Anger, shock, confusion as RBI bars banks from cryptocurrencies
"If you want to be like China, say it clearly," crypto traders shoot back after RBI's crypto ban. Initial coin offerings, which have started to become popular in India as an alternative way to raise funds, will also be impacted by this move.
Share Gift this article
Arti Singh
9 Apr 2018
What happened?
The Reserve Bank of India has barred banks and financial institutions from dealing in cryptocurrencies. In a statement, the regulator said, "In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs (virtual currencies)."
"We have decided to ring-fence the RBI regulated entities from the risk of dealing with entities associated with virtual currencies. They are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationship within a period of three months," BP Kanungo, deputy governor, RBI, said.
Banks will not be allowed to facilitate sale or purchase of cryptocurrencies, which means crypto investors will not be able to transfer money from their bank accounts to crypto-trading wallets like Zebpay, Koinex, Unocoin, Coinsecure, and others.
This will impact nearly 50 lakh Indians who have invested in cryptocurrencies, as well as India's crypto exchanges. Bitcoin investments in India are estimated to be in region of $2 billion.
Speaking in two voices?
A payments expert who spoke to ET Prime on the condition of anonymity called the decision "confusing" - while it does not directly ban cryptocurrencies, it makes trading in them impossible.
"On one hand, you put in place a panel to devise a cryptocurrency framework, and on the other hand, RBI comes up with this decision. Even if there is an issue with one or two players, you can't put the whole industry and consumers in a fix," he said.
"If the regulator behaves this way, then one wonders - what kind of economy are we creating? Why are we talking digital? What kind of message are we sending to digital entrepreneurs? If you want to be like China [which has banned cryotocurrencies], at least make it clear," he added.
End of the road for investors and exchanges?
Sathvik Vishwanath, co-founder of crypto exchange Unocoin, said the move will create panic among investors.
"It is going to be difficult for these people to find an exit route out of these currencies. These are middle-class people who will now be stuck," said Vishal Gupta, founder, Binex Trade.
Payment Council of India chairman Naveen Surya agreed. "The RBI's intent is to protect customer interest, however this move will only adversely impact the organised sector and the government. Cryptocurrency volumes and prices have dropped. This would force customers to sell at losses and make them more susceptible to taking illegal routes for trading."
"This is a back-handed way of crippling a system. Instead, the regulator should implement KYC requirements, risk mitigation, and general security-related measures for the sector," Surya added.
Initial coin offerings (ICOs), which have started to become popular in India as an alternative way to raise funds, will also be impacted by this move, says Aditya Dev Sood, chief mentor and general partner, Startup Tunnel. Sood fears the move might have deleterious effects on India's larger blockchain plans. "I expect things will change eventually, but this will make us few years late in the game," he said.
The RBI's move will push investors to either go to "OTC markets or overseas", believes Pankaj Jain, founder of BlockHack.io, a community promoting blockchain and crypto, and former partner, 500 Startups. "It's a very poorly thought-out decision. If they think crypto is going to go away, then they really don't understand this space at all. You are forcing these people to become criminals and go underground, and this is completely opposite of what the Narendra Modi government is trying to achieve," Jain said.
Some experts feel investors will find a way to keep crypto trading alive. In China, investors took to WeChat and formed groups to exchange cryptocurrencies when the Chinese government took a strict stance against the exchanges.
"In Venezuela people figured out a way to mine bitcoins and used it to buy Amazon coupons on the Internet. A similar case cannot be ruled out in the Indian market," said a Bitcoin trader who didn't want to be named. "Indians know many means to keep an underground market active. They might actually show the way to the world on how to [circumvent bans]."
Will cryptocurrency exchanges shut down? Or will they hang in by only supporting crypto-to-crypto trading? If they shut down, what will happen to the investors' money? No one really knows.
"I think some small exchanges will shut down, but the larger ones will continue if they can move to crypto-to-crypto," said Jain of BlockHack.io. Some new exchanges with innovative models might even crop up, he added.
Killing a potential golden goose?
According to Surya of the Payments of Council India, the government earned Rs50 crore-Rs100 crore in taxes from the crypto segment last year.
"The Indian tax department is still sending circulars to a lot of investors to pay taxes, and then you have the RBI saying you cannot convert it into rupees anymore. If you can't convert it into rupees, how will you be taxed?" asked Jain of Blockhack.io.
With inputs from Pravin Palande
(Disclaimer: The author is a Bitcoin investor.)
