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India Might Be Considering a Law to Ban Cryptocurrency Trading

Sep 18, 2020 1:38 PM 4 min read

The Indian Government is reportedly set to introduce a law that would ban all cryptocurrency trading in the country.

The legislation, Bloomberg reported, could be introduced in Parliament following Cabinet consideration. It could see blockchain - the technology that underpins cryptocurrencies - being encouraged whilst outlawing crypto trading.

The penalty for rule-breaking could be steep: a ten-year prison sentence as well as hefty fines of up to Rs 25 crores ($3.63m).

The Rise and Fall and Re-rise of Indian Crypto

If you’re not an ardent crypto enthusiast, it may seem as if India has had an on-off relationship with crypto.

Indeed, that’s been the case.

India had a vibrant crypto market before it was banned by the RBI in 2018. This decision was contested by a consortium of crypto players, who took their fight to the Supreme Court...which earlier this year overturned the Central Bank’s decision.

But as for the Government, it’s never been a big fan of cryptocurrencies. It has had two main concerns: “the source of money being used to trade in [cryptocurrencies]; and regulation of exchanges of VC [virtual currency] to protect the common man”.

Former Finance Minister Arun Jaitley derided cryptocurrencies as Ponzi schemes, regulators ensured that players in the sector faced an uphill battle every day, and a high-level Government panel proposed in July last year a draft law banning all such currencies.

It is this law that is expected to come to fruition shortly. If passed, it could decimate the crypto industry in India which, while still in its nascent stages, has experienced tremendous growth in recent months.


How Big is India's Crypto Scene?

Before the RBI intervened, India had a burgeoning crypto landscape with a potential market size of $12.9bn. In fact, the country was responsible for about 10% of all Bitcoin transactions worldwide.

Several startups emerged as crypto exchanges to cash in on the Bitcoin madness - notably Zebpay, Unocoin and Koinex - and claimed to add over 400,000 new users every month.

But the legal status of Bitcoin and other crypto instruments was always shrouded in skepticism. The 2018 RBI directive banning them altogether threatened to be the final nail in the crypto coffin. In the following months, crypto exchanges in India struggled to stay afloat. Some, like Koinex, shut shop altogether.


Crypto’s Great Revival

The Supreme Court verdict in March this year changed everything. The sector enjoyed a fresh lease of life.

Public interest surged - not only due to the court verdict but also due to millions of people being stuck at home amidst the COVID-19 lockdowns, bored, chained to the internet and looking for new ways to make money (so, not too different from the lockdown-induced spike in Robinhood traders in the Indian stock market).

The below chart is from Google Trends: it shows how India-based searches for “crypto” have steadily climbed in 2020, visibly spiking in March when the apex court delivered its verdict.

India Might Be Considering a Law to Ban Cryptocurrency Trading

Bitcoin’s price duly rose 53.13% as crypto trading in India ballooned by over 400% in recent months.

Crypto marketplaces enjoyed a gush of activity. Paxful saw 883% growth in January-May. Mumbai-based WazirX grew 400%. Malta-based Okex’s said the number of new users from India jumped 4100% during the same period

All in all, it seemed as if the crypto scene in India had finally come of age.

But now, it may be forced to end its journey despite having barely begun. If the news reports are indeed true and the law to ban crypto is passed, it would be a terrible smack on the face for crypto enthusiasts.

Not that this was completely unexpected - regulatory opinions on digital currencies have hardly been rosy - but because the prevailing expectation was that the Government would opt for regulating the sector instead of outright banning it.


Blockchain, Yes. Trading, No

It may be pertinent to note here that the Government isn’t averse to the idea of blockchain tech per se. NITI Aayog has pitched the technology as an efficient way of managing land records, supply chains or records of educational certificates.

Besides, the high-level Government panel that advised banning cryptos in 2019? Its advice was actually restricted to private cryptocurrencies. In fact, Economic Affairs Secretary Subhash Chandra Garg, who headed that panel, voiced his support for a “Digital Rupee” to replace all private cryptos.

RBI Governor Shaktikanta Das himself said in December that the issuance of a Central Bank Digital Currency (CBDC) was being looked into - although he added it was still “too early” to talk about the same.


Speaking of CBDCs...

A CBDC is essentially a Bitcoin-inspired cryptocurrency with the main difference being it would be issued by the state, have legal tender and potentially be pegged to fiat currency.

About 80% of central banks across the world are researching CBDCs and around 40% of them have already progressed to the experimental stage. Last week, Mastercard launched a testing platform for central banks to test their virtual currencies. It’s an idea that is slowly catching on.

But while regulators consider setting up state-sponsored digital currencies, the future of their private counterparts has once again been cast in doubt.


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