The Indian government mulling a blanket ban on cryptocurrencies has set off alarm bells in the ecosystem. For such a move could deal a body blow to an industry already struggling under tightening norms.
On Oct. 30, a meeting of the country’s financial stability and development council (FSDC) deliberated banning “the use of private cryptocurrencies in India,” the Indian government’s Press Information Bureau (PIB) said in a release. The FSDC is a high-level committee of officials, headed by finance minister Arun Jaitley, to study risks to the Indian financial system.
The meeting was also attended by Subhash Chandra Garg, the secretary in the department of economic affairs. Garg heads a panel, set up by the finance ministry in December 2017, to recommend norms on virtual currencies, which are expected soon.
However, the recommendations of the Garg committee can only be treated as draft regulations at this stage, industry experts say.
“First the draft regulations will come out, then it will be introduced in the public domain for feedback. After that, it will be introduced in parliament, from where it has to get the necessary approvals to become law. Therefore, the whole process (of banning cryptocurrencies), even if it happens, will take time,” explained Rashmi Deshpande, associate partner at Khaitan & Co, a law firm that represents cryptocurrency exchanges.
A loss for bourses and technology
Cryptobourses in India are already choking from a hostile regulatory environment. Since July this year, Indian banks have been barred by the Reserve Bank of India (RBI) from having any business relationship with exchanges and traders. Trading volumes have plummeted since then and the addition of new investors has nosedived.
But most exchanges have managed to stay alive by moving to peer-to-peer and crypto-to-crypto trade.
A blanket ban is something else, though.
“If they ban the use (of cryptocoins), which probably means that people won’t be able to buy or sell, then the exchanges will have to shut down,” said Shubham Yadav, co-founder of Coindelta, an Indian cryptocurrency exchange. “I am sure one by one all the law enforcement agencies, such as the income-tax department, may come after us, which will make things worse for the industry.”
Shifting the business to foreign locations can be a daunting task for many exchanges because of the higher costs involved and the intense competition in crypto-friendly geographies. Hence, only the relatively bigger exchanges could choose this option.
For instance, Zebpay, India’s largest virtual currency exchange, shut down operations in September as the RBI’s diktat made the business unviable. But soon after, it opened a registered office in Malta, from where it will be serving residents of about 20 countries, except India. This overseas migration, however, may be impossible for smaller peers to replicate.
Another casualty would be blockchain-related technology which will flee India.
“A majority of innovations on the said technology (blockchain) will move away from India,” explained Praveen Kumar, chairman and CEO of Belfrics, a Malaysia-based exchange with operations in India. “Institutions in India will feel restrained to use the public blockchain as it will also involve the use of cryptocurrencies.”
This will make the country technologically poorer since blockchain technology has wide applications in fields like farming, education, health, banking, real estate, etc.
The silver lining amidst this chaos? Clarity.
“After months of wait, the exchanges will finally have a fair idea on where they stand and there is going to be some certainty once the framework is made public,” said Pushan Dwivedi, an associate at legal firm Ikigai Law, which represents several cryptocurrency exchanges. “The more technology-focussed companies will chalk out ways to survive by focusing on blockchain, etc.”
Can investors adapt?
As for investors, there are ways to work around a possible ban, experts say. And the government may be more sympathetic to the estimated 5-6 million cryptocurrency users in the country.
Even if a ban comes into effect, it may not be immediate. “There can’t be an overnight ban. Considering so many Indian investors have bet on these digital currencies, they will be given time and avenues to divest their stakes,” explained Pramod Emjay, a blockchain consultant.
If there is no ban on possession, then some investors may choose to hold their cryptocurrencies and explore other avenues later for selling these currencies. For instance, a user can transfer his or her holding to friends or family in another country where there is no ban. Then, the resident of that country can sell the coins and transfer the proceeds back after paying the requisite taxes in the overseas jurisdiction, explain experts.
The same is true even for future investments, too. A resident Indian is allowed to remit up to $250,000 in a financial year for any permissible current account or capital account transaction under RBI norms.
Blockchain without crypto
Despite its hostile approach to cryptocurrencies, the government is extremely keen on developing and promoting the use of blockchain technology, the digital infrastructure on which cryptocurrencies are based. It reiterated these plans during the FSDC meet.
A similar sentiment has been echoed by the RBI, which, too, realises the potential of blockchain technology, despite being opposed to bitcoin and its ilk.
However, this approach is a contradiction of sorts and makes little sense, believe experts.
“One is not independent of the other,” explained Nischal Shetty, founder and CEO of WazirX, another Indian cryptocurrency exchange. “Blockchain is useful as a ledger because the technology allows us to keep the data in the public domain and we will still be able to protect it. This is possible only because of cryptocurrencies. If you remove crypto from blockchain then the database will become so slow and inefficient that it will be worse than the existing system that the government is using.”
Therefore, in a pragmatic sense, a blanket ban on cryptocurrencies is easier said than done.
Want to read more from Nupur Anand? Subscribe to Quartz Private Key—Quartz’s premium crypto newsletter, delivered twice weekly.