Bitcoins in an office in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Experts Want India To Take A Clear View On The Virtual Currency Debate  

The Reserve Bank of India’s decision to bar banks and financial services companies from dealing in virtual currencies or related entities will hurt innovation, besides leaving stranded those who had bought such assets or built businesses upon them. At least according to the fintech and payments industry.

While the government is expressing interest in the blockchain technology and the RBI is considering its own fiat digital currency, the central bank has virtually banned private virtual currencies, such as bitcoin, based on risks involved, Navin Surya, chairman of Payment Council of India, a group of payments industry, told BloombergQuint.

“Risks exist in every system but we have solutions to each of those,” Surya said. So why not work with virtual currency traders in a similar way and create a risk-free system rather than indirectly shutting it down, he said.

The RBI’s move comes as regulators globally have expressed concerns over virtual currencies. Bitcoin prices had surged last year and peaked at about $20,000 in December, leading to concerns about asset bubbles. A series of curbs have since pulled it down, with steep losses since the beginning of this year.

While India has not made virtual currencies illegal, they have continuously that virtual currencies do not enjoy legal tender status like fiat currency does. The RBI’s latest move, though, virtually shuts down the ecosystem.

The RBI’s decision is a safe move but not good for innovation, said Kunal Nandwani, founder and chief executive officer at uTrade, a fintech firm. “You can’t not take risks and expect to innovate.”

Watch the full interaction here:

Here are the edited excerpts of the interaction:

The old finance universe keeps saying that anything you do which is midway, always lets people find a way around it. So, if they have to clamp down, they have to do it entirely.

Navin Surya: I think clamping down is not a solution. Because if you clamp down on anything that is organized, it will move to unorganised. In fact, when it is organised you can track what is happening, you could find actions and solutions to risk that it was creating. I find this approach very funny. What could be solved with an organised regulatory systemic approach is bring brought down by doing indirect things. Whatever is happening systematically, we are bringing it down. By trying to protect consumers, we are actually leaving them in a lurch. What will happen to these consumers now? The crypto markets are at an all time low in cryptocurrencies. They are now being forced to sell. They have no solution.

Cryptocurrency markets were still built upon the traditional universe of the payment system.If they are not allowed to interact with that system, what happens?

Navin Surya: Well it simply shuts down. You cannot do any business, you cannot give money to consumers nor take unless they cooperate. It’s better that the government makes a clear policy that this is not allowed-the holding, buying, selling (of virtual currencies) is illegal. You cannot have this indirect approach. If the crypto system is here to stay then they should create rules, with KYC norms, explain the limits, list the global currencies they will allow or not allow. They should not do it in an indirect way which means someone who is already doing it, they are trapped.

There are 20 organised players and they have not been included in any discussions. Committees have been formed which are still framing their guidelines and suggestions and recommendations, even before that comes out, this action is announced. There may be some reasons for this decision but those reasons need to be discussed. We live in a democracy, there should be a proper discussion or debate. The group of industries has already proposed norms can be implemented to curb the risks. Risks exist in every system: payments, banking but we have solutions to each of those risks.

People who have bought bitcoins, invested in initial coin offerings, do they have an opportunity to unwind?

Navin Surya: When they have said that there is a window available to close, this is probably what they mean. You can’t buy any new position in these currencies. Definitely, what you have you will sell. The problem is the time frame. If it is a pre-determined time frame, the markets don’t behave like the global markets. Currently, most of these currencies are at an all-time low in that last 12-18 months. This means that if somebody has taken a position at a higher rate, they will be forced to sell at a lower rate and book losses. So, probably the time frame for unwinding should be more flexible and open, till the time a proper framework is there.

Entities who built businesses are all young entrepreneurs. They could have done business out of any country. They are all well-educated and technical. All are not bad, there may be some who are. The reality is bad people will still thrive in the underground economy. Is this a message for them to stay out of India and do innovative businesses out of the country? We are never against managing risk. I have always been supportive of doing businesses in a risk-free manner. We work very closely with the government and regulators. But do it in a form of discussion that is right for all the stakeholders.

What are you hearing from FinTech ecosystem?

Kunal Nandwani: In India, everyone will struggle, if this ruling were to go through. This will be challenged by the ecosystem players but I am not sure if anything would change. This ruling is a safe move from the RBI’s perspective but not good for innovation. There are countries who are trying to woo these businesses to their country, for example, France, Spain, Switzerland, Gibraltar, Singapore and U.S. Many countries are trying to see what would be the next wave of growth in the technology driven world.

After internet, blockchain, bitcoins, cryptos could be a great innovation and they could lead to future economic system which we cannot even imagine yet. World bank came up with a report that India could form one of the next Silicon Valleys. But given these regulatory knee-jerk actions, I don’t think that is possible at all. You can’t not take risks and expect to innovate.

Indians, if they want to exit the positions legally and withdraw money back into, they have two choices. They can keep the money in cryptocurrencies forever or they could most likely convert it into Indian Rupees and run it as a fiat currency in the future. I don’t think many Indians would want to trade bitcoins versus an Ethereum anymore. That’s not the product they understand. Everybody understands bitcoin versus Indian Rupee. But in bitcoin versus etherum, there is a ratio that goes in. Those are not the products which get traded. Trading volumes, exchange platforms, revenues and associated taxes will go down. In Indian markets, crypto trading will drop significantly. People who have built their business around either they have to figure out alternate ways, may be expand into international territories or slowdown or shut down. That’s how they would end up.

Can the cryptocurrency trading move into cash?

Kunal Nandwani: Cash markets work. The reality is, irrespective of how much we clampdown, Hawala also works. That’s how these things could operate. The bigger challenge which is not in the favor of RBI, is that if people start moving their bitcoins abroad. For example, I may send my bitcoin to U.S. and ask them to give me in dollars or buy me an iPhone. That could be a violation of the Foreign Management Exchange Act because I am moving money out of India without even any authorized dealer or participator informing the RBI that money is moving. This may lead to unintended consequences too. Retail investors will not do this intentionally but they will not know of FEMA or any related guidelines that RBI has.

That’s the risk we run. It is likely to go into cash. It has been working in the cash in the background too. That is one of the risks that RBI is trying to cut out. In India, cryptos are not recognized and that is the reason why they have not completely ban it. To ban it, you need to first recognize it in the legal system. But to recognize crypto there is probably a change that they need to go through at some point in the future, if these things need to stay around. It is a very complicated situation. Let’s see how it plays out.

What is the risk which you see that one needs to guard against?

Navin Surya: There are all kinds of risks and because of the risks we take action. Reality is that those risks increase multi-fold and then you don’t have any control. It is just that we don’t see them. May be certain consumers will stop these activities because they don’t like it. But those who are active participants, they will find their own ways to continue doing it. They see future in these technologies. They will still want to invest in it. They will find their own informal ways which is where the economy will continue to give a birth to a black economy.

On one side the country is saying we want to explore blockchain because we like it and issue our own digital currency which is why they are advocating it. Cashless solution can go away with digital currency, which is the initiative by the government. We believe in the concept.

I am not saying that it is risk free. There are risks. There are multiple examples. We have derivative exchanges, commodity exchanges, stock markets and all of them are running and all of them are very active markets. We have enough know-how and knowledge to regulate them. Why are we not doing that? Instead we are taking a shortcut and crippling a system which is built by entrepreneurs over a period of time? These systems are organized and are providing data transparently. So, why not work with them and create a risk-free system rather than indirectly shutting it down. Or the government should officially say that this is not acceptable, which has not happened.