The government’s decision to ban crypto-currencies in India, signals that it is ready to regulate the crypto-currency industry in India which should be taken as a positive, says Nischal Shetty, founder and chief executive officer, WazirX. In an interview with MediaNama, Shetty said that with crypto-currencies now valued at over $1trillion, India has the opportunity to grab at least 10-20% of this market if not more.
Nearly two weeks ago, the government announced that it would introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will ban “private” crypto-currencies while at the same time providing the Reserve Bank of India (RBI) with the requisite legal powers to develop a central bank-backed digital currency (CBDC), according to the official Lok Sabha Bulletin Part II for the Budget Session 2021 of Parliament.
On Tuesday, Finance Minister Nirmala Sitharaman told Parliament that as per the government’s previous position, it does not consider crypto-currencies as legal tender and will take all measures to eliminate the use of these crypto-assets in financing illegal activities or as part of the payments system. Anurag Thakur, the Minister of State for Finance told Parliament on the same day that Bill is being finalised and would be sent to the Cabinet soon, and thereafter introduced to Parliament.
While the government wants to promote the use of blockchain across various use-cases, it has decided to enter the global race of digital currencies or CBDCs while at the same time banning “private” crypto-currencies like Bitcoin and Ethereum among others. The government’s decision to ban crypto-currencies in India comes a week after the RBI said it had begun exploring the possibility of issuing and developing a digital currency or digital Rupee.
Edited excerpts from MediaNama’s interview with Nischal Shetty, founder and CEO, WazirX.
‘Significant that govt has taken initiative to start regulating’
In the crypto-universe nothing is normal, it is either goes up or down, Shetty said. “You get used to it. But I think this development is sort of significant because it has reached the Parliament as against previous proposal, where it’s been more talk and a draft bill. This time it’s reached Parliament. I see this as a great move forward for India, where at least the government has taken the initiative to get into that path of regulation,” he said.
“I think this is how it starts. You start with something. Either there’s a 50% chance it might have a positive shock or negative, and that’s okay. The government wants to minimise negative impact, and that’s fine. But you cannot just think about how to minimise the negative impact, we also have to see how to maximize the positive impact,” Shetty said. He added that he believes the government will consult the industry and may even send the Bill to a Standing Committee to have deeper discussions on the right way to regulate the industry.
“If you look at the draft Bill, you will realise it is a regulator-driven approach. Regulatory driven approach is not about innovation or growth. You can have separate regulators as per the use-cases. In the United States, they see cryptos as security, but they still have a demarcating thing. So only when a particular crypto falls into a particular regulator will the regulator step in. I think that’s a beautiful approach because in India we have a currency regulator and securities regulator, so I think we do start with a similar approach,” Shetty said.
He said that the RBI could start with issuing guidelines to banks and payment companies on how to deal with crypto-currencies. “Due to the nature of crypto-currencies, none of the existing regulators are in a position to regulate. So I’m guessing that the government will probably give some powers to one of the regulators. Looking at the situation today, I think the RBI is going to step in as a regulator for crypto-currencies in India. It is. That’s how it looks from the outside for now, and then maybe we’ll have more regulators coming in later,” Shetty said.
‘India should bite into the $1 trillion crypto pie’
There is a large opportunity for India to eat a large part of this new business. Globally, every country understands the problem, but no one is banning it because there is a larger pie to be eaten into. If we are only concerned about negative use cases, you’re going to let go of a $100 billion opportunity. I think that is a decision that we as a country should not have to pay,” said Shetty.
“Bad actors can be kept in check while we eat a larger part of the pie that exists. If the crypto-market today is worth $1 trillion, India could easily eat 10-20% of that, which would be great for our economy. We’re focusing too much on the side effects rather than the opportunity in front of us,” Shetty said.
He said that India still has a massive formal credit gap and while fintechs are attempting to bridge this gap, cryptos and decentralised finance can also increase access to formal credit. “It can also break geographical barriers that Indian companies have today in terms of accessing capital,” Shetty added.
