Crypto and India: Stunted Growth
by Zubin Koticha, Alexis Gauba, Aparna Krishnan @opyn_
With support from the MakerDAO.
Note: all interviewee names have been changed for privacy reasons.
India has been economically thriving in recent years. India is the fastest growing large economy in the world with a growing and increasingly educated population. The Indian Rupee, previously prone to significant inflation, is now a stable, low inflation currency.
Additionally, India has made large strides in the digital realm. There is a rapidly growing rate of internet adoption, with about 600 million Indians connected to the internet in 2019, as opposed to less than 60 million Indians in 2009. 40% of Indians own smartphones, a proportion that has doubled since 2014. And beyond just technology consumption, the country has more than 5 million software developers, which is more than any other country in the world (even the US or China).
However, though India has experienced great improvements in economic and digital access in recent years, there is still significant progress that remains to be made. For example, the vast majority of economic exchanges are done without the help of digital payments, and a substantial portion of those transactions are done off the record (outside the reaches of the formal financial system), which is helpful for money launderers and corrupt officials.
Our Study
At first glance, India seemed a perfect market for cryptocurrency to help improve financial inclusion. As such, with the generous support of the Maker Foundation, we conducted a field study in India in two trips over the past two months to understand the current state of cryptocurrency adoption, existing user habits, the current regulatory climate, and where cryptocurrency could be most useful.
Over our two visits to India, we spoke to 70 people across different ages, genders, geographies, and backgrounds, to understand their stories, perspectives, and experiences. Through generative interviews and analyses, we identified a number of key themes and understood different groups’ motivations, struggles, anxieties, hopes, and habits. Here, we’ll share some general background on India when it comes to crypto. Future posts will deep dive into specific topics: unbanked populations, remittances, and forex. Note that all names in this post have been changed for privacy reasons.
Reach of the Existing Financial System
India is home to 200 million people who do not have bank accounts, preventing them from having easy, safe stores of value, access to credit, hedges from inflation, and more. Lack of financial access is a major factor that prevents the rise of India’s middle class.
Not only does the limited reach of the formal financial system hurt large swathes of the population, but it is also a boon for money launderers and tax evaders. As a result, the government has a strong interest in increasing the reach of the financial system. Indeed, government initiatives in recent years have aimed to increase KYC efforts and increase the quantity of frequency of digital payments in India.
One such initiative was the policy of demonetization in 2016, in which the government pulled millions of banknotes from circulation with the hope that people would hold their money in the formal banking system and compliant fintech applications rather than in cash. The move was highly controversial, and prominent economists do not all agree that this was in fact helpful.
Jagbir Singh, CEO of an edtech startup in Delhi, described demonetization; “one fine day, the Indian prime minister appeared on TV and said all cash notes you have with you are useless now and we will give you new notes based on your holdings.”
However, demonetization seems to have increased digital payment utilization in the short term. For example, a study out of the National University of Singapore implies that immediately following demonetization, the “transaction volume [of] card usage increase[d] by 136% whilst the usage of digital wallets went up 72%.” However, the authors note that these figures overestimate the long-term benefit of demonetization, as the same study implies that “levels of digital payment adoption…decline[d] once cash ma[de] a comeback in the economy.” However, digital payment adoption “still stay[ed] far above the initial levels prior to the demonetization.”
Mr. Singh agreed that online payment usage grew after demonetization, but pointed out that “older people between started using cash again after demonetization with teens primarily using online payments.” He went on to explain that “folks who just got smartphones are still skeptical of using their money on phones since they have been using cash for decades so they are comfortable with cash.”
But other initiatives have been more clearly successful. In fact, some types of digital payments are highly advanced in India as a result of the aforementioned pushes by financial technology companies, the government, and banks.
A major body that has been aiming to increase Indian financial inclusion has been the Unique Identification Authority of India (UIDAI), a government agency whose chief prerogative has been to provide all Indian residents with a biometric identity called Aadhaar. They have been highly successful in getting people to sign up for the program. With more than 1.2 billion enrolled, Aadhaar is the largest biometric identification program in the world.
