Concerns rise as Indian investment in virtual currencies spike

In the absence of a regulatory framework in India, investors of virtual currencies (VCs), mostly young executives, run the risk of losing their investments in case of a default or fraud. Total investments by Indians in various cryptocurrencies, including Bitcoin (BTC) and other important virtual currencies such as Ethereum (ETH), Litecoin (LTC) and Binance Coin (BNB) are believed to have touched $1.5 billion and growing by the day.

As the investment goes up steadily, the Reserve Bank of India (RBI) is increasingly jittery.

Legitimate trade
Ever since the Supreme Court quashed in March, 2021, an earlier ban by the RBI, there has been a lot of confusion. The court said while the RBI has the power to regulate VCs, the prohibition imposed through the April 6, 2018, circular is disproportionate, and ultra vires. In the absence of any legislative prohibition, the business of dealing in these currencies ought to be treated as a legitimate trade that is protected by the fundamental right to carry on any occupation, trade or business under the constitution.

In April, 2018, the central bank had virtually banned cryptocurrency trading in India and barred all entities regulated by it from dealing with VCs or provide services for facilitating any person or entity in dealing with or settling VCs.

The cryptocurrency regulation bill
Now the spotlight is on the proposed legislation. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is yet to be tabled in the parliament. While its contours are yet to be made public, the Bill may permit the issuance of a central bank digital currency (CBDC) and the use of blockchain and distributed ledger technology. Nirmala Sitharaman, finance minister, said that India is not shutting off all options when it comes to cryptocurrency or blockchain and fintech, without explaining further.

Investors are aware that there is still uncertainty over the continuity of private virtual currencies in India.

However, it has not deterred young investors from taking a gamble. The growth of bitcoin — from $13,000 in early November to over $55,000 — and several other VCs, which reported much faster growth, have fuelled their enthusiasm further, despite several other VCs reporting a free fall and some crypto exchanges going bust.

Under the RBI’s nose, cryptocurrency exchanges are thriving in India. Some of them — Bitbns, WaszirX and CoinSwitch Kuber – have reported increasing volumes recently.

An industry official said many youngsters in India are using these platforms for making a quick profit. “After buying the most tradable VCs on domestic exchanges, most of them move to international exchanges and convert them lesser-known VCs, which offer higher returns in shorter timeframe. Their plan is to make a quick buck and convert them back to leading VCs that are traded on Indian exchanges. Of course, in the absence of a legal framework, it works like a gamble,” he said.

Ponzi schemes
There are many ponzi schemes still running on various crypto exchanges. “The investor needs to be well-informed. Some founders are anonymous. Ledgers are secretive,” he said.

As the central bank continues to be cautious, banks are slowly shutting the door and stopping services to cryptocurrency exchanges. The bank has told some of the payment gateway operators to stop net banking facility for merchants trading in cryptocurrencies directly or indirectly.

“The crypto exchanges were using payment gateways for the customer transactions as banks were not allowing cryptocurrency exchanges to maintain accounts,” said a banker.

If banks snap the payment gateway facilities, Indian investors will be forced to sit on them and encash them much later via foreign banks.