Will India Lose More Than Gain From a Crypto Ban?
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India’s cryptocurrency industry, along with several fintech watchers, is unanimously echoing a similar sentiment: “Banning is never the answer.” The reason is the Indian government is considering a ban on the digital tokens under The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. A draft of the Bill is expected to be presented in the second part of the Budget Session.
While a decision remains to be taken, digital currency exchanges and trading platforms in the country are on tenterhooks.
"We (industry stakeholders) are optimistic that the government will have a dialogue with investors, exchanges and other stakeholders to create positive regulations, and not go for an outright ban," says Rahul Pagidipati, CEO, ZebPay.
A Regulatory Tug-of-war
The Indian government and the central bank have been skeptical of cryptocurrencies since the beginning and have repeatedly advised investors against dealing in them. After Bitcoin's, the most popular cryptocurrency, first run-up in late 2017, the Reserve Bank of India (RBI) in April 2018 had barred all banks and other regulated financial institutions from dealing in transactions related to the digital tokens.
While P2P transactions and trading were still allowed, severed ties with the banks put most exchanges in comatose, some even forced to shut shop or move base outside the country. Following this, the industry stakeholders along with the Internet and Mobile Association of India (IAMAI) challenged RBI's ruling in the court and won in March last year.
The news restored investor's confidence in cryptocurrencies and in turn, dramatically spurted business growth in the space. Data from cryptocurrency analysis platform CoinGecko shows that trading volume on Indian exchanges WazirX and CoinDCX rose by a whopping 4,106 per cent and 3,239 per cent, respectively, between March 2020 and February 2021. Take note that WazirX’s operations are not limited to India.
This phenomenal growth has also been driven by a spurt in Bitcoin’s price, which touched a record $50,000 on Tuesday, over the year. Predictably, the number of new sign-ups on digital asset exchanges also increased during this period but withdrawals have been stable on the platforms, unlike the 2017 craze, indicating that investors are in it for the long haul this time.
Globally, institutional adoption of cryptocurrencies has been growing by the day, with Elon Musk’s Tesla being the latest to announce an investment of $1.5 billion in Bitcoin. Payments giants such as Paypal, Square, Mastercard and Visa by launching cryptocurrency-related services on their platforms have also contributed to the digital token’s growing acceptance.
But, the Indian government and regulators did not seem to have budged from their original stance of completely prohibiting people from dealing in these digital units.
So, as major economies move forward in accepting and regulating cryptocurrencies, a blanket ban by India will do the country more harm than good, all the industry stakeholders and experts Entrepreneur India spoke to agreed in unison.
Brain Drain, Spurt in Illegal Activities Expected After Ban
The industry will be back to square one if the proposed ban goes through, stakeholders believe.
First, similar to what followed the 2018 RBI ruling, exchanges, trading platforms and other startups in the cryptocurrency space will be forced to move out of the country, “honouring the new law of the land" says Sathvik Vishwanath, co-founder and CEO, Unocoin.
The brain drain this time is expected to be on a larger scale as the Bill also proposes to criminalise cryptocurrencies. Though documents of the Bill are not available in the public domain yet, the Bill is probably drawing upon Garg Committee’s IMC report of 2019 titled “Banning of Cryptocurrency and Regulation of Official Digital Currency”, which proposed a 10-year prison sentence for anyone found dealing in the digital tokens.
Unfavorable law will also mean that employment opportunities are also quashed, says founder of a fintech startup that specializes in algorithmic trading. “The cryptocurrency industry was able to attract good talent in the last one year as the Supreme Court’s reversal of the ban removed the negative connotation attributed to the industry,” he says on condition of anonymity. "Job seekers will now again shy away for the fear of getting linked to the so-called illegal activities.”
In the past few months, startups including CoinDCX, Bitex, CoinSwitch and Unocoin have been on a hiring spree across technology, product, finance, compliance and design departments, offering competitive salaries.
Keeping the digital tokens aside, blockchain innovation, which the government has openly supported, too will come to a standstill as a result of the ban as blockchains can’t function without crypto tokens to power them, says Pagidipati.
He adds the ban will hit small investors the most. “To be honest, wealthier, more sophisticated people may find ways to send their crypto to accounts outside India rather than sell. The average Indian, which is most of our members, wouldn’t have that privilege.”
Further, drawing from the past instances of banning liquor and gambling shows that this route usually results in creation of black markets and fraudulent activities with the common man getting cheated the most, says Navin Surya, chairman, Fintech Convergence Council, which is part of IAMAI. “We’re with the government to curb speculations and malpractices around cryptocurrencies, but that can be done through regulations and not by banning.”
"If anything, the industry has created numerous employment, innovation and investment opportunities," says Vishwanath.
Experts also fear that the extreme approach of banning can also result in India falling behind others in the global fintech revolution. “Globally, we (India) are at the forefront of financial innovation and banning cryptocurrencies at this juncture will take us back,” says Edul Patel, co-founder and COO, Mudrex, a digital asset exchange and a platform that allows cryptocurrency traders to automate trading strategies.The noise around a possible ban has not shaken the investor confidence yet. “There was an initial panic among users before the budget as the price of bitcoin had dropped by 8-9 per cent in India,” says Nischal Shetty, CEO, WazirX. But, it was short-lived and in fact news of Tesla adding Bitcoin to its cash reserves has boosted buying activity, say owners of exchanges