India at a crypto crossroads as New Delhi considers ban

For India's millions of cricket fans, games this year have been interrupted by cryptocurrency advertisements. The ads, which featured Bollywood stars offering free Bitcoins, largely glossed over the risks and legal ambiguities of trading digital coins.

“During the Cricket World Cup, at least 70 percent of commercials on TV had something to do with crypto,” said Uday Singh Ahlawat, a New Delhi-based corporate lawyer. “Since crypto is a gray area, people tried to take advantage of it.”

But as millions rushed to buy coins like Bitcoin and Ethereum, “alarm bells started ringing” in New Delhi, Ahlawat said. Now CoinSwitch Kuber and other exchanges are prepared for a regulatory backlash as the Indian government follows China by banning cryptocurrencies.

Last month's announcement that India's parliament would consider measures to "ban all private cryptocurrencies in India" sparked a frenzied sell-off, even though the same bill was first introduced earlier this year.

“What happened was panic,” said Nischal Shetty, co-founder and chief executive of crypto exchange WazirX. “And the people who came into crypto in the last six to eight months were the ones who panicked the most.” Prices on Indian bourses temporarily fell 10-15 percent below the global market, he said.

While the details of India's crypto bill are not known, it is expected to allow exceptions that will "promote the underlying technology" of blockchain, a massive digital ledger, while also supporting a central bank-issued digital . initiate coin, it says in the announcement of the parliamentary agenda.

Ahlawat said he was skeptical about banning crypto, “which could have been done without a bill.”

Anirudh Rastogi, managing partner at Ikigai Law, which has represented Indian crypto exchanges, said: “There is not too much clarity on how the government feels about this.”

He added that the government has said it is against accepting cryptocurrency as legal tender, but according to press reports, New Delhi is considering regulating the digital coins as assets and taxing trading.

India's crypto advocates say they welcome the regulation and that such hurdles are normal as governments around the world work to regulate the freewheeling market.

The November announcement wasn't the first time India's emerging crypto industry has come under regulatory scrutiny. After years of warning investors about the risks of cryptocurrencies, India's central bank ordered a ban on banking services for crypto companies in 2018, making their operations extremely difficult. But the Supreme Court lifted the banking ban in March and reopened the crypto industry to investors.

According to Rastogi, the softening stance came because “the government has started to realize that this industry is here to stay and you cannot simply ignore the larger developments.”

With an eye on potential gains from tech-savvy young Indians, foreign investors have piled in. The value of crypto transactions in India increased more than six-fold last year, from $9 billion between July 2019 and July 2020 to $68 billion in the same period the following year, according to blockchain data firm Chainalysis.

With backers like Tiger Global and Sequoia Capital India, Indian crypto startups have raised $502 million so far in 2021, compared to just $25 million the year before, according to Venture Intelligence.

US venture capital firm Andreessen Horowitz made its first Indian investment in September in trading platform CoinSwitch Kuber, which is the country's highest-valued crypto start-up with a valuation of $1.9 billion.

Now, says CoinSwitch Kuber co-founder Ashish Singhal, “there is an active dialogue between the industry and regulators.”

“Ideally, we would not want to leave India,” Singhal added. “We hope the government will issue these papers and regulations to encourage this innovation as this industry grows.”

Singhal said the crypto industry's stated goals of democratizing finance align with the Indian government's embrace of digital payment innovations.

But while some of India's ministers have made conciliatory remarks about crypto, Prime Minister Narendra Modi has taken a tougher stance.

In the days leading up to the announcement of the proposed crypto law, Modi urged countries to “work together on [cryptocurrency] and ensure that it does not fall into wrong hands that can corrupt our youth.”

Modi's concerns echo critics who say crypto facilitates criminal money laundering while leaving players vulnerable to scams and unprepared for the risky assets.

“It was almost like being in a casino, just trying your luck,” said a 33-year-old who worked at a technology company, who bought digital coins this year after seeing friends and colleagues cashing in and buying iPhones with their winnings. She declined to be named because she feared the cryptocurrency would be declared illegal.

Trading in India is still relatively limited, survey data from analytics firm Kantar shows, with only 16 percent of respondents to a crypto investment survey saying they have purchased digital coins.

Singhal said that only “about six million” of CoinSwitch’s 13 million users have traded Kuber at least once. WazirX's Shetty said 10 million people had signed up and "millions" had traded.

A Chainalysis report showed that India's total transactions worth less than $10,000 over a year, a benchmark for trading by ordinary people, lags far behind the US and China but is comparable to Vietnam and Turkey.

The rapid growth has damaged the industry's reputation. After facing accusations that crypto marketing was misleading, some startups have realized that the aggressive approach went too far, too fast.

“We should not promote this as a get-rich-quick scheme,” said Kapil Rathi, CEO of CrossTower, a cryptocurrency exchange.

After expanding into India this year, CrossTower had offered some free money for trading to educate new customers.

WazirX ran a few TV commercials, but "subsequently in April or May we stopped our ads," Shetty said.

This can help avoid regulatory scrutiny that increases crypto price volatility, a reality new Indian traders faced after the new draft law was announced.

“Until about a month ago, I was making about a 50 percent return,” said one amateur trader, “until all this stuff about banning crypto in India.” He said he was still awake, but only at a modest 7 percent.