“I do not think there is a need for crypto-payments solutions on the consumer side like Mastercard, Visa and Tesla have announced. I think at the national level, I’m a big fan of UPI and what the RBI has done. I think it’s beautiful. No other country has done it. So kudos to us. But the problem that exists today is that Indians lose about 7-10 % in remittance fees when they bring funds from abroad,” Shetty said. “If there is $100-200 billion that comes in, you’re losing $10-20 billion to other companies, which can instead go into the pockets of our people,” he added.
With China dominating the crypto-mining industry, purportedly controlling 65% of all Bitcoin and a major chunk of Ethereum mining, India should definitely participate as well, Shetty said.
“It is not just about mining and making money, but it’s also about understanding the technology, developing skills, adding jobs and therefore economic growth. There are large companies in China selling mining software and mining hardware, so instead of competing with tradition industries India can participate in mining and leapfrog faster if there is a government push,” he said.
‘Pandemic boosted user-base and trading activity’
“The timing of the Supreme Court verdict was very interesting because just a few weeks after that, we went into a lockdown in India due to the pandemic. As soon as the verdict came, we saw a bump in our traffic. And then when the pandemic hit, the number of people coming in grew even larger. When we looked into what was happening, we realised people who were affected by pandemic, either losing their job or having more time on their hands, started getting onto crypto. It snowballed,” said Shetty.
There was a third factor, he said, which was the sudden surge in the price of Bitcoins from the middle of last year.
‘CBDCs should go the institutional route’
The biggest change that Central Bank-backed Digital Currencies (CBDCs) will bring is on settlement times, as large transactions may take anywhere from one to four days to process, but with CBDCs it can be reduced to much less, said Shetty. “I would personally think of an institutional approach first, because you can make that efficient. The first time would be to solve how institutions talk to each other. Today, they have to keep their own ledger and do the reconciliation independently. You can eliminate all of that. So CBDCs can make settlements between our institutions quick and easy,” he said.
Shetty says that after solving the institutional issues, CBDCs can be extended to consumers, but with UPI there is no real need for it. “If our banks can talk to each other quickly, instantly, I think that’s going to make the banking system in India far more efficient. A Digital Rupee has to be on a blockchain, if it is to be a crypto, so that it functions on the principle of permission less equality and so that we can all read into it,” he said.
“When I hear that CBDCs are going to be the Bitcoin killer, it is saying Facebook can be Google Google search. But those are two different products with different use cases. That’s how I view the whole Bitcoin versus CBDC debate talk. Right now there’s a period of confusion,” Shetty added.
‘RBI circular led to a do-or-die situation for WazirX’
“We started in 2018 around March and about three weeks into our launch, the RBI circular came in. I remember the circular gave the banks three months to comply with it. So here we were just about three weeks old and this was a do-or-die situation for us. We decided that we are in this for the long term, since it was not illegal. The major I think point here was that the circular was meant for banks, and not meant for people in that it was not meant to ban trading of crypt0-currencies,” Shetty said.
As a new industry, for both users and government, building products was not enough, Shetty said. The industry as a whole had to work together on regulatory and legal aspects alongside product development and as a community they had to come together as one voice so that lawmakers would be able to listen and thereafter, propose suitable regulations, he said.
“So it was going to be difficult to do business, but not impossible. So with that mindset, we launched and we went ahead and we built what now is a very popular way for people to buy into cryptos. Being a new player, it was sort of an adversity that we can to get that opportunity, though I wouldn’t pay for an adversity like that in any industry. I think we did what we could the best of that,” Shetty said.
‘KYC norms on par with regulated financial industry’
“I would say our Know-Your-Customer practices is on par with the banking industry or any other financial services entity in India. I think the point of contention comes from what happens after you have bought the cryptocurrency. For instance, in European Union there is now a travel rule which states that if you are going to withdraw funds from a crypto-exchange from of EU region, the exchange needs to provide data to the tax authorities in that country for the user to withdraw fiat currencies,” Shetty said.
He said that concern for the government and regulators is whether money is being withdrawn for legitimate purposes or to legitimate accounts and not to random accounts. “So I think if India can go in that direction, it’s hard to implement, but I think there is a solution. I think there will definitely be concerns on whatever new emerges and when the governments’ control reduces. It is similar to traditional news media where there are rules versus the online blogging platforms, where there are no checks. There will always be side effects of new technologies,” Shetty said.
