India has never legally banned Bitcoin or other cryptocurrencies but traditionally employed a hands off approach towards them. They have always maintained that they are not currently versed with the technology required to monitor digital currencies and would take sufficient time before formulating a framework that enables them to do so. With increasing Bitcoin volumes on Indian exchanges and circulating petitions to legalize Bitcoin, the Indian Government has now been put in a position where inventing a framework to regulate Bitcoin has now become a necessity. Let’s look into how Indian Government is planning to formulate the framework:
The perfect set-up:
In November 2016, when the Prime Minister of India banned higher denomination currency notes and took a good couple of months before bringing new denomination into circulation. During this period, the government’s initiative has been to motivate the populous into shifting more towards digital payments. Digital payments application companies that enable micropayments like Paytm and Freecharge have enabled this transition and helped for more centralized regulation of transactions. However, a byproduct of this move was the rise of Bitcoin transactions within and in and out of the country. The BTCINR trading prices were over 20% than the premium depicting the boost the cryptocurrency received during this period. This has laid down the foundation for consistent adoption of Bitcoin in India and forced the government into finding ways to regulate it.
The proposed committee:
The Inter-disciplinary committee established by the Indian Government includes the Central Bank, prominent members from the ministry of Finance and other prominent financial bodies to delve into the framework requirements of Bitcoin regulation. Earlier in February, India’s Bitcoin ecosystem consisting of young companies and Bitcoin businesses established a private self-regulatory body to proactively prevent illegal use of the cryptocurrency. The formed government committee would produce a report on Bitcoin basing on the underlying technology, its usage in India and regulations across the world. If India goes down the path of legalizing Bitcoin, it would be a valuable addition to the Bitcoin adoption space. The Asian Bitcoin ecosystem is already enriched with Japan and Philippines embracing the cryptocurrency and giving it a legal status. With Russia and India looking forward to regulate the cryptocurrency, things seem very positive for the cryptocurrency.
Task order for the committee:
The announcement from the Indian Government had the following excerpt:
“The circulation of Virtual Currencies which are also known as Digital/Crypto Currencies has been a cause of concern….Reserve Bank of India [the country’s central bank] had also cautioned the users, holders and traders of Virtual currencies (VCs) including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.”
The task order laid out for the committee in the next three months are as follows:
- Checking on the present status of Virtual Currencies both in India and globally
- Examining the existing global regulatory and legal rules of compliance governing Virtual Currencies
- Suggest measures for dealing with such Virtual Currencies in areas such as consumer protection, money laundering, etc; and
- Examine any other matter related to Virtual Currencies which may be relevant.
India is a country with a good amount of smartphone and technology penetration. Traditionally, India has been the back office for most of the multinational companies owing to its time zone advantage, cheap and skilled labor and diligent technical skills. With the recent outburst of cheap and affordable smartphones in India, there has been a good amount of smartphone penetration leading most of the upcoming Indian e-commerce startups to go completely app-based rather than investing much on the traditional website. India is potentially one of the countries where with a good amount of adoption, Bitcoin volumes can inflate exponentially. However, the Reserve Bank of India has had a neutral standpoint towards the digital currencies. RBI has stated that they are not regulating Bitcoin or other cryptocurrencies yet and would like to observe and understand the technology better before adoption. However, Bitcoin businesses in India have filed a petition to make Bitcoin legal. Let’s dive into the details of the petition and the impending effects.
Bitcoin booms in India
While Bitcoin transactions in India initially were considerably low, Bitcoin mining activity has been very high since 2012. GB Miners group have 9% hashing power of the Bitcoin network, paralleling their western counterparst, making them the largest Bitcoin mining group in the country. With the Indian Government’s demonetization move, the country was forced to go cashless and this saw a rise in Bitcoin transactions and Bitcoin prices. The demonetization ended at the start of 2017, but the effects are still persistent with lower cash withdrawals being observed at banks and ATMs. This has built the required momentum for Bitcoin adoption in India.
The petition comes at a time when Bitcoin is making regional headlines due to statements from policymakers and politicians who have raised concerns about the lack of regulation surrounding the bitcoin industry. As the government is sticking to the hands off approach, big players in the Indian bitcoin industry who welcome regulation have banded together to launch a self-regulatory body to ensure adherence to KYC and AML norms called The Digital Asset and Blockchain Foundation of India (DABFI). DABFI has launched a petition calling for the explicit legality of bitcoin and other cryptocurrencies in the country. Their main motive is to develop an amicable environment for the development of Bitcoin and other cryptocurrencies.
What can India do to Bitcoin?
