Why India has reached a cryptocurrency crossroad

India's cryptocurrency sector is on tenterhooks as it awaits the introduction of new regulations. As the government plans legislation that could ban payments using digital currencies such as Bitcoin, speculation about the rules has rattled many investors and industry insiders.

However, others remain hopeful the government will not go so far as a ban and it will leave scope for the sector to flourish by bringing in some much-needed certainty.

“We do not think that a blanket ban on the cryptocurrency ecosystem is likely to happen,” says Edul Patel, chief executive and co-founder of Mudrex, a cryptocurrency investment platform.

The cryptocurrency ecosystem is currently “a grey area” in India, Mr Patel says.

“The crypto regulation bill is massive progress in the right direction,” he says. “The lack of regulation had been a hindrance to the growth of this sphere in India for a long time. Regulation would allow clear guidelines allowing the sector to boom – investors looking to invest would also be comfortable in entering the sector.”

A brief official description of the proposed bill released ahead of the current session of parliament, which began last week, stated it “seeks to prohibit all private cryptocurrencies in India”, but that it also “allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.

In addition, the bill aims to establish a framework for “the creation of the official digital currency to be issued by the Reserve Bank of India”.

India's finance minister, Nirmala Sitharaman, last week said the country had no plans to recognise Bitcoin as a currency and that the new bill was being worked on. With the new regulation, the government may treat cryptocurrencies as a financial asset, while enforcing an official ban on their use as legal tender, Bloomberg reported.

Local media, including Indian business newspaper Mint, on Thursday reported sources as saying that instead of imposing a ban, the government could bring cryptocurrencies under a regulatory framework, which would ease some of the concerns in the market.

As is the case with many countries, authorities in India are grappling with how to regulate cryptocurrencies. They have long expressed concerns that virtual currencies could be used for illegal purposes such as money laundering or that they could threaten the stability of the country's financial system and pose a risk to investors.

But cryptocurrencies, including Bitcoin and Ethereum, have gained traction in India, particularly after the Supreme Court last year reversed a 2018 order by the RBI that had prohibited banks from dealing with transactions related to digital assets.

India is one of the biggest markets for cryptocurrencies in the Asia region and one of the fastest expanding in the world, growing 641 per cent between July 2020 and June 2021, according to a report by cryptocurrency research firm Chainalysis.

There are up to 20 million cryptocurrency investors in India, with holdings totalling some 400 billion Indian rupees ($5.3bn), according to industry estimates and reported by Reuters.

“Cryptocurrency is getting widely adopted around the world, as the high rate of returns is luring many investors towards investment in crypto coins, despite it being highly volatile and risky,” says Hemang Jani, head of equity strategy, broking and distribution at Mumbai-based Motilal Oswal Financial Services.

India has 15 home-grown cryptocurrency exchange platforms, propelled by the country's young, tech-savvy population, data from Motilal Oswal Financial Services shows.

“Crypto investment is not only limited to metros but is garnering a lot of interest from the young population in smaller cities,” says Mr Jani.

While “there is lot of uncertainty … the government is making efforts to soon put out proper regulation with regards to crypto investment as it is quickly getting widespread across India”, he adds.

But when the news emerged last month that the proposed bill would be tabled in parliament, a wave of investors panicked and sold off some of their cryptocurrency holdings. This resulted in digital currencies on Indian exchanges slumping as much as 25 per cent compared with other markets globally.

“A short-term panic selling was witnessed during the first two to three days of the crypto bill announcement where prices plummeted on Indian exchanges, but the prices stabilised shortly and are in sync with global markets as we speak,” says Shivam Thakral, co-founder and chief executive of BuyUcoin, a Delhi-based cryptocurrency exchange that started operations in 2016.

Mr Thakral remains upbeat that the government will come up with a system that will ultimately benefit the industry.

“We need a positive regulatory framework urgently to protect the interest of a large number of investors in India,” says Mr Thakral. “There is a plethora of talent ripe for disruption in the crypto industry, lawmakers need to ensure the growth of the crypto sector while also protecting the interest of an average investor.”

Full details of India's cryptocurrency bill have yet to be released and it will have to go through parliament for clearance, so it remains unknown what will emerge in the final law.

The situation is “scary” for investors and a ban could mean “that we will not be able to convert our local currency into buying any kind of cryptocurrency”, says Raj Kapoor, founder of the India Blockchain Alliance and a cryptocurrency investor.

Ultimately, it still remains to be seen what the government will finally decide and there are other regulatory solutions that would make far more sense than a ban, he says.

“I believe that, though there is a lot of uncertainty, we are at a stage where fear of a complete ban has been replaced and rightly so by an anticipation of a rational policy where investor interest and government interests can seamlessly coexist.”

Cryptocurrency investor Srinivas Handadi holds virtual coins including Bitcoin, Ethereum, Cardano and Polygon.

When cryptocurrencies slumped in India recently, Mr Handadi says he “used the dip to buy more”.

A ban would be “difficult” to enforce and it is more likely that the government “will start working with other countries to understand crypto”, he adds.

Despite the lack of clarity, foreign cryptocurrency companies have been moving to capitalise on the Indian market.

“When OKEx entered the Indian market early this year, we were optimistic about India’s strong policy framework,” says Jay Hao, chief executive of Seychelles-based cryptocurrency exchange OKEx. “We are now finally witnessing India’s crypto policy taking shape to ensure a better future for the entire crypto ecosystem in India.”

Once the regulation is in place, Mr Hao expects to see more foreign exchanges enter India, which will help to advance the sector and create jobs.

“The global crypto community will be closely monitoring the situation in India as we go into the finer details of India’s crypto law,” Mr Hao says.

Singapore-based cryptocurrency exchange Coinstore just last week started operations in India, seemingly unperturbed by the possibility of a clampdown.

“With nearly a quarter of our total active users coming from India, it made sense for us to expand into the market,” Charles Tan, Coinstore's head of marketing, told Reuters.

As plans to regulate the sector remain a work in progress, India is also planning to have its own official digital currency.

Central banks in other countries, including China, are working on creating digital currencies and the RBI is expected to start piloting India's digital currency as soon as next year.

Industry experts say this would be a welcome development.

“One important thing to note regarding Central Bank Digital Currencies is the fact that they are not cryptocurrencies. These are digital forms of fiat money, under the total control of the central banks,” says Mr Patel.