“I should have bought bitcoin eight years ago. I am late to the party. I am a supporter of bitcoin. It’s on the verge of wide acceptance by the financial world.” These are words from Elon Musk as reported on Twitter by fintech entrepreneur Kunal Shah, who attended a meeting recently with the world’s richest man and founder of Tesla and SpaceX on Clubhouse, an audio-chat social networking app.
Musk’s Clubhouse statement was followed a week later, on February 8, by the revelation that Tesla, his electric car company, had bought $1.5 billion worth of bitcoin, the most popular cryptocurrency. “We invested an aggregate of $1.5 billion in bitcoin… and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future,” Tesla said in its annual report.
That sent the coin from its already high price up by another 10 percent or so—it was at over $48,000 per bitcoin on February 9.
“It is a bold move, but not entirely a surprise,” Sathvik Vishwanath, founder of India’s oldest bitcoin exchange Unocoin, tells Forbes India. Musk had been talking up cryptocurrency for a while, and about a week back, even changed his Twitter bio briefly to just #bitcoin, Vishwanath points out.
Surprise or not, interest in cryptocurrency is strong in India—where it is yet to get any government backing and may, in fact, be banned. Vishwanath and the founders of a few other cryptocurrency startups in India have come together to lobby the government that backing bitcoin with some regulation, instead of banning it, is good for the economy. Killing it will be a setback to India’s standing as a technology startup hub, they said in a release on February 8.
They have also started a campaign #Indiawantsbitcoin and a website indiawantsbitcoin.org where people can find ready-to-use drafts on the benefits of bitcoin that they can send to their respective Members of Parliament, petitioning them to get the government to reconsider the proposed ban.
“The government is concerned about money laundering activities to be specific. It presently has a challenge to trace the Indian transactions on blockchain, but it is missing out on the point that even if it bans it, it cannot be technically enforced,” says Vishwanath.
The fledgling bitcoin ecosystem in India estimates that there are some six million crypto investors in the country who have invested over a billion dollars in total. Some of the other bitcoin startups that have joined the campaign to lobby the government are CoinDCX, WazirX, CoinSwitch Kuber, Zebpay and PocketBits. There are some 300 crypto startups in India, according to a Reserve Bank of India (RBI) report, but most of them are small operations. There are about five large exchanges, he said.
Tesla’s move shows corporate businesses too can take interest in bitcoin, even though it is known for the wild swings in its price. Till last month, it was just some hedge funds buying bitcoin and holding on their balance sheet, whereas this is news about a corporate business attempting to hold bitcoin on its balance sheet. For corporates, money is essential on a day-to-day basis for their operations, whereas for hedge funds, it is often a case of buying something and just holding it, explains Vishwanath.
Vishwanath started Unocoin as a simple buy-and-sell platform for Indians interested in bitcoin, and then introduced other services, including a merchant gateway for both offline and online merchants. Unocoin also provides a systematic investment plan through which people can buy bitcoin or ether, another cryptocurrency, on a daily, weekly or monthly basis. Now the company also provides a bid-and-ask matching service for bitcoin and 30 other cryptocurrencies.
Originally, the main utility for bitcoin was thought to be fast and free payments across the world. But today, it is increasingly being seen as an asset class. There are also derivatives of bitcoin — such as bitcoin cash —which are more suited for quick online transactions at virtually zero cost.
One of the reasons that it won’t be easy to regulate bitcoin is that it is changing rapidly. It’s in a fast-changing phase and that makes it even more complicated. It’s possible that the RBI, the country’s central bank, or even markets regulator Securities Exchange Board of India (Sebi) will wait and watch, look at any regulations in the advanced economies and check if those have worked well or not, before formulating policies in India.
From 2013 to 2017, bitcoin was mostly used for online transactions. Then there was a huge bull run and the price went from $1,000 to $20,000. That prompted people to hold on to their bitcoin, hoping for ever larger returns. Today, that’s happening again. This also means that institutions like Sebi should get in on the regulation because bitcoins are also increasingly being seen as a ‘value store’ or an asset class.
Supreme Court Intervenes
In March 2020, the Supreme Court set aside a circular by RBI on virtual currencies, breathing new life into startups working in this field. The RBI circular, dated April 6, 2018, had directed that entities under its purview should not deal with virtual currencies. The Supreme Court ruling was in a lawsuit between the Internet and Mobile Association of India and the RBI. Cryptocurrency and digital money startups and companies celebrated the ruling.
Even startups overseas appeared enthusiastic. “This only reinforces the fact that crypto and blockchain are the technologies of the future,” Zac Cheah, CEO, Pundi X, a blockchain wallet provider based in Singapore, had said in an email at the time. “It encourages us to expand our expert offerings to potential geographies such as India. We are confident that this is a positive move and will put India on the growth trajectory, as it will experience the convenience that blockchain-based digital asset transactions offer, with added security.”
India has the second-largest user base of Pundi X’s blockchain wallet called X Wallet. In the world of digital currencies and technologies such as blockchain, users, consumers and startups offering various products and services related to virtual currencies have often taken the lead. Regulators have then moved in with their rules, he had pointed out.
