By Bradley Dunseith
Bitcoin trading in India peaked to over US$3.5 million this September, following a steady rise in domestic usage. While a monthly trading volume of US$3.5 million may seem insignificant in juxtaposition to global trends – the U.S. bitcoin trading volume for the same month exceeded US$36 million – the figure demonstrates India’s growing interest in cryptocurrency.
India’s financial institutions are digitizing at a time when nearly 40 percent of the country’s 1.3 billion population own smartphones. Indians, furthermore, are becoming skeptical of keeping the entirety of their savings in banks – a sentiment exacerbated by the recent demonetization of 86 percent of the country’s paper currency.
These trends all make India ripe for a spur in cryptocurrency usage, and trading. Looming government regulations, however, may turn this boom into bust.
Cryptocurrency in India
Though India was regularly buying and selling bitcoin in as early as 2015, the cryptocurrency made its real debut as fiat money in November 2016 when the Modi-led government demonetized 86 percent of paper currency.
The reason for this is twofold.
First, demonetization forced many Indians holding onto large amounts of untaxed, black money to quickly find new, novel ways of laundering money in order to avoid both taxation and government scrutiny. Bitcoin became an ingenious way to hide money from the purview of the state: would-be money launders could simply purchase large quantities of bitcoin with old rupee notes, then sell them back later for newly minted, legal currency.
Secondly, and more importantly, demonetization showed Indian citizens that they could not trust the government to uphold the value of money. As journalist and novelist John Lanchester explains in an essay on bitcoin, “The value of fiat money is an act of faith”. By turning the vast majority of India’s fiat currency into valueless paper overnight, the Indian government broke that faith.
For tech-savvy Indians, bitcoin, a digital currency independent from banks and government, became an attractive alternative to government controlled currency.
Despite the demonetization-driven spur in bitcoin purchases in India, cryptocurrency usage remains peripheral. Though its price is volatile in nature, bitcoin is consistently more expensive in India than rates on the international market – by five to 10 percent. This is largely because India lacks bitcoin ‘mining’ capacity, the excruciatingly slow and energy intensive means of generating new bitcoins through the verification of sophisticated algorithms.
Furthermore, Indian nationals struggle to buy bitcoin from foreign exchanges due to government restrictions on cross-border currency flows.
However, a growing domestic cryptocurrency ecosystem and favorable government regulations could make bitcoin more accessible to middle class Indians, setting the stage for a digital gold rush.
Government regulations on bitcoin
In April 2017, Finance Minister Arun Jaitley formed an interdisciplinary committee to assist in drafting a regulatory framework for cryptocurrency in India. The committee submitted their report in August 2017, and the government has stated their intention to publish proposed rules on cryptocurrency in the near future, though have yet to stipulate a date.
As early as 2013, the Reserve Bank of India (RBI) began cautioning Indians of the risks and potential misuses of cryptocurrency. A lack of understanding about how cryptocurrency works in India has given rise to fraudulent and predatory schemes. Moreover, the recent global ransomware attacks, which affected India as well, where cyber-hijackers demanded bitcoin in payment, has added urgency to the need for a government policy on cryptocurrency.
In response, the Indian government is allegedly mulling the creation of its own form of digital currency to compete with the bitcoin called ‘Lakshmi’ (named after the Hindu goddess of wealth and fortune). This would be a largely unproductive strategy, given that the appeal of cryptocurrency is its independence from governments.
Many observers assume that cryptocurrency will come under the gambit of the RBI, though Digital Currency Exchanges may also have to register under the Securities and Exchange Board of India (SEBI). The Indian government will most likely make cryptocurrency taxable and create guidelines for Initial Coin Offerings (ICO) in which cryptocurrency ventures raise funds in bitcoin and other digital monies.
A central concern for the Bitcoin community in India, however, is how the government will define cryptocurrency. Though referred to in terms of currency, given its slow transaction times and volatile value, bitcoin operates more like an asset. A decision to classify it as a currency instead of an asset would necessitate a large regulatory apparatus – constituting a serious discouragement for bitcoin usage in India.
A new milestone for Digital India?
As the Indian government watches the domestic growth of cryptocurrency with a mix of apprehension and intrigue, local startups are leading the way in incorporating bitcoin and other cryptocurrencies into India’s lofty digital ambitions.
A dedicated group of bitcoin exchanges now provide app-based buying and selling; similarly, a small but growing number of stores and online vendors are accepting cryptocurrencies for products and services. A series of funding rounds have already taken place for cryptocurrency startups such as Coinsecure, Unocoin, and Zebpay – an indication that investors are taking notice.
As India moves to digitize much of its financial services and parts of its consumer market, cryptocurrencies offer a new, dynamic addition to the Digital India project.
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