Cryptocurrencies spur mixed reactions in India

While public interest surges, authorities in the country have been trying to crack down on investment in digital currencies, citing financial and security risks

Cryptocurrency values plunged on Tuesday amid fears of new regulations. Chris Ratcliffe / Bloomberg

Shivam Thakral, 22, was so fascinated by bitcoin that, while studying for his undergraduate degree, the young entrepreneur decided to launch a cryptocurrency exchange in India in 2016.

"Cryptocurrencies have been gaining a lot of traction in India because people who have invested have doubled, tripled their investment," says Mr Thakral, the co-founder of BuyUcoin, based in New Delhi, which provides a platform to trade cryptocurrencies including bitcoin.

Despite mounting concerns expressed by authorities, the cryptocurrency frenzy in India seems to be showing no signs of abating. Several cryptocurrency companies have started in India, while existing firms are moving in on the rising interest in virtual currencies. Demand for this new money has gathered pace in the subcontinent amid surging prices generating worldwide interest. Demonetisation in particular has helped to fuel demand in India.

But, increasingly, authorities in the country have been trying to repress investment in cryptocurrencies, citing financial and security risks, which has prompted some Indian banks in recent weeks to block transactions related to exchanges such as BuyUcoin.

This comes as governments globally are becoming more concerned about speculative investments in virtual currencies. The South Korean state said last week it plans to ban local cryptocurrency exchanges, which triggered a 12 per cent slump in bitcoin rates to US$12,801. Last year, regulators in China took steps to block such exchanges.

"There are pros and cons of investments in cryptocurrency – cryptocurrencies display a tendency to oscillate between high-value returns and substantial value reductions," says Vinay Kalantri, the founder of the Mobile Wallet, an online payment solution company based in Mumbai.

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The Indian government has not yet revealed measures as aggressive as some of its Asian peers, but is has been very outspoken of its negative stance on the trend. India's finance minister Arun Jaitley, warned that cryptocurrencies are not "legal tender". The finance ministry recently issued a statement describing the currencies as a "Ponzi scheme", stating that virtual currencies "don't have any intrinsic value and are not backed by any kind of assets" and their prices are purely driven by speculation, making them highly volatile.

Taxation around the currencies has also become an area of concern and is still to be clearly defined. The income tax department last month moved in on exchanges and individuals in connection with these tokens, sending notices to traders and conducting surveys of exchanges across several major cities.

The central bank, the Reserve Bank of India, has issued a series of warnings to the public.

RBI says it has not issued "any licence or authorisation to any entity or company to operate such schemes or deal with bitcoin or any virtual currency". The RBI added "that dealing with virtual currencies came with "potential economic, financial, operational, legal, customer protection and security related risks". Local media reports suggest the RBI has informally requested banks in the country to steer clear of virtual currency exchanges, and this has led to a number of banks blocking transactions.

"This has resulted in deposit and withdrawal related bottlenecks across all the Indian exchanges," says Vikram Pandya, the director of the fintech programme at SP Jain School of Management, which also has a campus in Dubai.

“What we require is the proper framework and regulations to govern these projects. If one bans deposit and withdrawal from banks, people may start exploring other routes to do these transactions, which defies the purpose because through the bank it is at least traceable. While some of the currencies are utter nonsense there are currencies which have really good potential.”

Mr Thakral says the move by the banks to avoid cryptocurrencies has impacted his business. "It has caused a little bit of a drop," he says, but he expects the negative impact to be temporary and believes interest in cryptocurrencies among investors is actually growing because of the backlash against them.

“More and more people are becoming aware of cryptocurrencies because of the comments by the government and the RBI,” Mr Thakral says.

Ultimately, he thinks the government will move towards issuing a set of regulations to govern exchanges such as his rather than trying to ban the trading of the currencies.

Reliance Jio, a telecom company, which is part of the billionaire Mukesh Ambani's Reliance Industries conglomerate, is reportedly planning to create its own cryptocurrency to capitalise on the trend, according to Mint, an Indian business daily.

“With Reliance Jio planning to launch their own coin, I assume very soon we can expect regulations around such tokens,” says Mr Pandya. “India has always taken wait and watch stance for regulations around new technologies.”

With countries including Singapore coming up with their own guidelines and framework around virtual currencies, he says he expects the RBI to eventually follow suit.

The Indian government's demonetisation move – in which it suddenly banned the two highest value banknotes in November 2016 – has played a significant role in the rise of cryptocurrencies in India, with people prompted to look for alternatives to cash. There have been some allegations that this has led to black money flowing into virtual currencies.

Prime minister Narendra Modi is eager for India to move towards a more transparent digital economy. Ironically, while the government is wary of cryptocurrencies, its broader policies have helped boost demand for them.

Some businesses in the country are starting to accept bitcoin, in some restaurants, for example, as cash liquidity has reduced following demonetisation.

"In India, the culture towards digital money has been pushed by the government itself and cryptocurrencies are another form of digital money," says Arjun Chakraborti, the president of TrakInvest, a virtual equity stock platform headquartered in Singapore and with operations in India, which last month launched its own cryptocurrency.

He says that India forms one of the biggest portions of the company's business and this interest is being driven by "the new millennial" who is attracted to these currencies.

“Millennials in Asia want opportunities to earn money, they do speculate and they use technology, and these are all the factors that have driven the adoption.”

Mr Chakraborti says individuals, however, need to be made aware of the risks and understand "socially responsible trading" and that, globally, the market needs to be "pushed in a mature direction … otherwise it becomes a one-time frenzy, people will lose their money and the bubble will burst".

But Mr Thakral believes virtual currencies are here to stay.

“In spite of the government and RBI saying “don't invest”, people are attracted to cryptocurrencies and the technology behind them,” he says.

"Cryptocurrencies are not going to go anywhere.”