A cognitive gap divides the world as it exists and the new world that’s dawning on us as we speak, lining the horizon in strange, abstract hues. One sign of that came, dear reader, even as we were assembling this cover story for you. Our in-house photo team, in their normal course of duty, wondered how they could “photograph cryptocurrency”. Language can handle abstraction—through special vocabulary or through metaphors that hark back to the material world. Digital coins, blocks, chains…and mining. But how do you visualise something that doesn’t even exist as a tangible thing? That we would arrive on the edge of such a conceptual gorge could have been foretold. Mail had long gone digital. Photography itself had decidedly moved out of the confines of physical film by the 1990s. Heck, by now, even we are getting dissolved into bits, bytes and pixels and getting recomposed as apparitions on a Zoom screen. Money was bound to follow them into the ether. Zipping around on digital pathways for years anyway, it was pre-scripted that the object too would, at some stage, pass through the mirror.
The landscape on the other side is a bit surreal…and inscrutable. People are struggling. Governments too are struggling. Should they hold off the future? Or master it? In May this year, some customers of one of the biggest private sector banks received an email with the following subject: Caution advice for dealing in virtual currency. One customer—let’s call him Gupt Sikka—was left quite perplexed. The mail asked him to visit the nearby branch to clarify the nature of transactions he had been making, failing which the bank would be compelled to restrict his transactions. “I’ve done my KYCs regularly, have been banking with them for over 10 years now, my salary account is also in the same bank, and then they send me this email,” says Sikka, who has been dealing with cryptocurrency for over six months. He contacted his crypto exchange. Within a fortnight, he received another mail, this time informing him that the earlier mail stood withdrawn. Clearly, our financial police haven’t decided what to do with cryptocurrency—whether to ‘encounter’ it, merely shoot at its knees, or let it walk free. An investor trading in cryptocurrency or crypto assets in India must be ready to face any number of notices or queries from the I-T department or the Enforcement Directorate.
Still, a fast-burgeoning crowd is risking it. Call it cryptomania. At last count, some 15 million Indians were caught up in it. Cumulatively, they had invested over $6.6 billion in cryptocurrencies until May 2021. These numbers are beginning to compare well with other countries—the US has 23 million crypto traders, the UK about 2 million. What’s holding it back from becoming a full-blown pandemic?
Everydays: The First 5,000 Days Digital collage by Beeple (Mike Winkelmann), it sold for $69m on March 11, 2021 as an NFT (non-fungible token)
For many, it’s sheer incomprehension. Abstraction is hardly new to economics. Value itself is a notional thing—a benchmark mutually negotiated between various parties. That’s what makes a Picasso or a Damien Hirst so expensive. Even a 100-rupee note is just a piece of paper, finally—one that says someone promises to pay you 100 rupees! But that someone is the Reserve Bank of India. At one time, currencies used to be backed by gold. The fiat currencies of today have replaced that with the sovereign authority of the state. How do you parse the value of something that’s not backed by any real asset—like land or gold? Not even the word of authority? That’s what brings us to the second reason for crypto hesitancy: risk.
Official reluctance to sanction virtual money means the crypto scene in India is hobbled by a lack of regulatory clarity and the fear of the taxman. Even the crypto exchanges that enable this trading face regulatory probes from authorities across the world. Case in point: Binance, the holding company of India’s largest crypto exchange, WazirX, is facing a probe by the Enforcement Directorate in a money-laundering case. Add to that the influence of entities called whales—a self-explanatory term for individuals and organisations who have such large holdings in crypto assets that they can unduly impact prices. There’s high volatility there. Then there are also outright scams and thefts. Industry estimates are that Indian investors have lost around $500 million to crypto scams so far. Despite all the hype around the security brought by blockchain technology, which cryptocurrencies are built on, the fortress has allowed quite a few breaches. In 2018, Coinsecure, a Delhi-based exchange, filed an FIR alleging theft of Bitcoins worth Rs 20 crore. Globally, the biggest crypto theft was reported last month by Poly Network, which claimed hackers stole some $600 million in cryptocurrency from its platform. Put together, all that makes investments in this asset class one of the riskiest bets you can place.
