I have spoken to colleagues at the Reserve Bank of India (RBI) and in the finance ministry about why India chose a blunt instrument such as a ban rather than a more measured approach to regulating digital assets. They said the RBI considers cryptocurrency a significant risk to India’s payments system.
Informally, these colleagues accepted that while India’s experience with cryptocurrencies has been just as uneven as that of China or the U.S., the real challenge for India has been law enforcement. Unlike China, India is an argumentative democracy, which means India can’t shoot scammers in the back of the head in rice paddies if necessary. Unlike the U.S., India has a very large population as well as arcane, out-of-date colonial-era laws and an underfunded judiciary, which means lawsuits drag in courts for years with no verdict or settlement.
Indeed, rule of law is a significant challenge in India, entirely unrelated to cryptocurrencies. When justice is likely to be delayed and therefore denied by default, it’s understandable for regulators to seek to eliminate rather than manage risk to consumers. That’s essentially why the central bank chose to ban rather than regulate first.
Village scams and the road ahead
We have all heard of the infamous Crypto Queen, Dr. Ruja Ignatova. On April 23, 2017, police arrested 18 people in Navi Mumbai for organizing a OneCoin recruitment event. In May, that led to the recovery of $4 million in nine bank accounts whereas $11 million was transferred before the authorities were able to seize it. It’s sufficient to say that the police’s concerns about the legendary scam have been proven prophetic and avoided an utter disaster like Uganda, where poor and middle-class victims lost several hundred million dollars in aggregate.
In 2017 and 2018, India’s challenge was not so much prominent initial coin offerings (ICO) sold on YouTube or Facebook but nonexistent, no-name coins sold by unscrupulous fraudsters in small towns and villages all around the country. The rampant ICO boom and nonexistent coins forced the RBI to restrict banks and financial institutions from providing any services to individuals or businesses dealing in virtual currency.
When justice is likely to be delayed and therefore denied by default, it’s understandable for regulators to seek to eliminate rather than manage risk to consumers.
This decision by the Supreme Court doesn’t address the law enforcement issue but it paves the way for creating rules that are nuanced and well designed. The decision will likely place the responsibility for regulating digital commodities like bitcoin in the hands of the commodities and securities markets regulator, the Securities and Exchange Board of India (SEBI).
This is good news for three reasons. First, the SEBI is India’s equivalent of the U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission combined, which means the Industry has fewer regulatory fiefdoms to engage and fewer issues and topics will fall through the cracks. Secondly, the crypto industry does not have to worry about a patchwork of state-by-state laws as we have to in the U.S. Third, the SEBI has prior experience in addressing market failure. In 2015, SEBI assimilated the former commodities regulator, the Futures Markets Commission after a multi-billion dollar scam undermined public trust in India’s commodities markets.
That has two major implications. First, SEBI is more likely to take a nuanced approach to treating mainstream, decentralized digital assets like bitcoin and ethereum differently from fly-by-night coins. Second, having a single market regulator for both equity-like tokens (many ICOs) and commodity-like tokens (e.g. bitcoin and ethereum) means fewer opportunities for regulatory confusion or regulatory arbitrage. All of this in turn means that, when India finally lays out a comprehensive regulatory framework for digital assets, it will be one that is far clearer, efficient and transparent than the rampant confusion we have to deal with in the United States or Europe. Getting to that point will take sustained effort, but the prize is more than worth it.
While the RBI may not be able to restrict crypto to crypto transactions going forward, the central bank is still the prudential regulator of India’s banking and payments system. This means the RBI still has the power to restrict banks from offering fiat services to crypto businesses and might still choose to do so. This ring-fencing of the fiat system from crypto related risks is not unique to India and is essentially a BCBS (Basel Committee Recommendation to Prudential Regulators). European countries and the U.K. have only recently started unlocking these fiat bridges to crypto exchanges on a case-to-case basis and India may take some time to follow the learning curve. This requires ongoing constructive engagement with the central bank.
In my opinion, the primary social function of cryptocurrency is to finance the development of Web3, often also called the decentralized internet-of-value. We are so early in the development of this new architecture that most legacy enterprises or even mainstream VCs are often not the ideal source of funding for digital asset startups. So far, in the absence of crypto financing, there has been little incentive for India’s developers to prioritize blockchain technology ahead of opportunities in traditional software development.
At DevCon5 in Osaka, my former boss and ConsenSys CEO Joseph Lubin called for the ethereum community to enlist one million developers to build Web3. It’s not difficult to argue that this mission can not be achieved without the participation of India’s thriving technology ecosystem. I hope that the overturning of RBI’s crypto ban will finally unlock this all important source of financing for India’s blockchain technology startups and bring one million developers from India alone to blockchain and crypto platforms.
Too early to celebrate
Two years ago, at a Bloomberg conference in London, I called upon the crypto community to take a grown-up approach to engaging with the legal system and the regulators. That’s exactly what India’s crypto community has done and this mature and thoughtful approach has clearly set a precedent and thus delivered sustainable results.
But it’s too early to celebrate. As I highlighted in this article, the industry has just won the first battle, not the war. We still need to engage with the RBI, the SEBI and the central government to create a favorable and sustainable environment for crypto that accelerates innovation while also protecting consumers. In spite of the IMAI’s terrific win, India still lacks well-funded industry level forums to constructively engage with policymakers.
In the last three years, several major crypto companies have withdrawn entirely from India – a significant lost opportunity for the nation. Now would be the perfect time for these companies to re-engage and put India right back in their plans for investment, hiring, technology partnerships and ecosystem development – a process which I personally intend to contribute to in the coming months.
The future is bright for crypto and it looks brighter because India is a bigger part of the picture.