru was an early crypto evangelist in 2017. He had entered the space in the beginning of that year and witnessed an almost 20-fold growth in his investment. Throughout the year, he introduced cryptocurrencies to friends and the acquaintances he cultivated online, even as a growing tribe of young tech-savvy Indians joined the crypto bandwagon.

However, K.S. lost interest in cryptocurrency after a steep crash in early 2018. Then, a Reserve Bank of India (RBI) ban followed in April 2018. The industry promptly went into a deep freeze. Crypto exchanges either shut shop or started looking outside India for opportunities. That era of tumult and waning interest may have finally ended. Amid the pandemic, crypto markets are rallying once again. But, more importantly, companies and businesses are now beginning to view cryptocurrencies more favourably as an attractive alternative store of value, instead of just as an asset that is prone to bubbles—a long-time hope of proponents.

Last week, PayPal announced that it would allow cryptocurrency in its wallets. The announcement followed a decision by several companies to hold crypto in their treasuries. A global thaw is likely to provide important directions for India too. Ultimately, the key, perhaps radical, shift is not the ability to hold crypto assets per se, but when businesses accept it as a form of payment for, say, groceries or movie tickets. Suddenly, that day seems much more of a possibility now than it did in 2017.

In India, not only has RBI’s 2018 ban been reversed by the Supreme Court through a ruling in March 2020, but also the country’s famously conservative banking system is making nascent forays into the crypto space. On Monday, a London-based cryptocurrency platform, Cashaa, said that it had tied up with a multi-state cooperative credit society in India and would pursue more such tie-ups as part of its Indian operations. Such societies are regulated by the registrar of cooperative societies, rather than RBI. The larger regulatory environment is still a nebulous void, and remains the main source of uncertainty, but several players in the ecosystem are bent on pushing ahead on crypto.

Even consumer interest is spiking. K.S., who lost money in the 2017 rally, did not venture back into the space, but Yash Zanwar, a 21-year-old engineering student at BITS Pilani said 5% of his savings will always be in crypto. “If the price shoots up, I will do well and if it collapses, I won’t lose much. I have an interest in tech in general and, hence, crypto is attractive from that point of view," he said.

“Around 15% of today’s investors, I would say, would be those who joined before the Supreme Court ruling (in March)… who have seen the rally of 2017," said Gaurav Dahake, CEO, Bitbns, a cryptocurrency exchange. “For the large segment of new investors, it is low fixed deposit rates, a depreciating currency, and lacklustre stock markets that are bringing them in."

Crypto exchanges have smelled opportunity in the air and ramped up operations. One such exchange, Coinswitch Kuber, told Mint that it has signed up 400,000 users in just 4 months of operations in India. Many of these new users are less likely to be driven by the frenzied expectations of 2017 and may prove to be more loyal to the segment. The big gamble driving this new inflow? That the global environment will drift slowly and inevitably towards greater support for cryptocurrency-like instruments.

“Since the SC judgement, we’ve tripled our monthly active users," said Vikram Rangala, chief marketing officer, Zebpay, a cryptocurrency exchange. “They aren’t just short-term traders. We see a lot of interest in long-term value investing in crypto, including from women, who have been underrepresented up to now. And what do investors want? Security and transparency, which is why we welcome (new) regulation."

Crypto boom

Signs of yet another boom in the space have already resulted in adventurous capital pouring into India, in the form of global exchanges buying Indian ones and via private equity (PE) investments. India’s largest crypto exchange, Wazir X, was purchased by a global player, Binance, in late-2019. Unocoin, which was the second-largest exchange in India in 2017, recently announced a fundraise of $5 million from Draper Associates. Coinswitch, a global cryptocurrency exchange, launched its India business Coinswitch Kuber in June 2020.

“We are seeing daily volumes of 10-11 crore. The average user invests around 11,000 into cryptos on our exchange and around 75-80% of them are below the age of 45," said Ashish Singhal, co-founder, Coinswitch. “In a short span of time, India has become as much as 15% of our global volume. However, industry-wide, India does not play a significant role in the global crypto market yet," he said.

The crypto industry has also been at pains to reorient investors away from short-term trading. “Unlike other assets, a majority of the participants in cryptos in India are traders rather than investors. We are trying to change this with our daily SIP-like feature," said Bitbns’ Dahake. “The original need for crypto came from freelancers who were due small payments from abroad," said Nitin Agarwal, founder and director, B21 Ltd, a cryptocurrency investment platform. “The costs of international money transfers were prohibitive, particularly for small amounts of money and the process was time-consuming. In 2017, many new cryptocurrencies got launched and this gave way to speculation. In today’s market, we are undertaking a conscious effort to nurture long-term holders."

In the wider world, a longer-term view is already leading to a regulatory thaw and a renaissance of sorts for crypto. The soundness of the underlying technology—particularly for international money transfers and for enforcing contractual payments—is resulting in wider adoption. Apart from PayPal’s recent move, Square, a payments fintech led by Twitter CEO Jack Dorsey, has announced that it would invest 1% of its assets ($50 million) in bitcoin this year. And, on 9 October, the Bank of International Settlements (BIS) and seven other central banks, including the US Federal Reserve and the European Central Bank, unveiled a report laying out principles under which central banks could launch their own cryptocurrencies.

