Explained: End Of The Road For Bitcoin In India?

India’s central bank has clamped down on virtual currencies like bitcoin.

(Photo: AP)

India’s central bank has clamped down on virtual currencies like bitcoin. On Thursday, it said that Reserve Bank of India-regulated entities cannot deal with an individual or business dealing in virtual currencies. This includes banks, non banking financial companies, payment banks and mobile wallets. Essentially, access to the traditional payment system, on top of which even the new age world of virtual currencies has been built, has been cut off. This, despite the fact that bitcoins or virtual currencies are not illegal in India.

What Does This Mean For Bitcoin Holders?

The RBI’s decision will hit the heart of the bitcoin or virtual currency business in India. Banks will no longer allow transactions to purchase or sell bitcoin through their payment systems. This means that exchanges where users can buy and sell virtual currencies like bitcoin via their bank accounts will come to a standstill.

Those who hold bitcoins can choose to retain them but they won’t be able to convert them to Indian currency or trade them in Indian currency.

The central bank has allowed a three-month period for regulated entities like banks to unwind their virtual currency positions. In this interim period, conversion to Indian rupees will be permitted.

However, if they choose to sell, they may have to exit at lower levels due to the recent fall in prices. Hours after the RBI announced bitcoin plunged 28 percent to $5400 from its peak of about $7500. Sathvik Vishwanath, co-founder of virtual currency exchange Unocoin, however, said that after an initial dip, the value of bitcoin has recovered.

Even if prices recover, there will be limited liquidity in the formal market since few will want to buy bitcoin in India.

What Does This Mean For Bitcoin Businesses?

Without the support of the banking system, most businesses will either have to shut down or move to international markets.

“After three months, if the government is rigid on the business, we will have to shut down operation in India or remove the Rupee part from the exchange,” said Shivam Thakral, CEO and co-founder of BuyUCoin, a virtual currency exchange. Sathvik Vishwanath founder of Unocoin adds: “We can even look at moving to international markets.”

Most businesses in the space will have to shut down because they can’t give or take money from consumers, said Navin Surya, chairman of the Payments Council of India. According to Surya, there are at least 20 organised players in this space but none have been called for consultations in the matter. “

The government should either ban it or frame rules for legitimate operations rather than going about it in this indirect way

Navin Surya, chairman of the Payments Council of India.

Could New Risks Emerge?

So far, major exchanges like Zebpay, Coinsecure and Unocoin were asking users to complete KYC (Know Your Customer) formalities such as providing details of the PAN cards or Aadhaar cards before trading.

With exchange transactions halted, peer-to-peer trading could pick up. This will be even tougher for authorities to track. Thakral said that there is already some evidence of this happening in centers like Pune, Gujarat and Maharashtra. He declined to share further details. Surya also cautioned that those looking to subvert the system, can easily move underground and start doing business in cash, thereby creating a parallel black economy.

There is also a Helsinki-based portal called ‘Local Bitcoin’, which posts adds allowing for both online and cash transactions involving bitcoins in India. On that platform, while the trading price for purchasing bitcoin online in India is under $6,000, the price for purchasing these tokens in cash was at $7,000, hinting at higher demand for cash-based trading.

Why Did The Regulator Do This?

Despite cautionary notices, the virtual currency universe has continued to grow in India and overseas. This has prompted regulatory agencies across countries like China, South Korea and Japan to consider stronger measures. In February, Agustín Carstens, an official at Bank for International Settlements, wrote a paper laying out the reasons that central bank intervention has become necessary.

To date, Bitcoin is not functional as a means of payment, but it relies on the oxygen provided by the connection to standard means of payments and trading apps that link users to conventional bank accounts. If the only “business case” is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.

BIS Paper

The paper also argued that a central bank may be justified in taking action should its broader goals of maintaining financial stability and upholding public trust be challenged.

According to the paper, virtual currencies have no characteristics of a true currency such as being a store of value or a widely accepted means of payment. "It has become a combination of a bubble, a Ponzi scheme and an environmental disaster," the paper said.

(This article was first published on BloombergQuint and has been republished in an arrangement.)