That’s still not reining in the surge of interest in India in this strange but shiny new object of desire that can be traded in minute fractions—you can buy 0.05 per cent or even 0.0001 per cent of a Bitcoin. Crypto investors—many of them in their 20s and 30s—are willing to experiment with their money by investing in currency or assets that exist only in electronic form. Cryptocurrency does not come out of a mint: there’s no physical coin or bill (unless you use a service that allows you to cash in cryptocurrency for a physical token). It’s bought and sold like stocks via exchanges, where investors pay a trading fee that varies depending on the exchange. In fact, India has over 12 crypto exchanges, mostly startups, typically run by IIT/IIM graduates and post-graduates who entered this enigmatic world after long trysts with giants like Ola, Google, Amazon, Flipkart, Twitter and Facebook (and therefore with a reasonable ken about the intricacies of the Indian legal system). They also possess an evangelical zeal, convinced as they are by the maxim that says “technology comes first, regulation follows”. The law, literally, catches up.
For all the incertitude, exchanges and market experts believe things are just getting started in India. The ecosystem is still in a nascent stage. Those dozen exchanges facilitate access to the 3,000-odd cryptocurrencies that exist in the world currently—a number that’s ever increasing—and are primarily categorised into four major categories globally: Asset, Utility, Currency and Security. But to be clear, before investing, understand that there’s still no redressal mechanism in India in case something goes wrong. What we do see is a shared desire for full legitimacy, and self-belief. A unique feature here: because of the official hostility, all present a united front in trying to break the shackles.
Grey Light At The End Of The Tunnel
Although holding cryptocurrencies is not a crime in India, the government is yet to reveal its cards on the legality of this asset class. Over the last two years, it has intermittently hinted at banning cryptocurrencies. But the latest indication from Union finance minister Nirmala Sitharaman is that a proposed legislation will only seek to regulate trading. Therein lies a dichotomy too: the lure of crypto for investors is precisely its volatility! And one objective of regulation is to lend a semblance of stability. The bill is before the Union cabinet and awaits approval before being tabled in Parliament.
Crypto adoption mainly picked up in India since March 2020 when the Supreme Court quashed a banking ban on them. By accident, the timing turned out perfect. The Covid-19 pandemic and lockdown further accelerated crypto adoption, with more people looking for ways to earn online. Interestingly, the growth in users is coming from Tier-II and Tier-III cities. India’s crypto exchanges too present a picture of growth: they employ around 10,000 people today, as per the human resources firm Xpheno. Says Nischal Shetty, founder and CEO of crypto exchange WazirX + Crowdfire: “WazirX has seen terrific growth of over 13,412 per cent in trading volumes since the banking ban removal. Our growth has in fact been driven by Tier-II and Tier-III cities: they gave us 55 per cent of the total user signups in 2021, overtaking Tier-I cities.” Among them are a high percentage of women, he adds—women from these cities add up to 65 per cent of the total signups by women from all over India. These include cities like Ahmedabad, Lucknow, Jaipur and Ludhiana.
Outlook Young Art Snigdha Borgohain, 11, Noida
In a country where households are obsessed with gold buying, is crypto then being embraced as a new asset class? The answer lies in the numbers: from a mere $200 million in 2020, crypto investments skyrocketed to an estimated $6.6 billion by May 2021. Though the absolute value of crypto holding would of course fade in comparison to gold, the rise in adoption is also a statement on the regulatory gaps in India’s personal finance sector. The lack of transparency in jargon-laced consumer finance instruments has long plagued the segment; the world of crypto trading is seen as a break from that.
