Case Study: Demonetization and the rise and rise of Bitcoins in India
Imagine a scenario — It is 8pm PST (Vancouver) and all banks in Canada have closed. Probably some TD branches might still be open ;) ;) , but its almost 11 pm in East Coast and half of Canada is already fast asleep. Justin Trudeau, with his sleeves folded up, gives an emergency announcement on all forms of media (TV, radio, youtube live etc) that 85% of currency notes in Canada are not going to be “Legal Tender” with effect immediately. Not even the Head of provinces, Central Bank executives, his own cabinet members- no one has a clue about it. Just think of the chaos, panic and confusion. Now multiple this hundred times. That was reality in India on 9th November 2016 (Thank God India has only one timezone :) )
Demonetization Reason and implementation
500 and 1000 Rs are the top 2 denominations of the Indian currency by value. They also form the highest percentage of currency notes in circulation. They are also hoarded as ‘Black money’ by a significant percentage of the population. That was one of the main intent of this demonetization. Another problem was there was a lot of counterfeit money in circulation and was used for terrorism activities.
In finance circles globally, this news is as big as the fall of Berlin Wall. If not for Trump victory on the same night, this news would have flashed even in Canada as one of the main headlines. Many believe that the Indian PM made the announcement purposely on USA Election night so as to have minimum global media attention.
To add to the chaos it was declared that the next 2 days bank will be closed for customers as ATM will be recalibrated and banks will be updated on new policies. Strict rules were defined by the Government in addition to the issuance of new currency notes for 500 and 2000. It is similar to the Canadian dollar and had a lot of anti-counterfeit measures. Some of the rules introduced were -
- Limit on amount of money to be deposited and limit on withdrawal per day
- Citizens will have until 30 December 2016 to tender their old banknotes at banks
- Exceptions for hospital, public utility etc … And many ,many more
- If marriage in household then withdrawal limit is 100 fold etc.
These rules have been changing almost every other day as per the situation. In fact Govt. has gone to the extent of applying an indelible ink on each person who is coming to bank — as a simple ‘Indian-way’ for tracking :) . This ensures that the same person is not coming to the bank repeatedly.
Reaction of Media and citizens
This was like a heavy dose of Red Bull for the every hungry media and they were super charged. It soon became clear that any media house/person who has been in favor of the PM historically went gaga over the move and rest criticized it. Media asked everyone to send videos of long queues outside ATM and banks. Pages from history were being spoken by the economic experts on past demonetization. A billion people had a very strong opinion about it as it directly affected them.
Now going back to the root cause why this was being done. BLACK MONEY. This is simply money in liquid cash on which tax is not paid. Hence hoarded similarly like a minuscule version of Pablo Escobar :). This money is in most cases actually not earned by illegal means. These are not criminals. Most are actually small business owners and vital components of the local economy.
The opposition parties were aghast and called out the PM as authoritarian and a dictator. But the PM replied back that if any person who has white-money then should not be complaining at all and this entire exercise is only for the poor people. One giant social experiment is undergoing in the world’s biggest democracy. Political parties are organizing ‘bandhs’ or nation-wide protest. The response has been poorer than expected. Suddenly the common man of India is saying that they are ready to undergo all the inconvenience for the sake of the nation. The PM has requested for 50 days. It has been about 3 weeks and there is no violent protest or any real form of aggressive opposition from the poor and middle class. The urban class is not really affected as they can do all transactions using plastic money. The inconvenience has been used as an opportunity to attack this demonetization. A few deaths of people standing in bank queues have been allegedly reported. The deaths have been politicized to an unbelievable extent.
However even the ardent supporters of this agree that the execution has been poor and without much planning. Probably the entire secrecy behind this operation meant it to be disclosed in advanced to a select few and hence it led to a planning disaster
Demonetization passes the litmus test
With media reporting the extreme cases only — of people either hating it or supporting it, no one was really sure of the general consensus. But in a democracy the litmus test is always elections. In the last week of November, the political party (BJP) of the Prime Minister (who is accused of being a dictator) won local elections by big margin in 2 major states — Maharashtra (whose capital is the financial hub, Mumbai) and Gujarat (traditionally this state is of business and trader communities). The common man of India has given a clear thumbs up to demonetization and is ready to face all the inconvenience for the sake of the nation.
New business models
The ‘Indian-jugaad’ is at its best (Jugaad: A ‘Hindi’ term for temporary work-around for every problem). The business of ‘Money mules’ is thriving. The business model is simple — A daily wage worker deposits 2,50,000 INR (the max limit) of someone else black money in their account with the promise of transferring back once everything is settled down for 10–20% premium. For the owner of black money as it is all the currency was of no value. Apps popped up showing ATM/ Banks in the neighborhood which have least waiting times. There was a service by which you can book a person to stand on your behalf in the bank queue :)
But in the tech savvy urban cities like Bangalore, Mumbai and Pune a different revolution has started altogether. It is called as BITCOIN!!!!
Why Bitcoin?
Indians always had a fascination for gold since many eons . Gold was the most stable form of money. Gold has very high significance in matters of religion, culture and investment. Even today many families buy little amounts of gold on paycheck day, whatever be the price. On certain auspicious days, people buy gold (especially the traders and business owners). So naturally everyone rushed to jewelry shops to convert black money to gold. But then Govt of India played its one final trick. All jewelry shop owners had to submit CCTV footage. This was the FINAL BLOW on the people with black money.
