Cryptocurrency – The view from India

The quick rise and expanding acceptance of cryptocurrencies has caused a dramatic shift in the financial industry over the last ten years. India has been leading this revolution in digital assets with its large population and booming technology sector. 

The Reserve Bank of India (RBI) took notice of the growing popularity of cryptocurrencies and released its first circular in 2013, alerting users to potential security risks related to the use of virtual currencies. The tug-of-war over regulations that would determine the direction of cryptocurrencies in the nation started with this.

Then demonetization followed

The Indian financial system saw a significant upheaval in 2016 when the government decided to suddenly demonetize high-value currency notes. Due to the fact that tech-savvy consumers were looking for alternative financial options, this action increased the preference for digital payments, which inadvertently helped cryptocurrency investments.

The Reserve Bank of India (RBI) repeated its concerns about the risks associated with virtual currencies in a 2017 circular in response to the growing interest in cryptocurrencies. By year’s end, the finance ministry and central bank jointly released a warning stating that cryptocurrencies were not accepted as legal money in India.

When the RBI released a circular prohibiting banks, non-banking financial companies (NBFCs), and payment system providers from dealing with virtual currencies or offering services to cryptocurrency exchanges, the regulatory uncertainty reached a critical point in March 2018. This decision had a severe negative impact on the country’s cryptocurrency ecosystem, with trading volumes plummeting by an incredible 99%.

Supreme Court Strikes Down the Crypto Banking Ban: 2020

The RBI’s 2018 circular banning banks from providing services to cryptocurrency exchanges was a significant setback for the industry. However, in March 2020, the Supreme Court of India struck down the RBI’s circular, declaring it unconstitutional.

This landmark ruling was a critical victory for the cryptocurrency ecosystem in India. Cryptocurrency exchanges, which had been forced to shut down or severely curtail their operations, were able to spring back to life. The Supreme Court’s decision coincided with a global cryptocurrency boom, further fuelling the growth of the Indian market.

The Regulatory Landscape: 2021 to 2023

Despite the Supreme Court’s ruling, the battle for the regulation of cryptocurrencies in India was far from over. On January 29, 2021, the Indian government announced its plans to introduce a bill to create a sovereign digital currency and subsequently ban private cryptocurrencies.

This announcement sparked a new wave of uncertainty, as the cryptocurrency community in India awaited the details of the proposed legislation. In November 2021, the Standing Committee on Finance met with the Blockchain and Crypto Assets Council (BACC) and other cryptocurrency representatives, concluding that cryptocurrencies should not be banned but regulated.

In early December 2021, Prime Minister Narendra Modi chaired a meeting on cryptocurrencies with senior officials, signalling the government’s intent to take a more nuanced approach to the regulation of digital assets. This meeting was followed by a series of consultations with industry stakeholders, as the government sought to strike a balance between fostering innovation and mitigating potential risks.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was subsequently introduced in the Indian Parliament in the Winter Session of 2021. The bill proposed to create a framework for the issuance of a central bank digital currency (CBDC) by the RBI, while also regulating the use of private cryptocurrencies.

However, the bill was eventually not introduced, and the government decided to take a more cautious approach, engaging in further consultations with stakeholders. This delay in the introduction of the bill created a sense of uncertainty, but also allowed the government to carefully consider the complexities and implications of cryptocurrency regulation.

In the absence of a comprehensive regulatory framework, the Indian cryptocurrency market continued to evolve and expand.

In April 2022, the Indian government introduced a Finance Bill that imposed a 30% tax on cryptocurrency holdings and transfers, as well as a 1% tax deducted at source (TDS) on all crypto-related transactions above INR 10,000.

While these measures made investing in cryptocurrencies more challenging from a tax perspective, they did not deter the growing enthusiasm of Indian investors for digital assets.

Future Outlook: A Collaborative Path Forward

The future of cryptocurrency in India in 2024 and beyond is expected to be marked by significant growth, increased maturity, and deeper integration into the financial landscape. Here’s a closer look at what the data suggests:

