Bitcoin Rally Draws First-Time Buyers In India But Also Fraudsters
Coins representing Bitcoin, center and right, Litecoin, left, cryptocurrencies sit reflected on a polished surface in the U.K. (Photographer: Luke MacGregor/Bloomberg)

Bitcoin Rally Draws First-Time Buyers In India But Also Fraudsters

As bitcoin prices zoomed to new highs, amid a continued regulatory vacuum in India, first-time investors and traders have flocked to exchanges. Alongside, reports of ponzi schemes have also reemerged, underscoring the importance for Indian authorities to finalise a framework for cryptocurrencies.

The total market value of cryptocurrencies surpassed $1 trillion for the first time on Thursday, according to Bloomberg. Bitcoin prices breached $37,000.

In India, the maximum interest, according to Sathvik Vishwanath, co-founder and chief executive of cryptocurrency exchange Unocoin, is coming from young first-time investors who are looking to invest rather than trade in bitcoins.

“As more Indians, especially youngsters, invest in bitcoins, we are seeing a surge in first-time bitcoin buyers who are coming to our platform to save their money by holding bitcoin investments in wallets, both for short- (1-2 years) and long-term (3-5 years) horizons. In fact, nearly three-fifths of our new user base, added in the past six months, is using bitcoin as a saving instrument,” he said. The exchange added nearly 70,000 new users in the past six months.

Agreed Nischal Shetty, chief executive of WazirX, that claims to be India’s largest cryptocurrency exchange. “Bitcoins have emerged as the best asset class of 2020 even as the global stock markets crashed due to the coronavirus pandemic. That has led to lakhs of new user sign-ups in the past 6-8 months on our platform, with most of them being young individuals between 25 and 40 years of age. Right now, nearly 80% of our customers are such passive investors, while the remaining 10-20% are active traders.”

BloombergQuint could not independently verify data provided by Unocoin and WazirX due to lack of any central database on cryptocurrency exchanges in India.

Compared to the investors that came in during the 2017 bitcoin rally, according to Sumit Gupta, co-founder and chief executive of cryptocurrency exchange CoinDCX, the past year has seen more sophisticated and mature retail investors entering the market.

“While most of them are holding their bitcoins in wallets, trading has also risen as a lot of first-time bitcoin users in India are now looking to buy bitcoins. But the larger trend is about bitcoin becoming a primary investment asset, similar to gold, for many young Indians,” said Gupta.

Globally too, calls from large investment houses has given credence to the view that Bitcoin may be seen as an alternative to gold. JPMorgan Chase & Co. on Monday said that bitcoin has the potential to reach $146,000 in the long term. “A crowding out of gold as an ‘alternative’ currency implies big upside for Bitcoin over the long term,” the investment bank said in its latest report.

This, as bitcoin prices have surged over nine-fold in the past two years to more than $37,000 compared to a nearly 50% increase in gold prices to above $1,900 per ounce, since January 2019. The steep rise could very well be followed by an equally steep fall. In December 2017, the price of one bitcoin touched $19,783, only to crash rapidly to lower below $3,500 by November 2018.

Bitcoin Rally Draws First-Time Buyers In India But Also Fraudsters

Regulatory Vacuum Brings Banks Back In

Following the Supreme Court order in March that set aside the Reserve Bank of India’s 2018 circular that barred banks and other financial institutions from facilitating transactions involving cryptocurrencies, most banks have once again begun dealing with cryptocurrency exchanges and their customers.

“Most top banks, including HDFC Bank Ltd., State Bank of India, Kotak Mahindra Bank Ltd. and ICICI Bank Ltd., are now allowing cryptocurrency traders and investors on our platform to transact using their bank accounts,” said Vishwanath.

“Initially, right after the Supreme Court ban was lifted on crypto trading, there was some reluctance from banks but now almost all banks are actively dealing with crypto exchanges and treating us on par with their other customers,” he added.

The confidence and acceptance for cryptocurrency, according to Shetty, has also increased in the country after banks began allowing customers to use their accounts to transact in cryptocurrency. “Besides high returns in bitcoins, for Indian customers this has been one of the encouraging factors as now many top banks are allowing their customers to buy and sell cryptocurrency using their bank accounts.”

Fraudsters Not Far Behind

Similar to the 2017 bitcoin rally that saw hackers and fraudsters duping a number of bitcoin buyers, the past year too has seen rising reports of frauds. No data is available on frauds reported.

In July last year, London-based cryptocurrency platform Cashaa took to social media platform Twitter to inform its customers that one of its wallets was compromised and nearly 336 bitcoins (worth about $3 million at the time) were stolen by hackers. The company reported the theft to the cyber crime department of the Delhi police, and to all the crypto exchanges to block the suspicious transaction.

On Jan. 1, a man who allegedly duped 45 investors to the tune of Rs 2.5 crore through his cryptocurrency venture Pluto Exchange in September, was arrested at the Indira Gandhi International Airport, according to an ANI report.

In October last year, three Bengaluru-based companies came under police scanner for allegedly taking at least Rs 15,000 each from over 11 lakh people to invest in a new cryptocurrency called Morris coin, later found to be a ponzi scheme, according to an Oct. 2 report by the New Indian Express.

A similar rise in frauds was observed between 2017 and 2019, when according to an August report by Cointelegraph, Indian investors lost almost $500 million to scams operated within India and abroad.

Most frauds within the cryptocurrency universe, according to Kunal Pande, partner at KPMG in India, happen essentially because of the weakness in the systems built around it. “Cryptocurrency frauds do not happen because of any weakness in the blockchain technology, but in surrounding processes and ecosystem around it.”

While crypto transactions are recorded in blockchain, these suffer from lack of adequate traceability, as there is no established way to trace the transaction to an end user.
Kunal Pande, Partner, KPMG in India

The issues, Pande said, could be addressed if regulators could introduce stringent norms for companies wanting to provide services around virtual currencies. “The regulator can also bring in requirements like KYC to improve traceability of end users and other participants, stipulate strict norms on cyber security, fraud control, etc for wallet services providers and additional controls for large transactions.”

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