People started buying Bitcoin ‘on the street’. This means that ‘agents’ would buy Bitcoin and sell it for very high premium for cash which is no more legal tender. This cash would be exchanged for new valid notes by the agents and deposited in their accounts. An important thing to note is that not every person was doing this to convert black money. As explained before Indians have a fascination with investing in something which is highly stable, has an excellent store of value, is fungible and durable. We have already seen how Bitcoin matches or is better in all of these parameters. Hence people started ‘investing’ in Bitcoin rather than gold. This further pushed the price of Bitcoin in India. This further pushed the price of Bitcoin in India coupled by the facts like Chinese yuan falling against USD and Venezuela’s economy heading for catastrophe.
The price difference for Bitcoin on Indian and US/Canadian BTC exchanges was as high as 150$. I was tempted to mint Indian rupees but resisted the temptation. All I had to do was –
- Open account in unocoin.com or zebpay.com (India’s BTC exchange)
- Buy 1 BTC from kraken (Canadian exchange)
- Send that BTC to BTC address generated by Indian BTC Exchange
- Sell BTC and convert BTC to INR.
If I had to remit the value of 1 BTC (approx 950 CAD) then after all transaction fees, exchange rate etc, only about 925 CAD worth of INR is deposited in my account. With the above steps, my account would have been credited with almost 1050 CAD :).
Suddenly all mainstream media (Business news and TV shows) started talking about Bitcoin. The price for 1 BTC kept on rising from 50,000 INR and reached almost 70,000 INR in 3 weeks (40% high). Early adopters of Bitcoin in West were the libertarians as discussed earlier. However, this philosophy originated in the west and is still alien to India. For Indians, it was the attraction of a stable investment asset which was of utmost importance.
Why India and Bitcoin are a marriage made in heaven
We Indians still widely practice the concept of ‘arranged-marriage’ and it is an integral part of our culture. The western perception of ‘arranged-marriage’ is certainly incorrect but I do not want to deviate from Bitcoins :)
We firmly believe that marriages are made in heaven. I feel India and Bitcoin share the same relation because -
- India has largest inward remittance market (more than 50 billion). Bitcoin has the power to disrupt it substantially as there is very low transaction fee, its instant without receiver having to go to a financial institution.
- Indians hold 20,000 tonnes of gold and India is highest importer of gold (30 % of yearly world gold mining).
- For bitcoin and the similar technologies to grow, India needs huge innovation in Information Technology. Fortunately, India has the highest number of IT professionals.366 million people (31 per cent of the population) have access to improved sanitation as compared to 545 million cell phones.
- More access to internet and mobiles means higher penetration for Bitcoin and similar technologies.
- India has the world’s highest unbanked population.
Regulations of Bitcoin in India
Bitcoin is neither illegal nor completely legal. It is neither not regulated nor completely regulated. This is actually at pace with all Western countries. There are a few legal BTC exchanges where to trade in BTC you have to upload your identity proof. These exchanges claim to be KYC and AML compliance and are willing to disclose identity of users against particular Bitcoin transactions. There is 1 Bitcoin regulation whitepapers in India and you can read it here
Bitcoin future in India
Today Indian PM is talking of cashless society. In his speeches, he is urging the youth to adopt to internet and mobile banking. There is a huge push and thrust from the Govt for a ‘Digital India’. But there are faint rumors and speculations that India will also work towards its own digital currency. A few articles like this one have already been printed. In fact, the economist (Mr. Anil Bokil), whose brainchild is the demonetization exercise, is talking vaguely in all his interviews on digital currency. 99.99% of the population might not exactly understand but he has referred to below terms consistently in his interviews-
- Future of India is digital money only
- There will NOT be any concept of ‘currency’, rather we will only have ‘money’
- India will go towards ‘single-coin’ or single money system
We have discussed this already on the concepts of ‘money’ and ‘currency’.
Today in India you can top-up your mobile balance, buy movie and even bus tickets and purchase Pizza with bitcoins. Tomorrow it might be paying utility bills and then you never know — The Govt of India might ask its ‘netizens’ to convert their liquid cash into digital currency issued and governed by the Central Govt of India but whose supply is based upon an algorithm :).
Bitcoin as a ‘centralized’ blockchain solution is against the very definition of Blockchain (as Blockchain is supposed to be a decentralized solution). It is like those non-alcoholic beers which Metro grocery store sells :)
But extraordinary circumstances need extraordinary measures and I feel a centralized-Govt controlled digital currency will be reality in next 10 years. The wave will start from the so called poor countries where banking is not as regulated as western countries. In fact, while North America and Europe were fighting their own internal demons (Trump, Brexit — to name a few), Tunisia and Senegal have already started working on its own blockchain based digital currencies.
India is fast-changing. Although ‘arranged-marriages’ are still a norm in India, I have married a Bengali girl (Think of it as meat vs non-meat consuming families, just to start with :) ). My elder brother lives in California and has married a Brazilian. Our middle-class, conservative families and relatives have whole-heartedly accepted our relationship. Perceptions are changing and so is attitude towards every aspect of the society including banking and finance :)
Crypto-currencies are here to stay and India is adopting it at an unbelievable pace. Future is unknown but definitely not uncertain :)
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