• India has emerged as the fastest-growing adopters of cryptocurrency investments in 2024, as on-chain value received by Indians reached $270 billion in 2024, up 60% year-on-year.
• Market Growth: Reports like those by Statista predict the Indian cryptocurrency market to reach a staggering $343.5 million by 2024, and with a projected annual growth rate of 8% between 2023 and 2028, it could potentially reach $467.2 million. This signifies the immense potential for the Indian market.
• User Base Expansion: The data indicates that over 15-20 million Indians have already invested in cryptocurrencies, with the total value exceeding $10 billion. This growing user base suggests a changing investment landscape in India, where individuals are increasingly looking to diversify their portfolios.
• Attracting Foreign Investment: Increased adoption of cryptocurrency is likely to attract foreign investments into India, leading to job creation and economic growth. Additionally, the use of central bank digital currencies (CBDCs) like the e-rupee promises faster, cheaper transactions, and wider financial inclusion.
• As of 2014, India’s top 2 centralised exchanges had more than 35 million users
• India still accounts for only 4% of the world’s Crypto investor population
• Bitcoin is the dominant asset in India with 17-18%, followed by Ethereum at 10-14%
• Meme Coins like Doge and Shiba Inu collectively make up 15-18% of the investments

(Source: Economic Times)

The Growing Popularity of Cryptocurrency Trading in India

Cryptocurrency trading has become increasingly popular in India, with many platforms

emerging to meet the growing demand. In this article, we will explore:

1. WazirX: WazirX stands out as one of the top cryptocurrency exchanges in India. It’s known for its easy-to-use interface and a large selection of cryptocurrencies available for trading. You can do various types of trading on WazirX, like spot trading, futures and options trading, and peer-to-peer (P2P) trading. Plus, they have a mobile app for trading on the fly.

2. CoinSwitch Kuber: CoinSwitch Kuber is another popular platform for buying, selling, and trading cryptocurrencies. It’s especially good for beginners because of its straightforward interface. CoinSwitch Kuber supports many different cryptocurrencies and gives you real-time market data and price alerts.

3. ZebPay: ZebPay is a well-known cryptocurrency exchange that recently made a comeback in India. It offers an easy-to-navigate platform for trading. You can do spot trading, make instant INR deposits and withdrawals, and keep your cryptocurrencies safe in their secure wallet.

4. P2P Exchanges: Another growing trend in India is P2P cryptocurrency exchanges. These platforms connect buyers and sellers directly, without any middlemen. They offer more privacy and often support a wider range of payment options.

Unveiled: The Regulation: 2023 and Later

After extensive deliberations and consultations, the Indian government finally unveiled its cryptocurrency regulation framework in July 2023. The Cryptocurrency and Regulation of Official Digital Currency Act, 2023, sought to strike a balance between nurturing the country’s burgeoning cryptocurrency ecosystem and addressing the potential risks associated with digital assets.

The key elements of the new regulatory framework include:

1. Legalization of cryptocurrencies: The act recognizes cryptocurrencies as a legitimate asset class, allowing for their trading and investment, subject to compliance with the guidelines.
2. Regulation of cryptocurrency exchanges: Cryptocurrency exchanges are now required to register with the Securities and Exchange Board of India (SEBI) and adhere to strict know-your-customer (KYC) and anti-money laundering (AML) rules.
3. Taxation of cryptocurrency gains: The government has introduced a comprehensive tax regime for cryptocurrency transactions, including a 30% capital gains tax and a 1% tax deducted at source (TDS) on all crypto-related transactions.
4. Prohibition of certain cryptocurrencies: The act empowers the government to prohibit the use of certain cryptocurrencies that pose a threat to the country’s financial stability or national security.
5. Creation of a central bank digital currency (CBDC): The Reserve Bank of India has been tasked with the development and issuance of a sovereign digital currency, which will be considered legal tender and enjoy the full backing of the central bank.

The introduction of the Cryptocurrency and Regulation of Official Digital Currency Act, 2023, has been widely welcomed by the Indian cryptocurrency community, as it provides much-needed regulatory clarity and legitimacy to the industry. The act’s balanced approach, which allows for the responsible growth of the cryptocurrency market while addressing potential risks, has been praised by industry experts and policymakers alike.

The Impact on the Indian Cryptocurrency Market

The implementation of the new regulatory framework has had a significant impact on the Indian cryptocurrency market. The legalization of cryptocurrencies and the establishment of a clear compliance regime have instilled a sense of confidence among investors, leading to a surge in both institutional and retail participation.

According to industry estimates, the number of cryptocurrency investors in India has reached over 30 million as of August 2023, with the total value of investments exceeding $20 billion. The increased regulatory oversight has also encouraged more global cryptocurrency exchanges to establish a presence in the country, further bolstering the ecosystem.

The introduction of the capital gains tax and the TDS on cryptocurrency transactions has been a major development, as it has brought the digital asset class into the formal financial system. While some investors have expressed concerns about the tax burden, the overall consensus is that the new regime provides much-needed clarity and legitimacy, ultimately benefiting the long-term growth of the industry.

