The Indian government is focused on deciding clear regulations for trading of cryptocurrencies and a policy framework is expected once the current committee submits its report, Ajeet Khurana, head, Blockchain and Cryptocurrency Committee (BACC) of Internet and Mobile Association of India (IAMAI), said over the phone on Friday.
While India does not yet have clear regulations on cryptocurrencies and exchanges, the govt has maintained that virtual currencies are not held as legal payment instruments in the country, but the Finance Minister did not say that cryptocurrencies were illegal. Cryptocurrency exchanges would argue that neither are gold, stocks, and bonds considered as legal tender. Still, Finance Minister Arun Jaitley’s statement in his Union Budget 2018 speech on Thursday were widely interpreted as a ban on the trading of cryptocurrencies.
“It is very wise that the government plans to not take any knee-jerk action on the exchanges. We are very happy with the measured, graduated and wise steps the government is taking,” Khurana, who took on the BACC role last month, said.
Cryptocurrency regulation spooks investors
Stricter regulation on cryptocurrency trading in many of the world markets already had investors spooked about the future of virtual money when Finance minister Jaitley announced that the country will take measures to clamp down on any “crypto-assets financing illegitimate activities”.
Since 2013, the Reserve Bank of India (RBI) has thrice reiterated its cautionary notification on cryptocurrencies for retail investors, which warns of “potential economic, financial, operational, legal, customer protection and security related risks” associated in dealing with such virtual currencies including bitcoins. But there has been no regulatory action as it is not easy to determine who regulates the new technology of virtual currencies.
In the past, it has been argued that cryptocurrencies should be considered as an asset or commodity and be regulated by the Securities and Exchange Board of India (SEBI), rather than being considered a currency per se.
The Indian government’s clampdown comes after many virtual currencies saw a significant spurt in their valuation. Bitcoins and other cryptocurrencies garnered attention and piqued the curiosity of many in India due to the phenomenal rise in its price in early-mid 2017. As a result, the threat of price volatility, speculative trading, and hack attacks all call for stricter regulation from the government on virtual currencies.
“The silence (of the government and regulators) is not to be taken for granted; there is a lot of internal thinking that is going on,” Khurana said. “Given that I work with a lot of regulators and financial institutions, I must say that there is a lot of conversation going on and there is a lot of interest in understanding this better.”
Regulating a decentralised network
Khurana estimates the number of people in India who either presently use a cryptocurrency or have in the past held a cryptocurrency is about 5 million. “And this number is growing... Our exchange participants neither allow foreigners to participate nor allow foreign exchange to come in. We are working independently from the world. Despite that, our market mechanism is very vibrant. If you were to ever look at the order book of cryptocurrency exchanges and compare them to forex or stock exchanges, you would feel they are operating similarly,” he said.
Cryptocurrencies work on the blockchain technology, which uses a decentralized network. Blockchain technology uses a digital ledger to securely keep a record of each transaction between users within its system. Regulatory framework on cryptocurrencies in India is taking time because of the nature of the technological innovation and confusion over who should regulate it, Khurana said.
A series of developments globally have spoilt the party for cryptocurrency investors.
In September, China moved to ban cryptocurrency exchanges and initial coin offerings (ICOs) to avert any financial risks even as the country remains the largest ground for mining of bitcoins. About 90 percent of global bitcoin trading volume in the past three years had been from China, according to industry estimates. South Korea too is clamping down on its own “illegal” cryptocurrency exchange trading in a bid to curb instances of money laundering while allowing genuine bank accounts to trade in cryptocurrencies.
A volatile market
It went further downhill for the virtual currency market when Facebook Inc said last week that it was banning all cryptocurrency adverts in the wake of potential scams. While Tokyo-based cryptocurrency exchange Coincheck Inc said hackers stole about $530 million of virtual coins.
Bitcoin, which still is the largest virtual currency in the overall cryptocurrency market, has lost almost half of its value this year after its meteoric rise last year. On 17 December, bitcoin touched an all-time high of about $19,783, according to CoinDesk Bitcoin Price Index, only days before it started to plunge rapidly. On Friday (2 February), it fell below $8,000, signalling that investors still remain cautious about the future of the virtual currency.
Other major cryptocurrencies such as Ripple and Ethereum have also dropped in value in a single day. In just about 24 hours on Friday, more than $100 billion was wiped off the global cryptocurrency market due to concerns over tighter regulation and speculation that the bitcoin price was likely manipulated on a major exchange, a CNBC report said.
The uncertainty and volatility in price of cryptocurrencies has also led to some banks not allowing retail investors to deposit money that they have earned from trading on bitcoin exchanges, according to a 28 January report by The Hindu Business Line.
Security a major concern
Further, the threat of cryptocurrency hacking attacks reoccurring gives enough reason for the governments in several of the countries, including India, to remain sceptical of cryptocurrencies.
“From investors’ point of view, regarding their money and coins, we give them protection for those as an exchange. We are always updating and educating them about recent developments in India and abroad. We want customers to understand the technology behind this before they invest so that they can take an informed decision because this is a little more complex product,” said Nischint Sanghavi, head of exchange at Zebpay, India's first bitcoin exchange. “We are taking full security measures and have top notch security in place for all customers’ funds as well as coins in the wallet.”
Zebpay said it will work with the government to help it eliminate the use of crypto-assets as part of the payment system.
In April, the government had constituted an inter-disciplinary committee to submit a report on handling cryptocurrencies and challenges of money laundering. Based on the report, another committee was constituted with representatives from the RBI, NITI Aayog, Sebi and others. This report, which could decide the policy framework for virtual currencies and cryptocurrency exchanges, is awaited. In November, a lawyer filed a public interest litigation (PIL) in the Supreme Court, asking the country to “regulate the flow of Bitcoin”.
In the past, countries including Vietnam, Bangladesh, Iceland, Bolivia, Eucador and Kyrgyzstan have banned either trading of bitcoin or cryptocurrencies in general. While in other parts of the world such as the United States, customers could buy pizza using bitcoins. Japan has been by far the most liberal in officially recognising bitcoins as a legal tender.
Shailaja Sharma is a Mumbai-based financial journalist.