This week, the Supreme Court of India formally set aside a comprehensive ban imposed by the Reserve Bank of India (RBI)—the country’s central bank—in April 2018, thus effectively allowing cryptocurrency trading for the first time in nearly two years.
The crypto market has not reacted strongly toward this major milestone, as seen by the relative stability in the Bitcoin price. But the reversal of the ban is likely to act as a long-term catalyst for the crypto industry in the years to come.
What the ban was like for local crypto businesses
But first, a little background. It all started on April 5, 2018, when the RBI released an unexpected circular to commercial banks in India to prohibit financial institutions in the country from dealing with crypto-related companies, which included crypto exchanges.
The RBI said two years ago:
“Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately.”
The RBI’s decision immediately created major roadblocks for local crypto exchanges. The country’s top exchanges could not process deposits or withdrawals from and to users’ bank accounts. Users could not transfer funds in Indian rupees from their bank accounts to exchanges, and were thus unable to invest in cryptocurrencies.
Merely four months after the ban was imposed by the RBI, Zebpay, the largest cryptocurrency exchange in India at the time, was forced to close down in India. However, they have since returned to the country.
The Zebpay team said that it became virtually impossible to sustain their operations without any support from local banks.
The team said in September 2018:
"Lakhs of Indians took their first step into the world of Bitcoin using the Zebpay app... However, the recent past has been extremely difficult. The curb on bank accounts has crippled … business meaningfully... We are unable to find a reasonable way to conduct the cryptocurrency exchange business.”
Koinex, for instance, which saw strong volumes of up to $265M in the December, according to co-founder Rahul Raj, prior to the release of the RBI circular, said that it was not just banks that were refusing to support crypto-related businesses. It faced difficulties in paying employee salaries, purchasing equipment, receiving services from vendors, and obtaining financial services from payment gateways.
Simply put, the RBI’s circular in 2018 virtually shut down every financial channel or service a crypto business needs to maintain their operations.
How India ended up unbanning crypto trading after 1 year and 10 months
For a grueling 22 months, India’s leading cryptocurrency exchanges Unocoin, WazirX, and Pocketbits, with the help of the Internet and Mobile Association of India—a non-profit industry body—fought against the RBI in a Supreme Court case.
The multi-year process had its ups and downs. Up until mid-2019, it seemed as if the Supreme Court was gearing towards favoring the decision of the RBI.
In July 2019, an inter-ministerial committee established by the government of India to study cryptocurrencies proposed a ban on crypto assets. Finance secretary Subhash Chandra Garg, who led the committee, proposed a bill entitled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill,” applying additional pressure on the IAMAI and other organizations in the RBI-Crypto Supreme Court case.
The committee’s proposal to ban cryptocurrencies was described as a “missed opportunity” for India in a column published on the University of Oxford’s Business Law Blog, written by Vidhi Centre for Legal Policy senior resident fellow Shehnaz Ahmed.
But the overall sentiment surrounding the crypto market started to change in late 2019 when the Financial Action Task Force (FATF), a watchdog under the G7, encouraged all member countries to adopt a unified guideline on cryptocurrencies.
In February 2020, the G20 formally recommended countries to implement the FATF’s standards on crypto assets. The communiqué released by the G20 made it difficult for major countries to dismiss cryptocurrencies like before, as the global community moves towards adopting cryptocurrencies and the guideline set forth by the FATF. It read:
“Building on the 2019 Leaders’ Declaration, we urge countries to implement the recently adopted Financial Action Task Force (FATF) standards on virtual assets and related providers. We reiterate our statement in October 2019 regarding the so-called ‘global stablecoins’ and other similar arrangements that such risks need to be evaluated and appropriately addressed”
The general approach towards crypto assets by key countries like the U.S., Japan, South Korea, Hong Kong, and others to regulate cryptocurrencies rather than dismiss the asset class likely influenced India to rethink its decision of outright prohibiting the trading of cryptocurrencies.
WazirX CEO tells Longhash the ruling will massively boost crypto adoption in India
Speaking to Longhash in an exclusive interview, WazirX CEO Nischal Shetty said that the resumption of cryptocurrency trading is a historic day for the entire crypto ecosystem in India.
“Today’s a historic day for the entire Indian crypto ecosystem,” Shetty said.“This positive judgement will open doors to massive crypto adoption in India. It proves that we can now innovate, and the entire country can participate in the blockchain revolution.”
Shetty emphasized that the decision will open up the country to the emergence of more innovative local companies, funding, and a prosperous cryptocurrency industry, adding:
“Local companies can now innovate and work on crypto without any fear of banking bans. They’ll get access to banking channels. They can also use many of the Fintech products such as automated KYC systems etc which previously were inaccessible due to the banking ban.”
In the long run, Shetty noted that the global crypto community will begin to benefit from the reversal of the ban.
“With a population of over 1 billion, the Indian market is a sleeping giant. I’m confident that this judgement will have a positive impact on the global crypto ecosystem. The RBI circular which prevented banks from dealing with crypto startups has been termed as unconstitutional by the Supreme Court of India. We should see a surge of new crypto startups in India leading to thousands of new jobs and millions of dollars of new VC investment in the crypto sector in India,” Shetty explained.
With the lead of Binance, industry executives anticipate foreign players to open up in India over time. Since the last quarter of 2019, Binance has invested in blockchain projects and companies from India, in the likes of WazirX.
Regulatory uncertainty regarding cryptocurrencies and crypto exchanges has prevented leading companies from expanding into India over the last two years. Coinbase, Binance, Huobi, OKEx, and other exchanges have expanded to overseas markets such as South Korea, either by establishing foreign customer support or launching regional exchanges. But, due to the cryptocurrency trading ban in India, major exchanges have not targeted the Indian market.
In the near-term, macro events such as the legalization of crypto by the government of South Korea and the resumption of trading in India may well have minimal impact on the Bitcoin price, at least judging from the price trend in the last three days.
But over the long term, foreign cryptocurrency-related companies moving into India, over a billion people opening up to cryptocurrency in a major market, and the change in sentiment in global law towards crypto are a game changer for the cryptocurrency industry.
So why didn’t Bitcoin’s price feel the impact? It’s possible that this long-term catalyst for crypto growth was simply overshadowed by the spread of coronavirus across Europe, Asia, and the U.S. But this story is far from over.