Aadhaar has become a large part of life in India. Initially outlined as a voluntary program, different government agencies and private companies tied one’s financial statements, school grades, ability to get a simcard or bank account to one’s Aadhaar number. The Supreme Court of India ruled that obtaining an Aadhaar number should not be mandatory for any Indian, but de facto, “if you have Aadhaar, everything else is easy, if you don’t it is kind of a nightmare,” said Shaili Ramesh, Indian university student.
As a report by McKinsey notes, “The system…can be used not only for verifying customers but also for loans, direct transfers of subsidies, and a host of other financial transactions.” Aadhaar has also made KYC significantly easier, which the government hopes will decrease the rate of money laundering.
The government is encouraging key players in the financial system to use Aadhaar. To this end, the government, along with the central bank (the Reserve Bank of India or RBI), and the Indian Banks Association (IBA), set up the National Payments Corporation of India (NPCI), a nonprofit that aimed to use the Aadhaar numbers as the basis for a new countrywide digital payments system.
In late 2016, the NPCI unveiled the Universal Payments Interface (UPI), a payment system enabling mobile transactions for clients of 140 of India’s largest banks, thereby making digital money transfers much easier for a majority of Indians. Paired with Aadhaar, UPI has made online payments significantly easier for banks, internet companies, and consumers.
Nischal Krishna, a senior official at the NPCI, explained that “any card from any bank can be used in any ATM in the country because of the interoperability that UPI provides.” This previously wasn’t the case in India.
These initiatives have made transactions in the formal financial system much easier, resulting in increased volumes of mobile and digital transactions, in turn benefiting a wide variety of technology businesses that require user payment.
One such company that has benefited from the development of UPI is Paytm, an Indian fintech and online payments giant. Paytm makes the process of P2P payment as simple as typing in a friend’s number and makes merchant payment as simple as scanning a QR code. Paytm is fast growing, and already claims over 300 million accounts and is worth over $16 billion. It has attracted significant foreign investment as Berkshire Hathaway, SoftBank, Alibaba, and Ant Financial are minority shareholders.
Priya, who runs a business that markets and sells watches on Instagram, conveyed that her demographic prefers using online payments: “My customers pay me using Paytm, Google Pay, and other online payments services, and I get rewards for using Paytm.” Part of Paytm’s prevalence is owed to their success in branding and marketing. “I heard of Paytm…because of ads. When you are watching a cricket match you will see Paytm ads,” Priya said.
A number of other domestic payment applications such as Tez, Phone Pe and Bhim, as well as foreign-made ones such Google Pay and Whatsapp pay, operate on UPI (note that Facebook is even rumored to be building a cryptocurrency for Indian remittances on Whatsapp). Together, UPI-based applications support more than 400 million digital transactions per month, a number which is growing rapidly.
All in all, this leads to considerable and rapidly growing digital payments transaction volumes, a point of pride for the government and financial technology companies, and a strategic asset for the country in general. So how does crypto fit into this story?
Crypto and India
Due to its large developer population and increasing adoption of digital payments technologies, India seems at first glance to be a well placed to benefit from cryptocurrency adoption and seems like an ideal market for builders to focus on. Indeed, there was a strong interest in cryptocurrency before the RBI ban.
One of the founders of a prominent cryptocurrency exchange, Harshita Govinda noted that “most of India discovered crypto in 2016 or 2017. In a country of traders, Bitcoin became one more asset people could trade.” Companies sprung up to support this fledgling ecosystem. “There were people who started to build out exchanges as they anticipated that traders would need a way to easily access and swap fiat for crypto,” said Ms. Govinda.
Some of these companies did considerably well. Indian exchanges were once amongst the top of the world. Both Zepbay and competitor Koinex, were in the global top 10 in terms of exchange volume. At its peak, cryptocurrency exchange Zebpay handled over $265 million/day and was seeing 300,000–400,000 new users every month. The largest 10 Indian exchanges had a combined monthly volume of over $1.5 billion.
Unfortunately for the cryptocurrency community in India, however, Indian regulators have taken a strong stance against cryptocurrencies, which has severely hindered the community there.
