Crypto investors and exchanges in India upbeat despite threat of government ban

Market participants believe stricter control of the sector is more likely than outright prohibition

Shaktikanta Das, governor of the Reserve Bank of India. Mr Das has expressed 'major concerns' about the effect cryptocurrencies can have on financial stability. Dhiraj Singh/Bloomberg

A cryptocurrency bill under review in India has prompted speculation that the country could ban digital assets. But many industry insiders believe that once the details of the proposed law are finalised, it could bring about much-needed regulation rather than an outright ban on cryptocurrencies.

The sector “is optimistic about the outcome and feels that the government may regulate it, tax it and probably tighten the norms”, says Sumit Gupta, chief executive and co-founder of CoinDCX, a cryptocurrency exchange platform in India.

Concern about the future of cryptocurrencies in the country is emerging as Bitcoin this month hit a record high above $60,000. There are 8 million investors holding about $1.4 billion of cryptocurrency assets in India, according to industry estimates published by Reuters.

The possibility of a ban is a potential blow to exchanges and investors – many of whom bought heavily into cryptocurrencies last year after the Supreme Court reversed a 2018 order by the Reserve Bank of India (RBI) that had prevented banks from dealing with transactions related to the digital assets.

In February, central bank governor Shaktikanta Das told news channel CNBC-TV18 that he had “major concerns” about cryptocurrencies because of the impact they could have on “financial stability”. He said the central bank had relayed these concerns to the government, but added that the underlying blockchain technology was separate and could be useful. In the past, the RBI has said the possibility that digital currencies could be used for money laundering or terror financing is a major worry.

There have long been rumours about a potential ban, but these intensified last week after a Reuters report said a proposed new law could impose some of the world's strictest policies on cryptocurrencies. The news agency cited an unnamed government official who said India could make it illegal to even hold digital assets, as well as trade and mine them.

The Reuters report also suggested that investors would be given six months to liquidate their crypto holdings.

Investors are concerned, but they remain optimistic about the proposed law.

“Banning crypto will be like banning the internet or gold in [the] early days,” says Bitcoin investor Aditya Singh. “So, I personally feel the Indian government might take time but will eventually bring positive regulation.”

Comments from the country's finance minister Nirmala Sitharaman this month have given the industry some hope that the government might not introduce a blanket ban. She told local media that the government is open to “experiments” when it comes to cryptocurrencies.

“All of her statements and those from other officials tell me there will be more of a regulation and not a ban,” says Rahul Pagidipati, the chief executive at ZebPay, an Indian cryptocurrency exchange with 4 million customers.

But the company is also not ruling out the worst-case scenario.

“We are prepared, but not worried, about a ban,” says Mr Pagidipati.

Some details of the Cryptocurrency and Regulation of Official Digital Currency Bill emerged in January when it was listed in parliament, which proposed that all private cryptocurrencies in India are prohibited. The bill also includes details on creating a framework for the RBI to introduce its own digital currency.

“Since then, the industry has been talking with government officials and doing awareness campaigns like #IndiaWantsBitcoin,” says Mr Pagidipati.

News of the bill sparked a sell-off that lasted for a few days, he says. “After that short dip in early February, demand has shot up. February 2021 was our highest volume month of all time.”

Factors including Tesla chief executive Elon Musk backing Bitcoin have attracted more Indian investors to cryptocurrencies and exchanges have been growing their business, Mr Pagidipati says.

India is not alone in its concerns about the speculative nature of cryptocurrency investments. It has long been an issue globally, as countries grapple with how they can try to enforce some kind of oversight over the virtual currency ecosystem.

If an outright ban is enforced, India would be the first major economy to make ownership of digital assets illegal. China has banned trading, but it is not illegal to hold the virtual currency in the country.

“I do not foresee any reasons for an outright ban on cryptocurrencies in India,” says Sharat Chandra, a blockchain and emerging technology expert based in Bangalore.

But he points out that “the government’s concerns aren’t misplaced”.

“The regulatory vacuum with respect to cryptocurrencies had led to many exchange frauds and illicit activities,” says Mr Chandra.

“Regulation is important to weed out bad players and promote the ones fostering innovation. Money laundering and issues related to terror financing can be tackled with a more pro-active regulation.”

However, a ban would be “catastrophic” to those working in the industry in India, including hundreds of start-ups in the space, he says.

“A robust regulation would not only get more business and investments into the country but also contribute to job creation,” says Mr Chandra.

Edul Patel, the co-founder and chief executive of Mudrex, a cryptocurrency trading platform in India, says the industry needs clarity.

“I think a bill should be passed,” says Mr Patel. “I also have faith that such a bill will leave some ground for us to work with.

“Once a bill comes out, it provides guidelines about what can be done and what can't be done. It clarifies the government’s stance and removes speculation. It gives you a playing field with rules, and rules are important.”

If cryptocurrency activities were criminalised in India, he believes it would fuel a black market for crytpo trading.

It would “give rise to illegitimate transactions” and “will open retail users to significant risk and, unfortunately, end up causing more damage”, he says.

The industry is craving certainty, particularly after the hit it took in 2018 when the RBI stopped banks from handling cryptocurrency transactions.

ZebPay shut down its operations in 2018 following the move, and only relaunched last year – just before the Supreme Court struck down the RBI's order – after which it and other exchanges saw a surge in fresh interest.

Bangalore-based Kush Jain, who works for Mudrex, has invested in cryptocurrencies since 2017. Most of his holdings are in Bitcoin, but he also “experiments” with other assets including Ethereum and Ripple. He was "burnt" by the RBI's 2018 directive, which meant he couldn't get his hands on his investments.

Once that was reversed, he liquidated some of his assets, but then regained confidence and returned to investing in crytpo. He “is not panicking” about another potential ban, but says he would be affected should one materialise.

Yet concerns about the potentially destabilising effects of cryptocurrencies hasn't stopped the RBI from looking at India having its own digital currency.

“India does not want to be a laggard in the central bank digital currency [CBDC] space,” says Mr Chandra. “This explains the government’s move to bring in the bill to empower RBI to issue CBDC.”

He says such a digital currency could “bring efficiency and transparency to the cross-border payments process”.

India has an opportunity to “play a big role in this trillion dollar industry as a proactive player”, says Prashant Pandit, a cryptocurrency adviser and executive director for Universal CLC.

“We are presenting our case to the finance ministry along with crypto exchange operators and institutions,” he says. Along with other industry players, he believes that many of the authorities' concerns can be addressed by putting a regulatory framework in place rather than imposing a ban.

“Regulations are necessary to protect people from bad actors,” says Mr Pagidipati. “By their nature, innovations always come before the laws to regulate them.”

And despite the current uncertainty, he believes the industry will ultimately emerge stronger.

“Besides protecting people from fraud and other crimes, regulations would do two other things right away. One, it would give companies a set of rules and guidelines to follow. Two, it would tell the public that it’s safe to invest in crypto and do business with blockchain companies.”