On July 20, the Supreme Court of India will hold a hearing regarding the state of cryptocurrencies in the country. It is a decisive date for the local crypto industry that has been significantly suppressed in the past month by the Reserve Bank of India’s (RBI) ban on all banks' dealings with crypto-related businesses.
The hope for an overview of the hardline approach lives on, however, as last week a report citing anonymous sources in the government suggested that cryptocurrencies might be viewed as commodities in the future, and hence become regulated by relevant authorities rather than remain mostly banned.
Brief history of cryptocurrencies in India
India has not been perfectly cohesive in its stance toward crypto. The relationship between the two dates back to December 2013, when the RBI first issued a general public announcement to potential crypto users, warning them about typical risks involved — volatility, security and ties to illicit activities. Since then, the agency has been putting out similar notes in response to crypto’s gaining popularity, with the last one being issued on December 2017.
Those kind of warnings, however, failed to address the legal status of Bitcoin (BTC) and altcoins in the country — as Dr. S.P. Sharma, Chief Economist, opined in an interview with the Economic Times of India in October 2017, “neither has the government formally brought Bitcoin under the definition of currency, nor has it made it illegal.” According to some experts, the state chose the passive role simply due to not having a coherent plan in mind. Thus, Anirudh Rastogi, managing partner at the law firm TRA, told Quartz India:
“[Not having a concrete strategy] is the reason why they have been reiterating similar comments and warning the common investors to not go overboard.”
Nevertheless, as cryptocurrencies gained even more extreme momentum in December 2017 — when Bitcoin was infamously trading for $20,000 — the government stepped in with straightforward action, as India’s Income Tax Department began its major sweep. According to Business Standard, by December 13, the watchdog had visited nine virtual currency exchanges in Bengaluru, Hyderabad, Mumbai, Delhi and Kochi on the matter of tax evasion. Further, the agency reportedly sent tax notices to as many as 400,000-500,000 investors, based on their transaction history.
The situation became even less optimistic for cryptocurrencies after India’s Ministry of Finance compared Bitcoin to a ponzi scheme and local banks — including State Bank of India (SBI), Axis Bank, HDFC Bank, ICICI Bank and Yes Bank — began taking strong action against crypto exchanges by either closing their accounts altogether or significantly curtailing operation.
In April 2017, the RBI announced that the bank would no longer provide services to any person or business that deals with cryptocurrencies, and that decision essentially became law on July 5, when the deadline expired. That means that Indian citizens are currently not able to buy and sell cryptocurrencies on exchanges. Instead, they need to use peer-to-peer networks, where mainly crypto-to-crypto operations are allowed. If an Indian citizen wants to exchange crypto to fiat, then they will need to turn to marketplace exchanges or the black market, the Times of India explains. Additionally, crypto exchanges and companies cannot receive loans from banks in India, according to the legislative.
New reality: outlawed crypto
It would be fair to argue that the Indian government’s hardline regulatory action thus far has only prompted the crypto industry to go underground, and has therefore become even less regulated. At this point, a significant number of local exchanges have either closed shop or partly ceased their operation: The first victims were BTCXIndia and ETHEXIndia, who chose to shut down back in March, when the RBI ban hadn’t been announced yet. BTCXIndia cited the Indian government’s “discouraging cryptocurrency trading” as the primary reason for closure at the time. Both of them are inactive to this day.
The largest remaining players, namely Zebpay and Unocoin — Coinsecure is still offline due to the recent cyberattack — now warn their clients that rupee withdrawal processes can be compromised at any time due to the RBI ban deadline. In its announcement regarding the matter, Unocoin mentions that they are “in the process of deploying new mechanisms for INR deposits and withdrawals,” and has introduced Unodax — a peer-to-peer solution bypassing the RBI ban. Similar services have been rolled out by other Indian exchanges, such as WazirX and Koinex.
Meanwhile, as the Times of India reports, a number of opportunists used the RBI ban for their advantage by cashing in on the panic sales in India via "arbitrage" — a strategy that implied buying BTC within the Indian market on the cheap, transferring it to a middleman in another country, who would then sell it there for a better rate and share the profit among the both parties involved.
Even more confusion was caused by a Bloomberg article quoting anonymous parties with “direct knowledge” of the government plans to impose an 18 percent goods and services tax (GST) on crypto, as it could hardly coincide with the RBI ban — how can cryptocurrencies be taxed, when one can’t even trade them? Nevertheless, such news indicate that more positive regulation might be on the way, or merely that different government agencies take varying approaches toward crypto, not coordinating their moves among each other.
