Here's Why Crypto Exchanges Are Here to Stay Despite Government Crackdown No government can kill cryptocurrencies even if it wishes to.

The move by RBI has created too much of noise since its April 5 circular. Before deliberating on how it has "impacted' start-up exchanges, let's look at the bitcoin price which reportedly "crashed sharply'.

As per cryptocurrency ranking website CoinGecko, Bitcoin in India was trading at Rs 4,46,588 on April 5 midnight, which quickly bottomed out at Rs 4,29,151 on April 6 at around 7 pm – less than two days. After 10 days, however, it went up to Rs 5,33,737 and reached a new high at Rs 6,13,291 after subsequent 10 days. If one looks at the last 30-day graph, there has been steeper falls and rises before and after the RBI circular. Hence, the price resiliency has ruled out the impact whatsoever. "There was panic and knee-jerk reaction for two days but after that the market again picked momentum," says Abhishek G, Co-founder and Chief Executive Officer, ThroughBit. The platform went live on July 2017.

Measuring Impact

Coming to the "impact' part, RBI, essentially, in its circular had asked banks to end its support individuals or businesses dealing in cryptocurrencies. This means the exchange of any to cash and vice versa will be forbidden after July 5. Hence, risk-averse investors who fear their money being stuck still have time to liquidate their small or large holdings in cryptocurrencies. However, there is a surprise factor.

"While banks are currently supporting investment withdrawal, but interestingly, the proportion of the number of withdrawals is not that high. So people are thinking about cryptocurrency investment in long-term," says Ajeet Khurana, Member, Blockchain and Cryptocurrency Committee of India and Chief Executive Officer, Zebpay – Singapore and Indiabased exchange start-up.

Ideally, investors should stay invested instead of looking to sell their holdings as transacting is not limited to Indian market. Hence, the ban may have reduced the price of the currencies but it would stabilize soon. For such investors and for those who want to remain invested for a long-term longterm, start-ups like Delhi-based BuyUcoin – another exchange- could explore other options."As a backup, we are planning to float a company in countries like Singapore, Belarus, Estonia or Malta so that we can continue ouroperations," says Shivam Thakral, Co-founder and Chief Executive Officer, BuyUcoin.

The existing users or investors can use cryptocurrencies, saved in their wallets, in another country from their BuyUcoin accounts. The model, in such a case, would be much like existing global exchanges - cryptocurrency is exchanged with another cryptocurrency aka crypto-tocrypto which doesn't require bank accounts instead of fiat (legal currency) – to-crypto. If investors want to sell their holdings in other country and remit the money back to India, then they, says Hesham Rehman,Chief Executive Officer and Cofounder, Bitxoxo, "Need to hold a back account in that country that permits crypto-to-fiat conversion or ask their friends or family in the respective country to go with their bank accounts."

Crypto-to-crypto wasn't supported by Indian exchanges until CoinDCX, Zebpay and Koinex announced such transactions in April this year. ThroughBit too is ready with its crypto-to-crypto platform to continue with its operations in case the RBI ban continues. Thakral, however, still doesn't want to take the chance. "We cannot trust the government to allow us with that later. Moreover, we also need a bank account if we want to stay in India and pay salaries or taxes etc." Also since the number of users on each of the exchanges is still small, moving abroad won't be tough. Exchanges could also offer a cash-based service to buy and sell cryptocurrencies.

NO WAY OUT

While, globally too, countries like China, which outrightly banned cryptocurrencies, and South Korea, which banned initial coin offerings, have seen investors finding ways to trade. For instance, Chinese investors have been trading on the over-the-counter market and using virtual private networks to trade on Hong Kong and Japan-based exchanges. In South Korea, fintech company DAYLI Financial Group issued its coin called ICON in Switzerland. By using overseas listing for local trading, the currency is traded on South Korea's local exchanges, yet outside the purview of the government. Iran is among the latest in the list of countries imposing the ban in April this year.

The bottom line, however, remains that none of the countries have been able to stop cryptocurrency trading. Then there are other options that investors and exchanges might resort to in near future. For instance, sending cryptocurrencies via email, Twitter or SMS in case there is no internet access. Going extreme, if there is no electricity supply to charge your phone and send bitcoins over a message, solar-powered solutions would be handy.

"Few exchanges may be going towards crypto-to-crypto model, while some may establish themselves outside India and others may go for a cash-based market, such as cash pick up and cash drop," says Sathvik Vishwanath, Chief Executive Officer and Cofounder, Unocoin – Bengaluru-based bitcoin wallet.

The fact that Bitcoin is based on blockchain, which is a decentralized system, it would be tough for any government to completely ban it. It is much like the internet which nobody owns. "The government can only forcefully shutdown exchanges, but it cannot stop the trading which has been in existence even before cryptocurrency exchanges were launched," adds Hesham. This also possibly means giving rise to a parallel black economy which, Khurana asserts, can be checked if transactions are allowed through the bank account. "While RBI has stopped the use of bank accounts, we would have intuitively thought that the only way you can transact is through a bank account."

Another way could have been by getting Know Your Customer (KYC) done on the exchanges to ensure that cryptocurrencies are not sent to unverified accounts. Abhishek explains, "We would be able to ensure whether the customer who has sent Bitcoins from ThroughBit to another exchange is his own account or someone else's and whether his KYC is done." Largely, the problem is cryptocurrencies are seen as a way to make a quick buck. However, in reality, it is meant for enabling fast and free transactions. That's the adoption required in India. "Otherwise, it will become another big speculative instrument," asserts Vishwanath. For this mindset to change, the price volatility must come down.

THE FINAL BET

Angel investors too are less bothered about the ban. Governments like Singapore, Switzerland etc., have found a way to regulate such businesses and are working with startups to develop policies. Those which haven't are starting with a control mechanism to figure out the policies. This, in fact, allows angel investors to find early bets before other investors. "If we wait for the regulations then possibly the investment opportunities will be lost to large investors, as by then everyone would understand how it works," says Sanjay Mehta, angel investor, who has around 80 start-ups in his portfolio and recently backed Block.one.

The fate for cryptocurrencies, he believes, would be similar to peer-to peer (P2P) lending. The RBI had last year passed guidelines for them being regulated as non-banking finance companies. "Similar outcomes will be for cryptocurrencies. Following which, the institutional investors will also come in as opportunity seems as big. If the internet was about transferring information at scale, cryptocurrencies are about transferring value at scale," he adds.
How the RBI will behave ahead and what the report by its interdepartmental group- which has been formed to understand the feasibility of a fiat digital currency - says will determine the future course of action.

"I feel, it is a temporary bump since a great opportunity along with money being involved. The government wants to slow the industry down a little bit while they are able to figure out how it has to be regulated. So there will be a middle path as denying essential services for a business that is not considered illegal, is extreme," says Abhishek. That's certain, given the example of Ahmedabad-based firm Kali Digital Eco-Systems which filed a petition against RBI's ban. The firm was expected to launch its exchange called Coil Recoil.

RBI has largely three objectives with the ban - first, consumer protection; second, market integrity and third, preventing misuse of the cryptocurrencies. While everyone in the ecosystem wants cryptocurrencies to be regulated but it doesn't have to make banking transactions the scapegoat. "We are unable to see how not having a market improves this integrity and how it will protect people by not allowing them to transact," concludes Khurana.