Says a market expert, “In mid-April, when Bitcoin touched a record high of $65,000, it signalled the growth and momentum in the sector. This led to everyone—policymakers, banks, crypto exchanges, media and the public—accepting the idea.” While Bitcoin undoubtedly remains the most popular cryptocurrency, investors are now gradually investing in alternatives such as Ethereum, Bitcoin Cash and Litecoin. El Salvador’s decision this week to accept crypto as legal tender can do no harm to that bullish sentiment.
Because of the way the landscape has been evolving in India within the last 2-3 months, the Indian media too has shed its scepticism about cryptocurrency. The revolution is being televised: prime-time news, interviews and market updates are now a common feature. Investments coming from overseas also act as a goad. India’s crypto exchanges today have investors like Kunal Shah, Sequoia Capital, Ribbit Capital, Paradigm and Tiger Global to name a few. At a time when blockchain literacy eludes the large majority, the spectacle of big investors adds much-needed ballast. There’s a sense of the tide turning.
Lawyer Mathew Chacko, partner, Spice Route Legal, echoes that: “Most cryptocurrencies do not have any intrinsic value. However, easy transferability on a global scale has resulted in a thriving market—one that, like the market for tulips a century or two ago, offers significant reward and the risk of disastrous loss. The global scale, lack of a clear jurisprudence, difficulty of pinning accountability…all that haunts this market. But it’s much like how these issues haunted the securities market before the introduction of rules relating to market manipulation and insider trading.” None of the present travail constitute reasons to ban crypto trading, he feels, only to introduce sensible legislation to control, limit or prohibit undesirable activities. “Perhaps, something that protects a consumer against wild fluctuations inflicted by the random statements of billionaires would be a good place to start?” he suggests.
Paris Graffiti Bitcoin growing on graves of legal tenders
Former economic affairs secretary and finance secretary Subhash Garg differs: he sees a bubble that may burst. “I don’t think private cryptocurrency will last. Even the impending decision to treat cryptos as commodities that’s being reported does not make sense. Commodities are for consumption, crypto cannot be consumed. What it does is create assets like NFTs and provide services like decentralised finance. I don’t think it makes sense to treat cryptos as a commodity.” When he was in government, he concedes, the discourse went over these conceptual greys. That has now changed: crypto is recognised as an asset class. He also believes RBI’s forthcoming digital currency—which will of course be backed by the rupee—has the capacity to change the digital currency market across the world, as it will come with a sovereign/state guarantee that crypto does not enjoy.
That reluctance often flows downstream. Rajesh Sinha, a Gurgaon-based investor, offers a wistful picture of that ambivalence. With just 10 Bitcoins bought over a two-year period in 2016-18, Rajesh would have been a billionaire in 2020-21. But his wife and friends insisted that he sell them off after queries from I-T sleuths; he did so, with a promise never to return to this cryptic world. Says Rajesh, “It was a blessing in disguise. The crypto exchange I invested in disappeared in May 2018. So, if I hadn’t cashed, I would have lost my investment.” But with crypto booming again, Rajesh could not resist the itch: he re-entered the Bitcoin market during last year’s lockdown, and saw a huge difference from how things worked back in 2017. The exchanges have laid out a strict due diligence procedure through KYC norms to keep fake people away. Video calls are done to verify the identity of investors. To add onto all that, Rajesh says, “There are so many products now, like SIPs, which didn’t exist during my earlier stint. Now people talk about crypto openly; even experts are emerging.”
Gaurav Dahake, CEO & co-founder of BitBNS, has a five-point mantra for new crypto investors. Begin with small investments, be prepared for volatility, ignore the commotion, avoid impulse trading, learn to diversify. He also adds that cryptos are long-term investments, not short-trading stocks. Says Avinash Shekhar, Co-CEO, ZebPay: “We always recommend starting with Bitcoin and Ether. They’re the blue chips of the crypto market—well-established and powered by different technological innovations and user cases. For example, many of the trends that have gone mainstream, like NFTs and Decentralised Finance (DeFi), are mostly built on the Ethereum network. To participate in these, you need to have Ether with you.”