In the case of RBI, the central bank “consistently took a stand that it has not prohibited virtual currencies in India”, Sajai Singh, partner at law firm J Sagar Associates, had said in an email at the time of the Supreme Court decision. However, the RBI circular, while not banning cryptocurrencies, took away the lifeline of virtual currency trading and functioning of virtual currency exchanges by disconnecting them from the regular banking sector, Singh said.
An Inter-Ministerial Committee constituted on November 2, 2017, recommended a specific legal framework, including the introduction of a new law called Crypto-token and Crypto-Asset (Banning, Control and Regulation) Bill, 2018. According to Singh, the committee was initially of the opinion that a ban might be extreme, and the same objectives could be achieved through regulatory measures.
However, it changed its mind and in its final report, the committee recommended a complete ban on private cryptocurrencies through a proposed legislation—Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019. This Bill recommended the creation of a digital rupee as legal tender by the central government, in consultation with the RBI, and recognition of official foreign digital currencies in India.
The Supreme Court’s order even referenced Satoshi Nakamoto, widely believed to be pseudonym used by the person or persons who created bitcoin, the most popular cryptocurrency. Singh said Nakomoto’s view on the root problem with conventional currency relates to the trust placed on it and the implicit belief that the Central Bank will never debase the currency. However, “the history of fiat currencies may be full of breaches to that trust”, he said.
The Supreme Court, “while acknowledging that virtual currencies were meant to kill the demon of a central authority has held that the RBI has the requisite power to regulate or prohibit virtual currencies”, Singh said. This is supported by the argument that anything that may pose a threat to or have an impact on the financial system of India can be regulated or prohibited by the RBI despite the activity not forming part of the credit or payment systems.
The Payment and Settlement Systems Act, 2007, empowers the RBI to frame policies and issue directions to banks who are system participants with respect to transactions that fall under the category of payment obligations or payment instruction.
The startups say that blockchain—the record-keeping technology and digital ledger behind the bitcoin network—enables cross border transactions with ease, beneficial for small and medium businesses (SMBs) and freelancer communities in India. SMBs are the economic hotbed for the country, and easing of regulations on the payment front will only help them, reducing roadblocks. This move will further give birth to a lot of startups in India, Cheah had said.
The Supreme Court’s removal of RBI’s diktat spurred startups and crypto activity in India, the #Indiawantsbitcoin campaigners point out. The average daily cryptocurrency trading volumes across the top Indian exchanges have grown by nearly 500 percent since March 2020. India is the second-biggest bitcoin nation in Asia after China, and the sixth biggest in the world—after the US, Nigeria, China, Canada and Britain—they said in their release.
Investments worth $24 million went into Indian crypto startups in 2020 after the Supreme Court’s decision, they said, citing data from research company Venture Intelligence. Venture capital interest continues in Indian crypto startups. On January 13, CoinSwitch Kuber, a fast-growing cryptocurrency investment platform in India, said it has closed $15 million in its Series A funding. The round is led by global fintech and crypto investor Ribbit Capital, and San Francisco-based crypto-focussed investment firm, Paradigm.
CoinSwitch will use the funds to enhance product, security, compliance and tech capabilities, and build its brand as a cryptocurrency investment platform for Indian users. The investment round also saw participation from the company’s existing investor Sequoia Capital India and Kunal Shah.
CoinSwitch was founded in 2017 by Ashish Singhal, Govind Soni and Vimal Sagar Tiwari, and as a global aggregator of cryptocurrency exchanges. The company launched its India-exclusive crypto platform, CoinSwitch Kuber, in June 2020 to simplify crypto investments for Indian retail investors and has since garnered over a million users. The company expects to have 10 million users on the platform in the next one year.
Backing from Ribbit and Paradigm, and additional investment from Sequoia shows the interest in India’s crypto ecosystem, Singhal said in a press release. CoinSwitch is Ribbit Capital’s first investment in a cryptocurrency platform in India. The fund has also invested in some of India’s well-known fintech startups such as BharatPe, Capital Float, Cred and Razorpay. CoinSwitch can become a generational technology brand in India, Nick Shalek, general partner at Ribbit Capital, said in the release.
CoinSwitch is Paradigm’s first investment in India. Paradigm is a crypto-focussed investment firm based in San Francisco. It was founded in 2018 by Matt Huang, a former Sequoia partner, and Fred Ehrsam, who co-founded Coinbase, the largest cryptocurrency exchange in the US. The firm invests in crypto assets and businesses from the earliest stages of idea formation through maturity. Some of Paradigm’s other investments include Uniswap, Yield Protocol, Fireblocks and Compound.
“While the crypto landscape in India remains nascent, it has been an exciting past 12 months and over time, we believe India could be one of the largest global crypto markets,” Matt Huang, co-founder and managing partner at Paradigm, said in the release.
Dismantling this ecosystem through a ban will position India as an outlier while the other leading economies like the US, China, Japan, Germany, South Korea and Australia have already accepted cryptocurrencies and are building innovation hubs around them, the crypto startups campaigning against the ban said in their release.
While the crypto ecosystem in India is still at a nascent stage, banning the digital currency will strengthen China’s position in the Asian money market. Banning cryptocurrencies can also dent India’s reputation as a technology hub and its standing in the Ease of Doing Business Index. It could make India a laggard when it comes to adopting applications based on distributed ledger technology while China and Silicon Valley are making blockchains the centre of their next big technology push, the startups pointed out.