Can a ban be flouted without the rules explicitly being broken? Is it possible for a central regulator to ban a completely decentralised currency, created with the objective of making the formal financial system irrelevant?
It may be hard to believe that the Reserve Bank of India
(RBI) —the banking regulator with an iron hand — would fail to enforce its own regulations, but that’s pretty much what happened when it tried to ban cryptocurrency in India.
On April 6, the central bank issued directions to all banks to freeze accounts of virtual exchanges
dealing in the storage or transfer of cryptocurrency.
“Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs,” the RBI circular stated, and gave banks three months to comply.
The ban didn’t quite work, however. On the contrary, virtual currencies
are thriving in India. In fact, panic selling by investors after the ban ensured that on July 8, the day after the RBI ban came into effect, investors found lucrative arbitrage opportunities that resulted in more virtual currency exchanging hands in a single day than before the RBI ban (see chart: “Virtual boom”).
Now, as the dust settles and banks refuse to deal with virtual currency exchanges, new business models have emerged. Strictly speaking, the RBI direction was to ensure that no transaction in Indian rupees to buy or sell virtual currency goes through the Indian banking system. To circumvent this loophole, exchanges like Unocoin
quickly launched peer-to-peer exchanges.
The mode of operation is convoluted but nothing a seasoned trader can’t handle. It works like this. A person holding currencies like Bitcoin
and Ethereum signs up on the exchange where his currency is held in an escrow account provided by the exchange. The person finds a buyer online who transfers funds directly to the seller’s account. As soon as the seller confirms the receipt of funds, the cryptocurrency is dispensed to the buyer’s account.
“We charge people in crypto, not INR, which was banned by the RBI, so we aren’t flouting any rules,” said a virtual currency exchange founder.
To facilitate the process, the exchange charges a share of transaction fee, which is no longer collected in cash but in virtual currencies.
Since most currencies are infinitely divisible, the exchanges collect 0.1 per cent of the total transaction value as their fee. Everyone is happy. No rules are flouted and Indian banking system remains largely clueless about the booming virtual currency market
in the country.
The government, however, has set up an inter-disciplinary committee to study cryptocurrency. The panel is yet to submit its report.
To escape the regulatory eye further, bitcoin
traders have organised themselves in secret groups that communicate via encrypted messaging apps such as Telegram. One such group has more than 5,000 members and gets minute-by-minute updates on prices, volumes and arbitrage opportunities on virtual currency exchanges around the world.
To make things a bit more complicated (and legal), exchanges have thrown US Dollar into the mix. A product termed TrueUSD coin is available on the Indian exchange Unocoin.
This coin is backed by the US dollar, implying that one coin can be exchanged for $1. Those willing to invest in virtual currencies
such as bitcoins simply have to buy this coin and then go to the peer-to-peer exchange where this coin can be used as an instant money transfer solution. Exchanges make their money by charging a commission for allowing currencies to be stored in their virtual wallet.
“With the current ban on INR for crypto transactions in India, Unocoin
intends to provide its users on Unodax platform with a secure and legal way of investing in digital assets,” the company said.
A similar solution exists on WazirX
exchange, which allows people to buy the US dollar-backed virtual currency which can be exchanged for bitcoins on its peer-to-peer platforms. The platform sees at least one trade per minute, despite the ban, said its founder Nischal Shetty.
Even as the dollar-backed currency is called a “stable coin,” because it is backed by actual currency, high demand has resulted in inflation.
“The demand for the coin is so high that the price has gone up. On our platform, people are ready to buy a $1 coin for as much as Rs 73, whereas the market price should be Rs 69,” said Shetty. He added that all virtual currencies
in India are sold at a premium because of insatiable demand and limited supply.
Shetty said that volumes are increasing every week because many new investors are coming into the virtual currency market
despite the ban because the USD backed coin allows for a “legal and stable” medium of transaction.
How long this crypto-legal currency trading will last in India is an open question. The government seemed to have already clarified its stance in the Budget speech this year when Finance Minister Arun Jaitley said that the government doesn't recognise cryptocurrency and it will do everything to eliminate its role in financing "illegitimate activities or as part of the payment systems".
But the government also set up a committee in December 2017 under the Department of Economic Affairs Secretary Subhash Garg to look into cryptocurrency issues and suggest policy recommendations. The report was expected to be out by July this year, Garg told media that there's some delay and it is likely to come only by the end of 2018.
Even as the bitcoin
business thrives in India despite the ban, players are hopeful that the pending Supreme Court challenge to the RBI direction will bring some positive news. The apex court is hearing a petition by multiple parties arguing against the ban on virtual currency exchanges. The final hearing for the case has been set for September 11.