NFT digital art supported by cryptocurrency, courtesy WazirX
He adds: “There are many other coins…known as altcoins. These are cryptos based on different blockchains and services. Investors should do thorough research on these projects, their use cases and tokenomics (how these coins are distributed within the ecosystem and to investors) before investing in these coins. We also have launched an app called ZEBB to support this efficient investment strategy. With ZEBB, you can start your SIPs with just Rs 100.” A crypto SIP is similar to the regular Systematic Investment Plan: it allows one to invest in cryptocurrencies, and the investor has the luxury of selecting the mode of investment (can be quarterly, monthly, or annual). One can invest in, say, Bitcoin or Ethereum in regular daily, weekly or monthly instalments.
Ashish Singhal, co-founder & CEO, CoinSwitch Kuber, cautions that the crypto market’s behaviour depends on a variety of factors. There has been a major increase in overall adoption and investors have also been venturing into altcoins. Bullish sentiments are therefore being witnessed across crypto-based sectors, raising the market cap. The Indian crypto market might also soon see the entry of stalwarts. India’s latest unicorn, Zerodha Broking Limited, which offers financial services like retail brokerage, currencies and commodities trading, mutual funds and bonds, is keen to enter the market. Zerodha co-founder Nithin Kamath said in a media interview: “People shouldn’t have more than 1-2 percent exposure to cryptos as an asset class. The only reason to buy Bitcoins is the hope that someone will buy it from you at a higher price. Zerodha will offer crypto when regulations are explicit.”
“We welcome competition,” says Vikram Subburaj, co-founder and CEO of Giottus Cryptocurrency Exchange. “The cryptocurrency market in India is just in its infancy and has legroom to grow multi-fold. Established companies entering the space will give it more visibility and awareness, thus increasing the overall pie for all.” It’s this optimism that has made crypto the favourite asset class for several investors. In fact, for many large players in crypto, the future plan is laid out. “Many individual investors are reluctant to embrace crypto openly, given the grey areas of regulation. But if things turn south, they will migrate their accounts to Singapore,” says the chief marketing officer of an Indian crypto exchange. “Singapore is fast emerging as the global leader in mainstream adoption of crypto,” agrees Shetty of WazirX. Although the industry is fairly new, its global market cap stands at over $2.36 trillion as of September 7, 2021. To put this into perspective, the combined market cap of Facebook and Tesla stands at just over $1.8 trillion.
Says Edul Patel, CEO and co-founder of Mudrex, “The year 2020 saw a major shift in the cryptocurrency space, with several tokens shooting up over 5,000 per cent. Undoubtedly, this insane rally lured several novice investors and traders, who ended up losing a lot of money in trying to become rich overnight. The volatile nature of the crypto market can be disastrous to novice traders. But experienced traders enter this market to leverage such volatility.” Mudrex is not an exchange, but an automated trading platform in partnership with top exchanges around the world.
How exactly must officialdom navigate these waters? There are several ideas. Legal expert Asim Abbas of L&L Partners suggests, “The government should explore the possibility of registering crypto exchanges in India. Also, we can mandate a reporting mechanism, specify safeguards, requirements, customer verification/KYC, traceability, redressal mechanism, etc. These steps will protect investors and ensure accountability. In addition, the government can also tax crypto assets innovatively.” The best way, he feels, is to regulate and bring transparency and accountability so as to protect investors. What everyone is waiting for is signs of clarity from the Indian government. Presently, it’s going slow on the legislation, waiting to see how things pan out across the world. Banning is no more an option anyway; it’s too late and there are too many people and too much money involved. Overseas investments too are flowing in. The RBI’s Digital Currency is of course a clue—even if a cryptic one. The government does want to impose a degree of order on proceedings. How will it happen? How will the crossword be solved…shall we toss a coin?
(This appeared in the print edition as "Bullish")