India is the second most populated country in the world relying heavily on micropayments. This is especially true for the small scale and medium industries that play a vital role in the country’s economy. With sustained adoption, Indian Bitcoin adoption can be a game changer for the cryptocurrency. Unlike China where the Bitcoin is only now a speculative vehicle, India can do justice to the true stature of Bitcoin and nurture the currencies through large scale adoption and eventually using its massively brilliant technical force for Bitcoin engineering. The verdict for Bitcoin’s legality in India might be set sometime in April. How the Indian government’s judgment would impact Bitcoin is to be seen.
From Mid 2016 Bitcoin has been forming higher highs and higher lows every month making the market overtly trendy. With Yuan devaluation helping the cause, Bitcoin prices were soaring high with ample opportunities for investing. The continuous rise in prices and reasonably acceptable volatility made Bitcoin one of the best performing assets of 2016. Perceivably, majority of the people believed that China was responsible for the steady increase in prices. But was that really the case? Apart from the visible factors, there were other global drivers of adoption that helped the cause. Let’s dive into what we believe are two major factors that pulled in the volumes:
Prime Minister Modi sought to fight corruption, a widespread problem in India, by pulling out higher denomination bills from circulation. Considering the country’s largely unbanked population, it was a brave move. During this phase, the government tried actively to pursue a cashless society while pushing for digital wallets and transactions. Many Bitcoin startups including Unocoin, Zebay and Buyucoin have experienced a surge in their transactions owing to the policy. This has set up the stage for the growth of Fintech startups in India and has put Bitcoin into motion. The transactions from the subcontinent contributed heavily to the boost Bitcoin has received towards the fag end of 2016.
Venezuela is one country that has received a knockout blow from the economic crisis of 2008 followed by the oil slum of 2014. The once prosperous oil-rich country is now struggling to provide citizens with the most basic needs of life. The 100-bolívar note is worthless because it is worth less than $0.03 outside of the government’s pricing system. Most people have in fact started weighing the notes instead of counting them to barter for its worth. Owing to this and to introduce higher currency notes that would have value and power of purchase, government is all set to withdraw 100 bolivar notes. This transition was the opening Bitcoin needed to etch its place in the heart of Venezuela’s economy.
How Bitcoin gained:
Both demonetization in India and hyperinflation in Venezuela had a serious side effect on the population. It undermined public confidence in national currencies as store of wealth. As in the case of any hyperinflation cycle, public has resorted to holding foreign currencies that are stable. While they have an array of varied options, Gold and Bitcoin stood out as safe assets. While Gold cannot be handled with ease, owing to Bitcoins ease of use, the currency saw inflow of funds from different phases that ended up powering the bull run.
The Prime Minister of India played a master stroke to flush out the ‘Black Money’ holders and non-taxpayers last week. In a surprise announcement, Narendra Modi revealed that the bigger denomination bills were banned starting from that date. For people who had bills in this denomination, it became mandatory to get them exchanged at the nearest bank. Let’s look into why this was a surgical strike on black money and how this can boost Bitcoin prices:
India and Corruption:
India is a country with a population closer to 1.4 Billion. It becomes complexly difficult to monitor the tax filings for all income groups. The Indian currency has Rs 1000 and Rs 500 bills as their biggest denominations. It is estimated that most of the money that is not accounted for taxation (popularly referred to as Black money) is stored in these denominations. Hence as a first lash on the prevalent corruption, the Prime Minister recalled bills of these denominations, replacing them with newer versions of the bill. For replacing older denominations, people would have to go to banks and get the money accounted for before replacing them. This has created quite a stir and great deal of discomfort for the Indian population, but the public has responded positively to this strategy with a tolerant mindset.
For people holding huge reserves of untaxed money, it is now mandatory to account it to get value in return. Else the reserves would go waste as the replacement of the existing denominations is scheduled only till December 31st.
Bitcoin scenario in India:
The Reserve Bank of India has taken a neutral stance towards the cryptocurrency in 2013. They proclaimed that they are closely monitoring Bitcoin and would come to a conclusion only after fully understanding the technology. With the Bitcoin ecosystem in the country developing gradually, there is a strong possibility that this might boost the adoption. Companies like Unocoin, Zebpay and other wallet services have flourished organically in a set up that has been bending more towards e-commerce. On an average there is a volume transaction of 2051 BTC on Indian exchanges.
In 2015, when China announced capital controls, it turned out to be a boost for Bitcoin prices. Even though India doesn’t have a strong hold in the Bitcoin domain, it has a comparable population. Over the past few months, the volumes of LocalBitcoins in India has been on the rise and shown a significant rise. With this move, the population is facing great discomfort as local banks and ATMs are flooded with people in a bid to withdraw money. It is only a matter of time, before we see wallet companies partnering with franchises to provide cashless services.