The creation of the central bank digital currency (CBDC) by the RBI has also sparked significant interest among Indian consumers and businesses. The CBDC, which is designed to complement and coexist with private cryptocurrencies, is expected to enhance financial inclusion, reduce the cost of cash management, and facilitate more efficient cross-border transactions.

Despite the turbulence in the Indian cryptocurrency market over the past two years, the demand for digital assets has increased exponentially since February 2024.

Trading volumes on major exchanges have surged in the range of 150-250%, with a new wave of investors eager to explore the world of virtual assets.

This recent bull run has reignited the enthusiasm of young Indian investors who are more inclined towards making quick profits, in contrast to the traditional equity markets.

Environmental Impact of Cryptocurrencies

The environmental impact of cryptocurrency mining, particularly those utilizing the proof-of-work consensus mechanism, has become a major point of contention. Proof-of-work mining involves solving complex mathematical problems to validate transactions and secure the blockchain network. This process requires vast amounts of computing power, leading to high energy consumption.

• Energy Consumption Concerns: Bitcoin mining alone is estimated to consume more electricity than some entire countries. This raises concerns about the sustainability of widespread cryptocurrency adoption, especially in a world striving for cleaner energy sources.
• Alternative Consensus Mechanisms: Fortunately, alternative consensus mechanisms like proof-of-stake are emerging as more energy-efficient solutions. Proof-of-stake validates transactions based on the amount of cryptocurrency a user holds, significantly reducing the computational power required.
• The Debate Continues: The environmental impact of cryptocurrencies is a complex issue with no easy answers. While the energy consumption of proof-of-work mining is undeniable, proponents argue that the technology is constantly evolving, and more sustainable solutions are being developed. Finding a balance between security, efficiency, and environmental responsibility will be key to the future of cryptocurrency.

Impact on Traditional Financial Institutions

The rise of cryptocurrencies presents both challenges and opportunities for traditional financial institutions like banks and investment firms.

• Challenges and Adaptation: Cryptocurrencies could potentially disrupt the traditional financial system by offering faster, cheaper, and more inclusive financial services. Banks may need to adapt by developing their own digital asset offerings or integrating cryptocurrency services into their existing platforms.
• Collaboration and Integration: There’s also potential for collaboration between traditional finance and the cryptocurrency industry. Banks could act as custodians for institutional investors holding crypto assets, while cryptocurrency exchanges could benefit from the established infrastructure and regulatory compliance expertise of traditional institutions.

The Road Ahead: Opportunities and Challenges

The regulation of cryptocurrencies in India has opened up a new era of opportunities and challenges for the country’s financial landscape. The legitimization of the digital asset class has the potential to unlock significant economic value, fostering innovation, investment, and job creation in the burgeoning Fintech sector.

However, the regulatory framework also presents certain challenges that will need to be addressed. The prohibition of certain cryptocurrencies deemed a threat to financial stability or national security will require a robust and transparent decision-making process, ensuring that the interests of both investors and the broader economy are protected.

Additionally, the effective implementation and enforcement of the new regulations will be crucial. The government and regulatory authorities will need to work closely with the cryptocurrency industry to ensure compliance, while also addressing concerns related to consumer protection, money laundering, and terrorist financing.

Cryptocurrencies have emerged as a viable solution for seamless cross-border transactions, offering several advantages such as reduced costs, instant transfers, and exchange rate certainty.

This feature is particularly appealing to Indian investors, given the global presence of the Indian diaspora and the need for efficient international money transfers.

The success of the central bank digital currency (CBDC) will also be a key factor in the overall trajectory of the cryptocurrency landscape in India. The RBI will need to carefully design and deploy the CBDC, ensuring that it seamlessly integrates with the existing financial infrastructure and provides tangible benefits to both businesses and individual consumers.

Cryptocurrencies have emerged as a viable solution for seamless cross-border transactions, offering several advantages such as reduced costs, instant transfers, and exchange rate certainty.

This feature is particularly appealing to Indian investors, given the global presence of the Indian diaspora and the need for efficient international money transfers.

As India navigates this new era of cryptocurrency regulation, it will be essential for policymakers, regulators, and industry stakeholders to maintain open and continuous dialogue. This collaborative approach will be crucial in striking the right balance between fostering innovation and mitigating risks, ultimately positioning India as a global leader in the responsible development of the digital asset ecosystem.

At the time of writing, the author Tushar Kansal held the following position: EFounder & CEO at Kansaltancy Ventures. Find him on LinkedIn.

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