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Cryptocurrencies 2018 special report

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04 CRYPTOCURRENCIES Crackdown on crypto companies Once a front runner in cryptocurrencies and crypto exchanges, India has now sought to shut down trading E ver since he was elected in 2014, India's prime minister Narendra Modi has pledged to use technology to acceler- ate national development and boost growth. Promising to make govern- ment more transparent and innova- tive, Mr Modi says he will overhaul healthcare, banking and govern- ment services. He has already announced that India is partnering with Google to bring wifi to 500 railway sta- tions across the country. He also says he will aggressively expand the nation's broadband network to 600,000 villages. But the Indian government has struck a more cautious tone when faced with the often tumultu- ous rise of cryptocurrencies and crypto exchanges. In recent years, India has become a regional leader for cryptocurrencies and trading exchanges. According to industry fi gures, in May 2017 India accounted for almost 10 per cent of all global cryptocurrency trades. In April, the Reserve Bank of India abruptly introduced meas- ures to halt the f low of digital funds into the banking sector. The bank said all regulated financial companies must end services to individuals or businesses dealing with bitcoin and other cryptocur- rencies using blockchain technol- ogy within 90 days. T he new r u les, which come into effect on Ju ly 5, effect ively ba r t raders a nd investors from using India's reg u lated ba n k ing system to buy or sell v ir t ua l cur rencies for r upees on line. Facing a pos- sible lega l cha llenge, t he cent ra l ba n k later appea red to concede t hat it s ba n wa s not ba sed on deta iled resea rch. The Indian government's caution mirrors that of a number of oth- ers around the world. Nations such as Algeria and Bangladesh have all prohibited the use of cryptocur- rencies and last September China moved to shut down all cryptocur- rency exchanges. India's decision coincided with a r uling by neighbouring Pa kistan's centra l bank that cr y ptocur- rencies were no longer deemed lega l in the Islamic republic. The State Bank of Pa kistan told other banks and f inancia l ser vices pro- viders to refuse any customers seeking cr y ptocurrency transac- tions. The bank a lso said those using cr y ptocurrencies to transfer money outside of Pa kistan could be prosecuted. Yet it wasn't until recently that the Indian government began to issue warnings on a sector which is esti- mated to have added 200,000 new users each month. Last December, the Indian fi nance ministry described digital currency invest- ments as being like "Ponzi schemes" and urged caution when investing in cryptocurrencies. The ministry said investors transacting with digital currencies were doing so "entirely at their risk and should best avoid par- ticipating therein". In addition, the fi nance ministry highlighted possible national secu- rity threats and said the nature of encrypted transactions meant they could be used for activities such as "terror-funding, smuggling, drug traffi cking and other money laun- dering acts". Crypto specialists have viewed the Indian central bank's ruling as a glaring example of bureaucratic overreach that could stifl e innova- tion. "The way I see it, the Indian government, or the bureaucratic system, is not really profi cient in understanding new technological advancements like cryptocurren- cies or blockchain," says Awanish Rajan, co-founder and chief execu- tive of www.idap.io, a forthcoming crypto-derivatives exchange, regis- tered in Estonia, preparing an initial coin off ering. Mr Rajan says Indian reg ula- tors were seeking top-down con- trol over cr y ptocurrencies and exchanges. " They are not pro- f icient in understanding how it works and they couldn't see what was happening in the cr y pto space. They felt they were los- ing their authority over the sys- tem and didn't rea lly understand either blockchain or cr y ptocur- rencies. My sug gestion was to fol- low a countr y which has ta ken a good lead on this, for example Japan. But that hasn't happened." Yet even as India prepares for the new rules to come into eff ect, a number of companies have chosen to fi ght the central bank's decision in court. Other exchanges, such as Unocoin, are considering moving abroad to another country. "The innovation that has hap- pened in the Indian crypto-ex- change space over the last couple of years will be stifl ed," says Anirudh Rastogi, managing partner at TRA Law, a Delhi legal fi rm. TRA Law is representing CoinDelta cryptocur- rency exchange in challenging the Indian central bank's decision. Mr Rastogi warns that a ban isolating cryptocurrencies from the banking sector would either push companies abroad or underground into an ille- gal "dark" sector. "The promising companies are going to fl ee outside the country," he says. "Worse is that the Reserve Bank of India (RBI) directive comes in advance of a decision by the govern- ment on the legality of and regula- tory mechanics for cryptocurrencies. If the government or the court were to decide in favour of crypto busi- nesses eventually, the RBI directive would have by then taken a complete toll on the businesses, innovation and wealth in cryptos that has been created so far in the country." CoinDelta founder Shubham Yadav says the r uling had a big impact on business; new users on the trading platform had fa llen from a pea k of between 7,000 and 8,000 a day to just 50 to 60 af ter the r uling. "We are an exchange, so it has impacted us on a huge sca le," he says. " The RBI's deci- sion a lso has a lot of other unin- tended consequences. W hen the RBI asks banks to shut down the accounts of businesses like ours, they are effectively asking them not to suppor t companies like us. We use these accounts for our operating expenses and sa laries. This means we have to think about banking elsewhere." The central bank has said it is exploring the possibility of creat- ing a digital currency of its own and Indian state entities have already shown interest in using blockchain technology to tackle challenges ranging from land registration to managing healthcare records. Critics hope the government will quick ly rela x the banking ban on cr y ptocurrencies in favour of a ta x. " They ta lk about blockchain without rea lly understanding how it works," says Mr Rajan. "You can streamline your governing, but that is not blockchain. The cur- rent expectation is that the gov- ernment will come up with some- thing like a ta x, which would be more acceptable. That would be much better than seeing a para llel cr y pto black economy." INDIA BURHAN WAZIR Crypto specialists have viewed the Indian central bank's ruling as a glaring example of bureaucratic overreach that could stifl e innovation Kuni Takahashi/Bloomberg via Getty Images 01 The Reserve Bank of India has conceded that the ban announced in April was not based on detailed research 02 Prime minister Narendra Modi had pledged to use technology to accelerate national development and growth, promising to make government more transparent and innovative 01 02 Paul Miller/Bloomberg via Getty Images

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