India with a population that is over 1 billion strong has been on something of an economic renaissance in the last few years. Such has been the extent of the country’s growth that the IMF has called it the fastest-growing emerging economy. More than 40 percent of the country’s population has access to telecoms and internet services. A country steeped in mystery, history, and culture, it is also not one to fall behind when it comes to technological advancement. Bitcoin and other cryptocurrencies have been operating within the country for a number of years now. This article looks at the state of the Indian cryptocurrency market.
A little Bit of History
As early as 2012, smallscale Bitcoin transactions were already taking place within the country. These were still early days in the development of Bitcoin when only crypto hobbyists were interested in Bitcoin. By 2013, Bitcoin was beginning to gain a level of popularity that was spreading across many countries. That year, a few businesses began to accept Bitcoin payment. A vintage era pizza shop called Kolonial in the Worli area of Mumbai became the first restaurant service in India to accept Bitcoin payments.
In a short space of time, cryptocurrency exchanges began to spring up within the country. Pioneers like BtcxIndia, Unocoin, and Coinsecure began offering cryptocurrency exchange and trading services in India. Over time, others like Zebpay, Koinex, and Bitcoin-India were added to the list. With the proliferation of crypto trading and exchange platforms, the crypto market in India has grown from its modest level in 2013 to what it is today. Apart from these online exchanges, there are also a number of over-the-counter (OTC) crypto shops in the country and you have the makings of a crypto economic hub.
The 2016 Demonetization
On November 8, 2016, Prime Minister Narendra Modi announced the commencement of a demonetization policy. The move was aimed at effecting the withdrawal of the Rs 1,000 and Rs 500 currency notes from circulation. Announcing the move, the Prime Minister described the move as part of the government’s effort to curb counterfeiting of currency. He also declared that the move would fight against the circulation of black money while significantly reducing the level of inflation in the country’s economy. This was only the third time that the Indian government had demonetized the economy. The other two occasions were in 1949 and 1978, with the former happening a year before the country’s independence.
Impact on Cryptocurrencies
The move by the government to demonetize approximately 86 percent of the country’s paper currency sent shockwaves all across the subcontinent of India. People with large cash holdings required a new means of holding such wealth without incurring significant tax burdens and sundry government scrutiny. It became common practice for some to buy large orders of Bitcoin or other cryptocurrencies and then sell them at a later date. This meant that they were effectively circumventing what would have been considerable taxes if they had tried to circulate their wealth through the banking system.
The demonetization policy also led to widespread criticism of the mainstream financial scene in the country. In the space of 24 hours, 86 percent of the country’s paper currency in circulation had been rendered valueless by virtue of a single government proclamation. Realizing that fiat money isn’t exactly “real” money since it isn’t backed up by anything, Indians began to seek alternative currency models. Many Indians, especially those in the 40 percent bracket with access to the Internet began to take up Bitcoin and other cryptocurrency investments.
The 2016 demonetization policy may have spurred the adoption of cryptocurrencies among a considerable portion of the population but realities soon began to emerge that have stifled the growth of the market in the country. Despite its vast population, India only contributes 2 percent of the total global cryptocurrency market capitalization. The small role being played by such a large economy can be attributed to the following reasons
High Crypto Prices
The general level of prices of cryptocurrencies in India is on the high side. Market rates are relatively higher by as much as 5 to 10 percent compared to the global average. This means that Indians can only get involved in peripheral participation in crypto trading as far as international crypto exchange platforms are concerned. Lack of large-scale mining facilities especially with regard to Bitcoin has been identified as a reason for this. Also, strict government restrictions on international money flow also make it significantly difficult for Indians to transact with many of the large foreign crypto exchange platforms. The emergence of local platforms has helped to alleviate this issue to some extent as it is now a little easier for lower income citizens to gain access to cryptocurrencies.
RBI-led Government Crackdown
The Reserve Bank of India (RBI) has been consistent in warning citizens of the risk associated with cryptocurrencies. The RBI has released several statements since 2013 calling Bitcoin and other cryptocurrencies a Ponzi scheme as well as a bubble. The bank has also issued statements detailing the potential negative security, financial, and legal ramifications of crypto investments, calling on citizens to be wary. In 2017, reports began to emerge that the RBI and the government were considering establishing regulations on the cryptocurrency market.
The Finance Ministry in the country has labeled cryptocurrencies as not being legal tender. The government has also been in talks to develop modalities for some form of a crypto crackdown. Earlier in the month, it was reported that the major banks in the country also froze some accounts of a few cryptocurrency trading platforms.
While the government of the country hasn’t banned cryptocurrencies, they haven’t exactly been endorsing it. In recent times, a debate has emerged within the country as to whether profits from crypto transactions should be taxed or not. The coming months will reveal the direction in which the crypto market will move as far as India is concerned.