First, in December 2017, the RBI declared that cryptocurrency is not legal tender. Then in April 2018, the RBI instituted a harsh directive on cryptocurrencies stating that any RBI regulated entity was banned from dealing with cryptocurrencies, effectively shutting out bank based on/off ramps.
Within a few weeks of the RBI ban in April, Zebpay volume was below $15 million. Exchanges have been forced to make it extremely hard for users to engage with their service. Now, there are just a trickle of new signups. From being in the global top 10 in terms of exchange volume before the ban, Zebay and Koinex are now not even in the global top 100 in trading volume. As such, any previously strong crypto exchange based in India is now looking to leave the country to be able to continue doing business in an exceedingly hostile climate. One of the exchange founders explained that, “exchanges are trying to leave India and set up shop in South East Asia, Malta, or elsewhere.”
Two of the founders of Unocoin, once one of India’s largest crypto exchanges, were arrested for setting up a Bitcoin ATM. One exchange founder discussed some struggles with running the business; “last year before the RBI ban we were growing at a rate of 10,000 users a day. We had about 120 employees. We had to lay off many people and now have only 75 employees. We have been very negatively affected by the RBI ruling.” In this vein, another exchange founder conveyed communication difficulties with both the Reserve Bank of India and the Ministry of Finance. He also discussed how when his company was attempting to purchase computers from a store, the store’s bank froze that store’s accounts, portraying the far reach of these government dictates.
A number of exchanges responded by suing the RBI on the basis of Constitutionality, with representation by law firm Nishith Desai Associates. This case had made its way to the Supreme Court, which has been delaying proceedings since mid-2018. The court has yet to hear the case.
Workarounds
After the ban, some people have been trying to devise workaround processes to acquire cryptocurrency.
For example, some people we talked to sent fiat to friends bank accounts in other countries and asked those friends to directly purchase cryptocurrency for them and send it to their addresses. Mr. Singh brought up another recent trend, whereby Indians who have overseas bank accounts use this overseas infrastructure to buy cryptocurrency.
Some cryptocurrency companies attempted to get around the ban. The ban shut out onramps and offramps through direct bank deposit. However, some companies created smart workarounds, such as the P2P model, which is fully legal.
In the P2P model, exchanges match users with similar buying and selling orders, and then the buying user manually wires cash to the selling user, who sends Bitcoin to the receiving address. This means that the exchange is unconnected to the banking system, making it compliant with RBI orders. Some companies, such as WazirX, have fully switched to the P2P model. However, even with the P2P model in place, liquidity is still extremely low.
In addition, the banking bank still allows for crypto-crypto trading and acquiring cryptocurrencies through other methods like LocalBitcoins.
Unfortunately, because most P2P exchanges delineate most of their pairs as crypto-crypto, the lack of an INR token forced most P2P users to convert to USDT first, taking on an additional currency exchange fee.
As a result, thought workarounds to the ban exist, it is still very hard to obtain or use cryptocurrency in India, which has hurt the community there considerably.
Next Steps
In the long run, India is a promising market for cryptocurrency adoption given its size and growth, especially in the technological realm. However, there are a number of barriers that make it prohibitive for the medium term. First and foremost, the regulatory climate is not conducive to cryptocurrency projects. Next, in unbanked populations there are many concerns that must first be taken into account including basic needs — we’ll dive into more specific in upcoming posts. Regarding remittances, while there is promise to improve existing processes, decentralized financial projects will have a hard time breaking into this space in India while existing regulation is in place (Facebook, for example, might have better luck with their efforts). Similarly, there is limited capacity for decentralized finance projects to work in the Indian forex market; we see large barriers in restrictive capital controls, expensive software products, and limited hourly access.
Now that you have some background, stay tuned for further posts on unbanked populations, remittances, and forex coming soon, and further updates from opyn :D.
A huge thank you to MakerDAO for supporting this the study! Additional thanks to Rich Brown and Jordan Jackson from MakerDAO, Jill Carlson and Alejandro Machado from Open Money Initiative, Eva Beylin from the Ethereum Foundation, Christina Lomazzo from UNICEF Blockchain, Zooko from ZCash, and Alex Gladstein from the Human Rights Foundation for their advice and input. Lastly, a big thank you to everyone we interviewed for making this study possible.
