India’s cryptocurrency traders scramble after RBI crackdown

When the elusive Satoshi Nakamoto gave birth to bitcoin in 2009, Nischal Shetty was briefly intrigued. Using his home computer, the young Indian computer scientist mined a small number of the virtual coins — then worth less than a dollar apiece — before losing interest.

But last year, Mr Shetty — now a successful social media entrepreneur — was drawn back to cryptocurrencies, amid a surge in global activity that would send the bitcoin price above $19,700 by December. As excitement grew in India, he built WazirX, a local cryptocurrency exchange that finally went live on March 8. “I knew this was the right time,” he said.

Others might question that assessment. Four weeks after WazirX’s launch, the Reserve Bank of India made a draconian move to halt the flow of funds into this burgeoning sector.

All regulated financial companies, it said this month, must within 90 days end services to individuals or businesses dealing with bitcoin and other cryptocurrencies using blockchain technology — barring traders from using the bank system to buy or sell virtual currencies for rupees online.

Even as Indian authorities pledge to foster financial technology to accelerate national development, the fierce clampdown on cryptocurrencies is prompting protests that India could be left behind in a crucial area of innovation.

“Time and again we've seen this,” said Raj Chowdhury, managing director of HashCash Consultants, a California-based company whose blockchain technology is used by customers in 26 countries, including India. “The approach to new industries has left the country playing catch-up.”

From the start, India’s cryptocurrency market was shaped by the country’s tough regulations — notably its system of capital controls, which effectively blocked Indians from using local bank accounts to trade in cryptocurrencies on international exchanges.

This meant a chronic squeeze on the onshore supply of cryptocurrency. Some were brought in by traders who managed to sidestep the capital controls — for example, dual nationals with bank accounts in India and overseas. There was also bitcoin on the market that had been mined by local residents — typically in the early days of the technology, before mining became dominated by huge, energy-intensive computer farms.

With the Indian cryptocurrency market largely cut off from those abroad, the bitcoin price on Indian exchanges was consistently about 10 per cent higher than that seen on large global peers. Similar premiums have been seen in other countries with strict capital controls, such as South Africa and Brazil.