Cryptocurrency startups absorb blow of RBI ban, pivot to P2P trading!!!

WazirX is one of the many companies that have turned to Peer-to-Peer transfers, allowing users to seamlessly buy and sell crypto for rupees directly with each other.

Localbitcoins is also as P2P service(website) for cryptocurrency to inr..

The Supreme Court's verdict, upholding the Reserve Bank of India's ban on banks dealing with cryptocurrencies has rattled the industry and slowed down business. But players in the sector are refusing to let the industry die, with most of them now moving to a P2P model to soften the blow.

The verdict follows a public interest litigation asking the court to review RBI's circular dated April 6, allowing banks three months to exit operations dealing with virtual currencies.

"Removing the ‘bank account to digital exchange’ channel clearly will not help the industry and recently reduced trading levels demonstrate this. However, the market is adjusting quickly to this limitation and has already evolved to boost the 'crypto to crypto'. Bank accounts are not required in either of these models in order to continue trading activity," said Akash Aggarwal, Founder and CEO of Alluma.

Till last year, India was an attractive market for cryptocurrencies. Several players entered India because it was a lucrative market given the huge demand. But the government's stand in the Budget, and RBI's circular, have been big blows to the industry, according to Vajahaath Hussain, CEO of the only Cryptocurrency investment bank – Almora.

Prices of cryptocurrencies fell by almost 50 percent in a single day after RBI released the circular. The demand and activity in cryptocurrencies has remained subdued ever since.

India's stand against cryptocurrencies is in stark contrast to other countries such as Abu Dhabi and South Korea, which have opted regulate the sector rather than go for a blanket ban. Several companies Moneycontrol spoke to believe that the government did little or no research before arriving at its conclusion.

The finance ministry is yet to make a final ruling on a formal ban, but the recent volatility in cryptocurrency markets has already sent the industry spiralling down.

"Furthermore, the verdict is going to be a dampener for the government itself, since banking helps streamline the whole flow of money in and out of crypto. This also helps the government and its various departments, including GST, income tax, etc. Due to the ban by RBI, these revenue streams of the government are going to be lost," said Nischal Shetty, Founder and CEO of WazirX.

Considering RBI and the government's security concerns regarding virtual currencies, companies in India had created closed systems to encourage proper monitoring of transactions.

"Blockchain nodes can be chosen, so the government can actually monitor it. We can also filter these assets in terms of credibility. We, for example, don’t allow trading of certain assets. We can work with the government in determining such caveats," said Rahul Raj, Co-founder and CEO of Koinex.

Zebpay, another startup dealing in virtual currencies, has put in checks and balances by adopting KYC verification of all its users. Unocoin's transactions also levy service tax, which means every transaction is reported to the government, making discovery and detection easier.

WazirX is one of the many companies that have turned to Peer-to-Peer transfers, allowing users to seamlessly buy and sell crypto for rupees directly with each other. The seller deposits the crypto with WazirX, which the brand escrows for safekeeping during the transaction. On the other end of the spectrum, the buyer pays the seller in rupees and as soon as the seller confirms receipt of the payment, WazirX releases the crypto to the buyer.

"While the feature allows users to still build their digital assets, we are also hopeful that the authorities will acknowledge the impact crypto is having on global economies and would work closely with the private players like us to better regulate this space, instead of simply banning the same," Shetty of WazirX said.

Hussain of Crypto investment bank Almora warns that P2P trading will also lead to illegal trades, which can be done through cash, since the banks are no longer allowed to deal with cryptocurrencies. The primary concern the government has had with cryptocurrency is the lack of transparency, which makes detection of illegal transactions difficult.

"Presently all the major industry players are offering the crypto to fiat and fiat to crypto conversions. The crypto to crypto market does not have much traction. Given this scenario, there will be quite a bit of drop in the interest among the customers," said Sathvik Vishwanath, Co-Founder and CEO of Unocoin.

However, India is not the only country suffering from regulatory uncertainties surrounding cryptocurrencies. The connections between cryptocurrencies and scams, tax evasion, money laundering and terror funding have raised concerns among several countries.

South Korea, which has opted for regulation of virtual currencies, had previously considered shutting down local exchanges. The news from South Korea threw the cryptomarket into turmoil and hammered Bitcoin prices, which fell by around 31 percent in January.

Sandeep Phogat, Founder and CEO of Panaesha Capital, on the other hand says, that even though the Supreme Court did not grant a temporary stay against RBI's directive restricting banks to provide services to exchanges, this is far from the end of the crypto market in India.

"The Economic Affairs Secretary is already quoted saying that a regulatory framework is being built in relation to the cryptocurrency market in India. This framework would not have in the process of development, if the government had the intention to ban cryptocurrencies entirely," Phogat said. Panaesha Capital is a leading Singapore based fintech startup team of expert professionals dealing in cryptocurrencies.

Notwithstanding the enthusiasm, Indian entities are already rushing to cryptocurrency havens to bypass the uncertainty in the domestic market. Countries such as Malta and Estonia saw a major boost to their slowing economies after they adopted cryptocurrencies.

Estonia launched its e-residency programme in December 2014 making it easy to register a company in the country. Its representatives have been holding sessions in India to attract entrepreneurs there with a goal of 200 registered Indian startups.

Indium, an Ethereum-compatible blockchain network with a focus on utility apps and public goods, is one of the many examples of startups that have registered in Estonia.

There are alternatives that these companies can move to. But the verdict would fundamentally take away the convenience that Indian crypto traders and investors used to enjoy. Previously, they could simply invest in a cryptocurrency of their liking through Indian currency and opt for a trusted exchange for the same, based on its media presence, user reviews and ratings.

"Moving forward post the verdict, crypto investors would either have to rely on a stranger or a friend who wish to sell their digital assets for Indian rupees. That, in turn, warrants a lot of effort and would make crypto trade a harrowing experience," said Hussain.

Apart from trading, cryptocurrency was also emerging as a good funding option for startups. According to a research report by Ernst & Young, investors are now betting capital onto initial coin offerings at an average rate of $300,000 per second across the world.

The research studied 372 initial coin offerings (ICOs) around the world, which collectively raised USD 3.7 billion in funds, twice the amount of venture capital (VC) investment in blockchain projects.

In fact, about 10 percent of all Bitcoin transactions in the world take place in India alone. The US leads in investments into the ICOs, with USD 1 billion, followed by Russia and China with investments of over $300 million each.

"Liquidity of ICOs would be impacted post the verdict. This is rather unfortunate since the government did plan to support blockchain technology in India. A lot of blockchain-based businesses depend on ICOs to raise funds and gain traction, and the same would be impacted now," said WazirX's Shetty.