India has typically been a frontrunner when it comes to new technology adoption, and blockchain tech has been no different. From mining and investing in the bitcoins, to proposing to legalize the same (along with other cryptoassets), Indian public has been engaging itself in the cryptoasset market for some time now. The extraordinary rise in the value of Bitcoins in the recent past, has created ripples in the Indian investment market..
- In June 2017, India accounted for more than 11 per cent of the global cryptoasset trade.
- These numbers are significant because currently less than 0.5 percent of India’s total population is involved in trading cryptoassets.
This trend is a clear indication of the growing consumer interest toward Bitcoins as a lucrative investment proposition. And with the ever increasing user-base, it might not be long before we witness the government moving towards regulating blockchain tech and cryptoasset trade in India.
The Government’s primary concern with Cryptoasset
The Indian Government’s first and foremost problem with Cryptoassets/Bitcoins is that such a system causes it to lose control over the monetary supply, and consequently the economy. Cryptoassets are generated by a process of mining i.e., by solving complex mathematical problems.
But there is a limit to such currency-mining, making a cryptoasset a finite resource. For bitcoins, that limit is 21 million. Therefore, the state loses the control over its ability to inflate or deflate its economy by printing more currency. So switching to a cryptoasset based economy isn’t a very attractive option for the Government.
By being used as a trading commodity or a secondary currency, they can be allowed to exist in the system. The Government may still have apprehensions of them being used as a tool for money laundering. But such fears are overblown and poorly understood.
- For starters, those who want to buy bitcoins in India have to do so on exchanges.
- All these platforms have strict KYC frameworks in place, similar to the ones followed by mainstream banks.
- In order to buy Bitcoin, the user will have to first deposit the funds into his/her account on these exchanges through internet banking channels.
- Even if some exchanges did decide to allow people to buy bitcoins using cash, it will require the purchasers to provide them with their KYC and PAN credentials.
If someone did manage to purchase Bitcoins by avoiding exchange and buying directly from another Bitcoin holder using his/her black money, there are limited ways in which one can spend it, because only few merchants will accept bitcoin as a currency of exchange without being able to identify the source. This leaves Bitcoin holders with only one option — to sell on regular exchanges and receive money into their Indian bank accounts which is accountable for taxes, or to sell it to someone else for cash informally, in which case they anyway create a bitcoin wallet and perform a bitcoin transfer which is recorded and can be tracked by government.
India in 2018 with cryptoassets
Bitcoins and other cryptoassets are either illegal nor legal in India, they are simply unregulated. Recently the World Economic Forum reported that the number of digital transactions in India has increased following demonetisation.
Blockchain tech, upon which the cryptoassets are based on, operates as a public ledger which can be used to track all the bitcoin transactions taking place. Adopting and regulating blockchain tech and cryptoassets will further equip the government with better financial surveillance.
Cryptoasset startups in India have joined hands to form Digital Asset and Blockchain Foundation of India (DABFI), to promote the virtual currency industry. If the Government and DABFI choose to work out a proper compliance framework and documentation requirements for customers, cryptoassets will see an even great potential in Indian market.
The government is strongly considering the possibility of regulating cryptoassets. Though this seems challenging, it holds a great promise for the future. The idea is to treat such asset in a manner similar to gold sold digitally, so that it can be traded on registered exchanges in a bid to “promote” a formal tax base, while keeping a tab on their use for illegal activities such as money laundering, terror funding and drug trafficking.
But cryptoassets are not just a Pandora’s Box. They hold a great deal of promise for the market itself. Some of the benefits of mainstreaming cryptoassets are as follows:
- Financial Inclusion: Due to a considerable segment of the Indian economy remaining informal, there’s still a large part of the population that doesn’t rely on traditional financial institutions for financial services. This is a good entry point for cryptoassets. Blockchain technology almost entirely eliminates the need to belong in the tradition financial system, as seen in parts of Africa and South America.
- Fees and transaction costs: Currently, fees rather high in India. It costs a merchant between Rs 4,000 and Rs 8,000 to set up a card-swiping terminal in India. While this isn’t a problem for big-ticket merchants, smaller merchants who collectively constitute a big part of the economy might not be happy to pay that much in addition to the subsequent transaction fees. Indian consumers are moving back to cash-based transactions, because of remonetisation and high digital transaction costs. This makes a case for a cheaper way of conducting digital transactions. Again, Blockchain technology can be regulated to fit the bill.
- Improving transaction time: If a cashless economy is ever going to be the order of the day, it needs to work in real time. Today’s technologies have done a great job in reducing wait times between when a transaction is completed and when the funds become accessible. This can be further improved with Blockchain tech.
Even though the Government is yet to regulate cryptoassets, they’ve crept into Indian market in a big way. It is probably unlikely that the government will resort to a knee-jerk ban of bitcoin because of its controversies. But the future of Bitcoin is still ambiguous, and a great deal of cooperation between the industry and the government is obviously required.