India’s Move to Take on the Crypto Ecosystem — What Will Be Its Impact on the Economy?

July 21, 2019 / by Prashanth Swaminathan
• In the last 12 months, multiple exchanges have either shut shop or have ventured abroad to look for revenues.
• The key reason for the pathetic state of Indian exchanges is the banking ban introduced by the RBI in April 2018.

As the price of bitcoin crossed $13,000 and the global crypto ecosystem was expecting this to be further validation of a much-anticipated bull-run in this space, India got yet another rude shock with one of its leading cryptocurrency exchanges Koinex notifying its customers that it will be shutting operations. This is yet another example of India moving against the global tide in digital assets by offering no clarity to its ecosystem and effectively forcing them to shut shop.

Ailing exchanges

Koinex was generating volumes of $265 million a day at their peak in December 2017, and this is now down to under $5,000 (as per Coin Market Cap), a trend symptomatic of all Indian crypto exchanges. As the primary revenue source for exchanges is transaction fees, going must be really tough. In the last 12 months, multiple exchanges have either shut shop or have ventured abroad to look for revenues. Unocoin, Koinex, Coindelta, and KoinOK have all partially or fully shut down, while Zebpay and WazirX have launched international operations.

RBI banking ban

The key reason for this state of Indian exchanges is the banking ban introduced by the RBI in April 2018. This ban directed Indian banks to stop holding bank accounts for entities handling crypto, such as exchanges. This completely disabled the fiat to crypto on-ramp, debilitating the ecosystem. While the move was not entirely unexpected given the unregulated nature of these assets, it was anticipated that this will evolve into a regulatory framework under which the ecosystem could operate. It has been 15 months since, and while the case challenging the validity of the ban rumbles on at the Supreme Court (a classic dialogue from the movie Damini comes to mind!), there has been no regulatory clarity and the entire ecosystem is therefore in a limbo. To their credit, some exchanges, including Koinex, tried to get around the ban by launching P2P services, but this was always difficult to scale.

Why do we need exchanges?

Exchanges offer a critical role in the evolution of any asset class. They bring price discovery to assets, they are the most direct and transparent source for people to invest, and they show investors that there is ample liquidity for them to dilute or increase their stakes. While Indian projects may or may not be able to list on international exchanges, they would have been certainly listed on Indian exchanges as this was the only fiat-to-crypto on-ramp for Indian residents. Therefore an indirect and catastrophic impact of the banking ban is the strangulation of Indian cryptopreneurs who want to raise funding through ICOs and list such projects within India. Investors will stay away from such projects as there is no price discovery or liquidity for their investments and therefore eventually entrepreneurs will move abroad, thereby costing the Indian residents wonderful investment opportunities, and the Indian exchequer significant tax revenues.

Way forward

If the rumors are to be believed, India is strongly considering a ban on cryptocurrencies. If this is indeed the case, I cannot begin to express how tragic and myopic this will be, and how we will be perceived in the global eyes. While the government on one hand wants to establish a Digital India, on the other it is not setting the right example by delaying or banning cryptocurrencies, a form of digital assets. There is no denying that the crypto space has a lot of issues to resolve, and there are people who may need to be questioned and potentially convicted for committing scams, but this is a natural evolution of any unregulated industry. The obvious way forward is to come up with a regulatory framework and allow the industry to sustain and thrive under such a framework.

Prashanth Swaminathan is a graduate from IIT Guwahati and IIM Calcutta and spent 10 years in investment banking at Morgan Stanley London before setting up an EU cryptocurrency exchange, XDAT.