‘UPI allows our model to quickly settle payments’
WazirX has been working on a Peer-2-Peer model for crypto-trading, prior to the RBI circular and even after the SC verdict. Under the P2P model, a user with Rs 1,000 transfers the money to the exchanges’ bank account and in return, WazirX will deposit Rs 1,o00 in a digital wallet on their platform. Using the wallet, users can then buy Bitcoins or any other crypto-currencies, Shetty explained.
This model ensures that payment settlements take place directly between the buyer and seller, and there is no intermediary, Shetty said. “It worked beautifully. And this whole transaction takes place within five minutes, because the Unified Payments Interface has made it really easy for people to send money to each other. So when you send the money, you send it directly to the seller and we transfer the cryptocurrency from the seller to you,” he said.
“Today, not every payment gateway or payments company is open to working with crypto-currency exchange, but selectively some are working with the industry and some are in the process of entering the space. In the United States, payment services to crypto-exchanges is a huge business. So nobody wants to lose out on this business opportunity. Even in India, I’m seeing that shift happening where all the payment gateways now want to work with exchanges. And I think in a few, a couple of years, maybe it’ll be the new normal,” Shetty said.
In the wake of the verdict, banks were allowed to offer services to crypto-firms in India. “Banks are seeing that rapidly businesses are growing in the ecosystem. So they all started having discussions to understand how they can help. But I think the first two months, it was a little chaotic because they were going into a lockdown preparation themselves, and they were not aware of what the verdict said exactly,” he said.
‘Blockchain strategy is silent on benefits to individuals’
Shetty said that the blockchain strategy as outlined by the Ministry of Electronics and Information Technology is purely looking at public use-cases and business use-cases, but not how it will affect the common person. “It does not help people participate in this whole thing. It seems to be more of a technology choice that a few companies are going to make,” he said.
The question is about the technology choice companies and individuals will make based on their needs.
“Let’s say you are the only company in complete control and you’re building something then maybe Application Programme Interfaces (APIs) is the right approach, because blockchain will be expensive. But let’s say you want to work with four other companies and collaborate, to build a blockchain you will need to ask who owns the data, who controls it and do all the companies have a consensus mechanism,” Shetty explained.
“If the government is the only body which is going to provide an API, which will be replaced with a blockchain it will not solve anything. It’s going to make ithe system less efficient. So it’s a question of what what are you building? and why?,” he said.
‘Bitcoin’s price is subjective’
Shetty said that Bitcoins price is subjective. “Today, less than 10% of world knows what Bitcoin is and that there are only 21 million coins in supply. If another 80-90% of the world comes into it, the same amount of Bitcoins will be divided. So I think there is still a huge upside. But the time frame is very hard to predict, whether it will take 3 years or a decade for at least another 40% of world’s population to get on board,” he said.
“In the last 10 years, the Bitcoin network has only grown and it will only grow very similar to the internet. As more and more people enter the Bitcoin network, its value will appreciate, but its a deflationary asset. So if you’re looking at a three to five year timeframe, I think on any point in time, it’s a good point to buy, but if you’re looking at the timing for the next three to six months, it’s going to be hard because in the short term prices can go in any direction.
‘Decentralised finance is at a nascent stage’
The ultimate aim of decentralised finance is to create on global bank and at present, product and platform development is at a nascent stage, said Shetty. “Lending products are being built and savings products are being built. The idea is that once it is built, anyone in the world or any entrepreneur or anyone can get accfess to loans and savings products. We will have a future where you have these local banks which are providing local services, whereas there will be a global bank with access to liquidity globally. The fact that it is being build by an open-source community, means that this will be big ecosystem,” he said.
We cannot comprehend how large it can be, Shetty said.”Fintechs are also trying to decentralise financial products, but they still have the same underlying infrastructure which is bound by geography and by one company. As a company I need regulatory permission, I have rules to follow to enter a new country. With decentralised finance, you launch your product and you can service all countries on day one,” he said.
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.