Governments across the world abhor the virus of disruption. Their regulatory antibodies are quick to take down agents of radical change. Unless the disruption sneaks inside undetected. Think about Silicon Valley of the early 1990s — a place where young engineers were trying to make sense of this shiny new thing called the internet. In 1990, the internet was available in select American cities. By 1995, it was all over the country.
India saw the internets commercial launch exactly that same year: August 14, 1995. The result is, today we are a the cusp of 500 million internet users. India is one of most data-hungry countries in the world. Its ecommerce market is one of the worlds largest. The next wave of seismic change will come from blockchain and cryptocurrencies. Their transformative and economic credentials are there for all to see. The opportunity is open to lead this revolution. But where is India? The internet got in because it didnt raise the hackles of the powers that be.
Crypto? Not so lucky. A Reserve Bank of India (RBI) notification on April 6 barred all regulated entities — commercial and cooperative banks, payments banks, small finance banks, NBFCs and payment-system providers — from dealing in cryptocurrencies. The impact is not limited to the financial system but spreads to the innovation pipeline in the underlying blockchain technology. If it keeps going down this path, India will likely will be playing catch-up when blockchain and crypto assets move from being shiny new things to a way of life. Sure, blockchain and crypto are different ideas. Banning one doesnt mean banning the other — in fact, India is gung-ho about blockchain and is embracing it in everything from banking to education. But heres the thing: they need each other. The uncertainty miring crypto isnt good news for Indias blockchain aspirations. The most damaging is it casts a shadow on the countrys so-called commitment to technology to transform itself.
This is a battle that has governments and traditional institutions grappling with the potential end of the status quo on one side, and the crypto community on the other. The latters idealism — that traditional power centres can be cut down to size by large-scale adoption of blockchain and crypto assets — is at odds with the realities of the world. Moreover, this claim of moral superiority is marred by the presence of fly-by-night operators who run Ponzi schemes around cryptocurrencies. As Kasper Korjus, managing director of e-Residency in the Republic of Estonia and the force behind that countrys crypto token, Estcoin, tells ET Prime, “Both these sides often behave as if the other has no future. Like most things, the truth is somewhere in the middle.”
“This division is holding everyone back,” says Korjus. “Right now, by not embracing crypto, governments are failing to unlock a powerful driver of economic growth and risk losing relevance entirely. By not embracing public oversight, legitimate crypto investors are tarnished by fraudulent ones, and crypto investors are far less certain about the value and legitimacy of their tokens.”
Finding the Middle Ground
The Indian government, says Raj Chowdhury, managing director, HashCash Consultants, a blockchain company based in the US, is oscillating between the first two buckets described above. It is looking at cryptocurrencies with plenty of suspicion while not entirely discounting the transformational nature of the underlying idea.
R Gandhi, former deputy governor of the RBI, calls it a neutral, nonconclusive position. “From the beginning, the RBI has made it very clear that it is neither fully supporting cryptocurrency nor fully banning it. Nowhere in its decision has the RBI (said) that the technology — blockchain, digital currency — is bad. (But) the RBIs move also hints that people are trading in cryptocurrencies at their own risk.”
It isnt as if only the Indian regulators are in a bind. The challenge for any regulatory authority is to find an appropriate tradeoff between the competing objectives of mitigating the risks from a particular innovation and allowing market participants to harness the benefits of that innovation, says a spokesperson of the European Banking Authority (EBA). The eventual aim is for the EBA to identify whether any regulatory action is required to ensure that market participants can have confidence in the innovation in question.”
The Blockchain Link
In India, what the government, in effect, is trying to do is disengage cryptocurrencies from the foundation of blockchain. It sees crypto investments as an inherently volatile concept that investors need to be shielded from. But it is also examining the possibilities that blockchain as a platform offers. But the two are not exactly mutually exclusive.
Daniel Wang, who runs Loopring, an open-source software platform for decentralised exchanges out of China, says, “Blockchains without cryptocurrency or tokens are just data networks, not value networks. And only value networks drive new business behaviours and potentially change the way we do business. Countries that are not open to blockchain networks will lose their competitive advantage in the long run. Smart people will (leave for) a friendlier environment.”
That may be the biggest risk from the ambiguity in the governments position. Picking and choosing conservative notions of the relationship between blockchain and crypto assets could affect Indias aspirations of being a leader in the technology.
The Trading Conundrum
The current regulatory direction also means India will miss out on an emerging multibillion-dollar asset class. Globally, the market cap of crypto assets is above $400 billion.
Further, since it doesnt allow fiat-to-crypto conversions, it has removed the possibility of individual investors participating in initial coin offerings (ICOs). Conceptually, a well-regulated ICO system can protect investors while opening up wealth-creation opportunities and offering a new way of funding for businesses. “Now firms will have to go for the traditional way of equity fundraising. Not all startups can get that kind of funding,” says Nischal Shetty, founder of WazirX, a five-week-old crypto exchange.
How have other regimes dealt with potential risks? Japans case is illustrative. A major pro-crypto trading country, Japan didnt clamp down on trading even after the $425 million hack of Coincheck, a leading crypto exchange. Instead, it decided to beef up regulations. Meanwhile, the RBIs blanket ban could result in Indian crypto trading moving abroad. Several exchanges, including Zebpay, Unocoin, CoinSecure, BuyUcoin, and BTCX India, are reportedly looking to move their operations to foreign shores. Notwithstanding the uncertainty, Indian investors are whetted by cryptos risk-reward potential.
On April 18, WazirX hit Rs 2 crore worth of trade in one day and has over 50,000 KYC-registered customers. Koinex, another crypto exchange, claims it is still seeing 500 new sign-ups every day on its platform.
Rahul Raj, cofounder of Koinex, without disclosing what his next step would be, says he is still hoping for the tide to turn. “We wanted to give Indians a gateway to the blockchain space. We did not want them to move to global exchanges for trading. If the government has issues with how the businesses are currently operating, we are more than happy to find out a solution,” he says.
Alluma.io, a new exchange, strikes a bolder tone. “The RBI has stopped financial institutions from dealing with crypto exchanges. However, there is no such rule in terms of trading crypto assets or operating an exchange,” Akash Aggarwal, its founder and CEO, told ET Prime.
Indias Own Cryptocurrency
Amid this debate, theres buzz about India issuing its own fiatbacked cryptocurrency — the Lakshmi Coin. In the context of demonetisation and the interlinking of Aadhaar to financial products and bank accounts, it is clear the government wants greater control over the economy and how people participate in it. A fiat-backed cryptocurrency would help it here, notions of a nanny state aside.
As Korjus from Estcoin puts it, “In theory, a government could have greater control over a virtual currency than a paper one because it would be able to keep a tab on all transactions recorded on the blockchain ledger.
This partially explains why several governments are interested in cryptocurrencies, even if their vision might be sometimes very far from the ideal of decentralised currencies.”
According to the crypto community in India, even the development of a fiat-backed cryptocurrency may require a more collaborative approach.
“The government and the regulator have to understand how blockchain and cryptocurrency work. They need to know the technological requirements. They have to also balance between how much (money in the system) would be cash and how much would be digital currency,” Raj points out.
Will cryptocurrencies be a sour-grapes story? Possibly —unless the government and the RBI evolve a more nuanced outlook. The current mode of indecisiveness and reactionary moves wouldnt work. The best course of action is to decisively lean towards the US model of innovation with sandboxed regulation rather than stay paralysed by fear of the future.