Categories: Industry

India’s Central Bank Is Losing Against Cryptocurrencies

Regulatory changes differ from one place to the next. Though you have regulatory developments in the US that even considered Bitcoin and Ethereum not as securities, you can’t help the fact that countries like China continued to suppress crypto-activities. The same thing happened in India.

India’s Central Bank decided to declare that banks can’t transact with the crypto sector in the country. It was expected by India’s Central Bank that it could short-circuit the financial grid. However, the cryptocurrency exchanges even challenged this to the Supreme Court.

And also, Indians continued to trade and use cryptocurrencies. Following the ultimatum, India’s crypto sector reacted differently. The value of transactions using Bitcoin increased weeks prior to the deadline.

Freeze Accounts

The Reserve Bank of India (RBI) issued an order that accounts belonging to crypto exchanges should be frozen. This directive has also been released on direct lenders. Basically, the reason behind this is to slowly drain the crypto industry’s access to funds. Though this wasn’t explicitly a ban on cryptocurrencies, this has the intention to close crypto activities by restricting the access of crypto exchanges from formal channels.

Banks were banned from providing services such as trading, maintaining accounts, settling, clearing, and sanctioning loans to crypto exchanges. Though this move was quite aggressive, the outcome wasn’t exactly how the RBI planned it to be. India’s Central Bank is losing the battle considering the price of crypto transactions have gone up both in volume and value.

Value Increased

There is undoubtedly a demand for cryptocurrencies in the country. The total value of Bitcoin transactions in their domestic exchanges spiked by almost 25% even after the RBI decided to impose the de facto ban on cryptocurrencies. There was also an increase in the value of Bitcoin that passed hands within the Indian market. And all of these things happened despite the fact that Bitcoin depreciated continuously from its all-time high of near $20,000 in December.

New Business Model

Crypto exchanges, as well as traders, were able to develop a new business model that circumvents the existing ban. According to the circular, the RBI specifically mentioned that transactions in Indian rupees to buy or sell cryptos shouldn’t happen within India’s banking system. Instead, what the crypto exchanges did was to use third-party transactions or peer-to-peer exchanges.

There are domestic crypto exchanges such as WazirX and Unocoin that moved their system of trade on peer-to-peer transfer acting as its facilitator to its customers. Here, people that hold cryptos register with the exchange. A rupee equivalent of the digital currency is in an escrow account that is held by the exchange.

Once the person with cryptocurrencies is able to find a buyer online, the funds are then transferred to the buyer’s account and the seller receives the amount. And using this system, crypto activity in India remains healthy despite the roadblocks imposed by the RBI.

Basically, it is all about improvisation on the part of crypto exchanges in India for now. But is this a good move? Countries such as Japan imposed rules that not only protect investors but also encourage crypto exchanges to improve their services. Is this a better approach than a de facto ban on cryptos?

Lee Jenkins

Lee is our resident cryptocurrency expert who knows the ins and outs of each coin and the blockchain technology behind them. You’ll find that most of our technical guides are written or overseen by Lee and they are all easily digestible by the new and experienced alike, so there is no better place to learn blockchain 101 than here. Occasionally you may see a news article from him if it’s tech related!

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Lee Jenkins

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