The splash of 2017 may turn into a fight for survival for bitcoin this year in India.
As the country’s cryptocurrency exchanges deal with the manic rush, banks have become a stumbling block. Possibly taking cue from the uneasiness shared by the Reserve Bank of India (RBI) and the Narendra Modi government, some of the lenders are no longer comfortable with virtual currencies. This has led to issues with deposits and withdrawals.
This is precisely the tussle that is playing out at Koinex, a cryptocurrency exchange, between its payment service provider and its bank where withdrawals have been delayed for over two weeks.
“…regulators world-over, have struggled to understand the underlying blockchain technology and develop an appropriate response to it; and India is no exception. These misgivings have resultantly affected the financial services community, who find it difficult to make up their mind about supporting cryptocurrencies, eventually causing organisations like Koinex and its users to bear the brunt,” said Koinex, in a blog post on Jan. 07.
Coindelta, another exchange, has had its instant deposit and withdrawals facility suspended for a few days due to similar issues, Shubam Yadav, the firm’s co-founder, told Quartz. The management of three other exchanges confirmed they were aware of the brewing trouble. An email sent to the RBI remained unanswered.
“Apparently, banks have been asked by the RBI in an informal communication to stay away from dealing with the virtual exchanges and, therefore, they (banks) are doing it so brazenly,” said a lawyer who works with a few of these exchanges.
To discourage investors from betting on these cryptocurrencies, the government has repeatedly said that bitcoin and its kind are not legal tender in India. The finance ministry even went a step ahead and called them a ponzi scheme. Not just in India, governments elsewhere too have been tightening the noose around virtual currencies, triggering a drop in prices. On Jan. 09, bitcoin slumped below $15,000 a piece as regulators in South Korea, China, and US cracked down on illegal cryptocurrency offerings and initial coin offerings.
‘Decide the law first’
The exchanges blame all this on a lack of regulation.
“The government hasn’t banned virtual currencies, but has expressed its reservation about them. Our understanding, based on various meetings with our banking partners, is that this (situation) is a result of those reservations. Instead of arm-twisting, it would be better if they could come up with steps to regulate the industry,” said the CEO of a bitcoin exchange, requesting anonymity.
In fact, a government committee is studying how cryptocurrencies can be regulated and what their structure and legal implications are. But the warning signals from the government intensified following the recent volatility in bitcoin prices.
For instance, one bitcoin that was worth around Rs4.55 lakh ($7,175) on Nov. 01 had more than doubled in value to Rs13.80 lakh by Dec. 14; subsequently the prices tumbled and hovered around Rs11.82 lakh on Jan. 08.
“The government is following the same method used by China, where they haven’t explicitly banned bitcoin, but made the regulatory environment around it so difficult by cracking down on other things that it is no longer a conducive environment for cryptocurrencies,” said the lawyer.
Earlier, China accounted for 90% of bitcoin’s global trading volume; that has now slipped to 7%. Clearly, killing them softly has worked.