New hope: the commodity route
On July 11, Quartz India published an article dubbed “India may not ban cryptocurrency after all” — the piece cited an anonymous source and claimed that “a finance ministry panel set up to study [virtual currencies] may even suggest that they be treated as commodities.” Thus, a senior government official privy to the matter told the news outlet:
“I don’t think anyone is really thinking of banning [cryptocurrencies] altogether. The issue here is about regulating the trade and we need to know where the money is coming from. Allowing it as [a] commodity may let us better regulate trade and so that is being looked at.”
Viewing cryptocurrencies as commodities resembles the U.S. Commodity Futures Trading Commission’s (CFTC) approach. The U.S. agency that fully controls commodity derivatives transactions in the country claims that tokens are commodities: Essentially, in their view, Bitcoin is closer to gold than to conventional currencies or securities, as it is not backed by the government and doesn’t have a liability attached to it.
Shubham Yadav, co-founder of Coindelta — an Indian cryptocurrency exchange — agrees with that viewpoint:
“Though cryptocurrencies belong to a new class of financial assets, we can still welcome them as commodities and not currencies because of their high volatile prices.”
The cryptocurrency panel cited was set up in December 2017 with the purpose of understanding the expanding crypto industry, and it includes Subhash Chandra Garg, secretary in the department of economic affairs; BP Kanungo, deputy governor of the RBI; and Ajay Tyagi, chairman of market regulator Securities and Exchange Board of India. It is the second cryptocurrency panel in India, while the first panel — established by the Narendra Modi government in April 2017 — recommended “slowly choking” the industry: It couldn't be stopped in one day, as people would lose a lot of money, they argued, which is why a more timely approach was needed.
In June, Subhash Chandra Garg, the head of the newer — and more crypto friendly — panel, toldlocal news outlet ET news that his task force was almost ready to introduce a draft for a crypto regulatory framework and promised to deliver it within the first two weeks of July — no such announcements have been made by press time, however.
“We are fairly close to developing a template [for the cryptocurrency industry] that might be in the best interests of our country. We have moved pretty far in this regard, and we have prepared a draft that entails what parts of this businesses should be banned and what should be preserved.”
Local cryptocurrency firms are open for negotiations with the government, and, as Quartz points out, “have already agreed to be open for more scrutiny.” Additionally, they assure that solid Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures are already implemented, while they are willing to introduce other suggestions. Shubham Yadav, co-founder of Coindelta, told the publication:
“We are also ready to work with the government and assist them on creating a regulatory framework. We can help them in designing a monitoring system for blockchain where it can remotely monitor all transactions.”
The central bank’s controversial ban has prompted both public and industry-led petitions, with some appealing to the courts on the grounds that the decision is unconstitutional.
Thus, the community awaits July 20, when the Supreme Court of India will come up with a clear-cut position regarding the RBI blockade. However, it is worth noting that on July 3, the court ruled not to grant interim relief to those affected by the ban at a hearing of the Internet and Mobile Association of India (IAMAI) — organization comprised of members of several crypto exchanges that are challenging the RBI’s stance.
At a previous petition hearing on May 17, IAMAI was reportedly requested to submit a representation against the central bank.
In any case, blockchain is welcome
Similar to China, the Indian crypto ban — although it is objectively less harsh than the Chinese one— coexists with the government positive stance toward blockchain technology. For instance, on the same day as it introduced the crackdown measures, the RBI announced its plans for issuing a central bank-backed digital currency (CBDC). The RBI Deputy Governor BP Kanungo told the Times of India at the time:
“Technological innovations, including virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system.”
Nevertheless, India is home to existing blockchain adoption initiatives as well. In May, seven of India’s largest banks joined a blockchain-powered trade finance initiative led by local IT giant InfoSys. The alliance, known as India Trade Connect, includes participants such as Axis Bank, ICICI and South Indian Bank. It was reportedly formed to conduct tests of InfoSys’ Finacle Trade Connect, a blockchain platform designed to “address the trade finance process requirements of banks.”
Moreover, in June, the government of the south Indian state of Kerala announced that it will use blockchain for food supply and distribution in a new project headed by Keralan think tank the Development and Innovation Strategic Council (K-DISC). It will use blockchain and Internet of Things (IoT) technology to make the state’s supply network for dairy products, vegetables and fish more efficient, further establishing blockchain as a viable tool for the local economy.