The report said that such central bank digital cryptocurrencies (CBDCs) should complement rather than supplant cash. They should not harm financial stability and they should be low cost or completely free. There should also be an appropriate role for the private sector in them and their features should promote innovation and efficiency. The report came even as individual central banks such as China have marched ahead with trials of their own CBDCs.

“You can divide the world into 3 buckets," Ajeet Khurana, former CEO of Zebpay. “Countries which are opposed to crypto, countries that allow crypto but don’t actively encourage it, and countries that actively encourage crypto. Over the past few years, a host of countries have shifted from the first to the second bucket, and some to the third bucket, such as South Korea and Japan. China is an interesting example. Even when it banned crypto in the past, it allowed its firms to manufacture crypto mining hardware and export it," he said.

In India, while the RBI crypto payments ban was in effect over a two-year period, the government got to work on stronger criminal legislation on the subject. “No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use cryptocurrency in the territory of India," says section 3(1) of the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019. The law then goes on to prescribe imprisonment up to 10 years and not less than a year for such activities.

Though it has not yet seen the light of day, this law, based on the recommendations of the Subhash Garg committee hangs like a Damocles sword on India’s cryptocurrency industry. News reports of the government introducing the bill make regular appearances in the media, sending the industry into a tizzy. In the meantime, the bill’s author has left the government and moved away from the bill’s blanket ban position. In an online session with crypto industry professionals and lawyers on 17 July 2020 (a webinar hosted by Khaitan & Co.), Subhash Garg drew a distinction between permitting cryptocurrency as currency and allowing it to exist as an asset.

While the former should be banned, Garg said, the latter should be permitted with adequate safeguards to prevent uninformed investors from getting sucked into a speculative bubble. “I don’t think that a blanket ban of cryptocurrency in India will stand judicial scrutiny. Such a ban will be immediately challenged by the industry. Rather, regulation will bring certainty to the industry and tax revenue to the government," said Rashmi Deshpande, partner, indirect tax at Khaitan and Co.

The dark underbelly

Calls for adequate safeguards and worries about speculative bubbles have been an integral part of the cryptocurrency market. During the boom of 2017, a slew of “Made in India" coins were also launched in the country, which turned out to be Ponzi schemes. The anonymity in-built into the technology is a major concern for India’s law enforcement agencies.

95% of initial coin offerings (ICOs) are scams, industry insider and Bitbns CEO Dahake said. Recently, On 3 September, the Twitter account of Prime Minister Narendra Modi was hacked. A tweet from it asked for donations in cryptocurrency to the PM National Relief Fund. The message brought to the fore the connection with crime that India’s crypto industry is anxious to downplay.

Large crypto exchanges take pains to point out that they conduct careful Know Your Customer (KYC) procedures to counter money laundering or other types of criminal activities. “We do KYC for our users in the same manner as stock exchange brokers. We ask for Aadhaar, PAN and video verification," said Singhal of Coinswitch. However, the lack of a regulator has left the industry vulnerable to key risks. Exchanges can sometimes go bust or simply vanish without a trace. Cryptocurrency can be transferred outside the country with ease—its very nature makes national boundaries irrelevant. This leaves investors vulnerable to theft and entirely dependent on the probity of the exchange in question.

The road ahead

India’s payments revolution—from the creation of NEFT to UPI—has been a relative bright spot in an otherwise bureaucratic business landscape. However, the system is creaking at the edges because banks are beginning to resist the idea of processing hundreds of thousands of small transactions for free.

Several banks began limiting the number of free UPI transactions in 2020 and even collected fees on some transactions. This was met with an angry missive from the IT department in August 2020, which asked banks to refund such charges or face penal action. Cryptocurrency could potentially provide RBI with a more sustainable low-cost domestic payments system. Industry executives emphasize the ability of crypto to support micropayments, such as a few paise per page view for a website, which current systems and payment gateways cannot permit. The problem of high forex transfer costs for small Indian freelancers (if their customers happen to be outside the country) also remains to this day.

A regulated cryptocurrency market could have far lower costs, Zebpay’s Khurana said. But everything will depend on the nature of regulation India adopts. “Those cost savings could evaporate if similar levies and market structures as those which exist in the current forex market in India are mandated (via new rules)," Khurana added.

Although far away from the mania of 2017, cryptocurrency refuses to die out. Industry professionals and investors are even exploring new applications to develop it further. Decentralized Finance (DeFi) is one such idea. A type of self-executing contracts, such as loan agreements, the instrument could make banks and courts which are required to enforce traditional contracts irrelevant. DeFi could also enable crypto investors to earn interest on their holdings.

Meanwhile, global attitudes are clearly softening. The IMF released a video explainer on crypto in August 2020 with a neutral approach to the subject. Thus, ultimately, the nature of regulation that India decides to latch on to will be the crucial determinant. If the country goes down the path of blanket criminalization, it may lose a seat at the table in the coming second wave of fintech innovation.

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