“I met a few developers there who told me to mine bitcoins,” Kalra said, adding, “I was the largest miner in India from 2010 till 2013-end. The problem was that I was collecting a lot of coins, but there was no place to sell those coins in India. Even if someone was willing to buy it for cash in India, the prices were too low, with a difference of 20-30 per cent from global prices. That’s what pushed me to open the exchange, where Indians could buy and sell their bitcoins,” Kalra said.
However, even before starting the exchange, the Reserve Bank of India issued its first warning in 2013, cautioning investors against the risks of dealing with cryptocurrency.
Bitcoins or other cryptocurrency is like gold in more ways than one. Like gold, cryptocurrency has to be mined; it doesn’t have a central issuing authority and is a deregulated currency. There is no central bank that decides when and how many more cryptocurrency to produce. At present, there are around 17-million bitcoins in circulation and four million coins waiting to be mined.
Despite the absence of a regulatory framework for cryptocurrency, three warnings from the central bank and one from the central government to date, the industry, with nine exchanges, is witnessing volumes worth Rs 50 billion every month, Goenka said. He was part of a traditional family business, before he joined hands with software engineer Mahin Gupta to rebrand India’s first cryptocurrency platform, BuySellBitco.in into Zebpay.
But the regulatory warnings rang an alarm bell with various support systems of the cryptocurrency business, especially the banking network.
Earlier this month, exchange platform Koinex halted rupee transactions on its exchange for over two weeks after “a tussle between payment service partner and its bank”. It resumed withdrawals thereafter. Koinex was facing problems essentially because it was running on a single bank account.
According to people in the know, banks have been instructed by the government to keep a check on the transactions that are going through such accounts. “Apparently banks have stopped their support to payment gateways that are connected to cryptocurrency trading websites,” said a person aware of the development.
Thirty four year old Sathvik Vishwanath, founder of Unocoin, said a lot of banks have taken a risk-compliance attitude towards cryptocurrency exchange platforms. “They are of the view that if you are doing bitcoin trading activity, we don’t really want to support you or have you as customer. And that is due to lack of regulations,” he said.
Dip in business
The 28-question income-tax (I-T) department survey across exchanges in December and the government’s statement in the same month likening it to a ‘Ponzi scheme’ sent panic waves across investor circles. Coinsecure, that has a user base of 250,000, witnessed a 70 per cent drop in the volume of transactions. “The transactions have fallen from Rs 250 million a day before the government circular to Rs 100 million a day now,” said Kalra.
The government in December said that virtual currencies were not backed by the government fiat and were ‘not legal tender.’ It further said that consumers needed to be extremely cautious, so as to avoid getting trapped in such ‘Ponzi schemes.’ Goenka of Zebpay, which has three million users, said his interactions with NITI Aayog, the government’s policy think tank, made him hopeful. “When we talk to the Aayog, it feels like my battles are won, but when I am back in office, it’s a different story.’’
Even investors are cautious while trading in cryptocurrency after the I-T sleuths’ recent surveys. “We have been cautious in our investments. So, I have decided that whatever profit I earn out of my investments in cryptocurrency, I will set aside 30 per cent for paying taxes,” 26-year-old web developer Nitin Kacharia said, who started investing in various cryptocurrencies, including ripple and ethereum, since September last year.
Exchanges tighten disclosure norms
The cryptocurrency exchanges, too, are tightening know-your-customer (KYC) norms. Most of them halted registrations in December as the backlog piled up. Coinsecure has hired 40 new persons for KYC verification. Besides, it is planning to mandate Aadhaar for automated eKYC verification instead of the three documents — permanent account number card, ID proof, and address proof.
“We had temporarily stopped registration due to too much load. Every day, thousands of users are adding on,” said Kalra. They are working on making Aadhaar mandatory.
Fresh registration on Koinex has still not resumed; Unocoin is rejecting applications for not submitting Aadhaar as residential proof; Zebpay and BuyUcoin ask fresh users to submit a soft copy of cancelled cheques to validate their bank accounts. Meanwhile, competing cryptocurrency exchanges are coming together to push the government to give legitimacy to their business. In 2016, Zebpay, Coinsecure, and Unocoin launched the Digital Assets and Blockchain Foundation India. This has now expanded to become Blockchain and Cryptocurrency Committee under the Internet and Mobile Association of India. Competition can wait, as cryptocurrency enthusiasts argue.