A shift from peer-to-peer to exchange-administered payments has fuelled a sharp rise in cryptocurrency trading in India since March 2020. The Supreme Court invalidated an Reserve Bank of India (RBI) ban on crypto payments on 5 March, allowing banks to do business with crypto exchanges.
These exchanges resumed rupee transactions, allowing their customers to convert rupee to cryptocurrencies and vice versa. The rebound in exchange trading has been accompanied by a thaw in mainstream responses to cryptocurrenies.
Earlier this month, in a discussion with a business channel former RBI governor Raghuram Rajan said cryptocurrencies could have a role to play in a world in which central banks issue their own cryptocurrencies. On 24 August, the International Monetary Fund (IMF) released an educational video on cryptocurrency.
Crypto trading took a huge hit when RBI banned crypto-related payments in April 2018. Banks stopped providing services to exchanges, preventing them from banking transfers in the Indian rupee. This impacted the crucial first and last leg of cryptocurrency investment in which a trader invests in rupee and books profits in rupee.
Exchanges responded by shifting focus to crypto-to-crypto trading and some exchanges like Zebpay shifted base out of India. However, crypto exchanges also devised peer-to-peer systems to get around this problem, in which users connected through an exchange but paid each other directly.
However, these were clunky and inspired little trust. “It takes time to add beneficiaries and transfer money to peoples’ bank accounts. This can be anywhere from 30 minutes to several hours. Most people don’t have the patience to trade in this manner. Our volumes dropped by 90% when RBI payments ban came into effect in August 2018,” said Arjun Vijay, co founder and chief operating officer of Chennai-based Giottus Cryptocurrency Exchange.
There is also an element of trust involved in disclosing bank account details to third-parties and making transfers to unknown accounts. “We found a workaround-people who would receive and make payments for a fee (called hubs). Though this was not a perfect substitute, it helped us recover some lost volumes as it was superior to the solutions available to users at that time,” added Vijay.
WazirX, which is the largest player in the market today sought to retain volume post the ban by enforcing an escrow system on the ‘crypto-leg’ of a rupee-to-crypto transaction. The exchange would only release cryptocurrency to a buyer once the seller confirmed receipt of the payment in rupees.
In the meantime, industry players challenged the RBI ban in the Supreme Court and a decision in March 2020 overturned the ban. “As soon as the Supreme Court struck down the banking ban, WazirX resumed the instant rupee deposits and withdrawals option. Our number of users has gone by three times since then. Even though peer-to-peer trades continue to happen on WazirX, the demand for instant rupee deposits and withdrawals is way higher,” said Nishal Shetty, founder, Wazir X.
“The combined volume of rupee market on exchanges has jumped from about ₹2 crore per day when there was only peer to peer to about ₹50 crore per day with exchange based trading,” said Neeraj Khandelwal, co-founder, CoinDCX, another cryptocurrency exchange.
Many exchanges such as Giottus and CoinDCX now offer instant rupee transfers up to certain limits. Giottus has gone one step further and now offers two-way quotes for new users who are unfamiliar with order book matching. This opens up the crypto market to users unfamiliar with order-matching and how stock exchanges work. These users can simply buy and sell from the exchange itself.
Meanwhile, a draft government bill banning crypto trading and criminalising even possession of cryptocurrency hangs like a damocles sword over the industry. However, as the government dithers between a complete ban and a softer regulatory system, more and more Indians are taking to crypto trading.
After crashing to around ₹3.65 lakh per bitcoin in March, the price has gone up 2.4 times to ₹8.4 lakh, at present. The massive rally has coincided with the Supreme Court decision, providing further tailwind to crypto adoption.