One of the two high-end
cars seized from scam accused Amit Lakhanpal's home in Mumbai on June 7; Praful
Gangurde/Hindustan Times via Getty Images
"If you want to be like China, say it clearly," crypto traders shoot back after RBI's crypto ban. Initial coin offerings, which have started to become popular in India as an alternative way to raise funds, will also be impacted by this move.
Share Gift this article
Arti Singh
9 Apr 2018
What happened?
The Reserve Bank of India has barred banks and financial institutions from dealing in cryptocurrencies. In a statement, the regulator said, "In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs (virtual currencies)."
"We have decided to ring-fence the RBI regulated entities from the risk of dealing with entities associated with virtual currencies. They are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationship within a period of three months," BP Kanungo, deputy governor, RBI, said.
Banks will not be allowed to facilitate sale or purchase of cryptocurrencies, which means crypto investors will not be able to transfer money from their bank accounts to crypto-trading wallets like Zebpay, Koinex, Unocoin, Coinsecure, and others.
This will impact nearly 50 lakh Indians who have invested in cryptocurrencies, as well as India's crypto exchanges. Bitcoin investments in India are estimated to be in region of $2 billion.
Speaking in two voices?
A payments expert who spoke to ET Prime on the condition of anonymity called the decision "confusing" - while it does not directly ban cryptocurrencies, it makes trading in them impossible.
"On one hand, you put in place a panel to devise a cryptocurrency framework, and on the other hand, RBI comes up with this decision. Even if there is an issue with one or two players, you can't put the whole industry and consumers in a fix," he said.
"If the regulator behaves this way, then one wonders - what kind of economy are we creating? Why are we talking digital? What kind of message are we sending to digital entrepreneurs? If you want to be like China [which has banned cryotocurrencies], at least make it clear," he added.
End of the road for investors and exchanges?
Sathvik Vishwanath, co-founder of crypto exchange Unocoin, said the move will create panic among investors.
"It is going to be difficult for these people to find an exit route out of these currencies. These are middle-class people who will now be stuck," said Vishal Gupta, founder, Binex Trade.
Payment Council of India chairman Naveen Surya agreed. "The RBI's intent is to protect customer interest, however this move will only adversely impact the organised sector and the government. Cryptocurrency volumes and prices have dropped. This would force customers to sell at losses and make them more susceptible to taking illegal routes for trading."
"This is a back-handed way of crippling a system. Instead, the regulator should implement KYC requirements, risk mitigation, and general security-related measures for the sector," Surya added.
Initial coin offerings (ICOs), which have started to become popular in India as an alternative way to raise funds, will also be impacted by this move, says Aditya Dev Sood, chief mentor and general partner, Startup Tunnel. Sood fears the move might have deleterious effects on India's larger blockchain plans. "I expect things will change eventually, but this will make us few years late in the game," he said.
The RBI's move will push investors to either go to "OTC markets or overseas", believes Pankaj Jain, founder of BlockHack.io, a community promoting blockchain and crypto, and former partner, 500 Startups. "It's a very poorly thought-out decision. If they think crypto is going to go away, then they really don't understand this space at all. You are forcing these people to become criminals and go underground, and this is completely opposite of what the Narendra Modi government is trying to achieve," Jain said.
Some experts feel investors will find a way to keep crypto trading alive. In China, investors took to WeChat and formed groups to exchange cryptocurrencies when the Chinese government took a strict stance against the exchanges.
"In Venezuela people figured out a way to mine bitcoins and used it to buy Amazon coupons on the Internet. A similar case cannot be ruled out in the Indian market," said a Bitcoin trader who didn't want to be named. "Indians know many means to keep an underground market active. They might actually show the way to the world on how to [circumvent bans]."
Will cryptocurrency exchanges shut down? Or will they hang in by only supporting crypto-to-crypto trading? If they shut down, what will happen to the investors' money? No one really knows.
"I think some small exchanges will shut down, but the larger ones will continue if they can move to crypto-to-crypto," said Jain of BlockHack.io. Some new exchanges with innovative models might even crop up, he added.
Killing a potential golden goose?
According to Surya of the Payments of Council India, the government earned Rs50 crore-Rs100 crore in taxes from the crypto segment last year.
"The Indian tax department is still sending circulars to a lot of investors to pay taxes, and then you have the RBI saying you cannot convert it into rupees anymore. If you can't convert it into rupees, how will you be taxed?" asked Jain of Blockhack.io.
With inputs from Pravin Palande
(Disclaimer: The author is a Bitcoin investor.)
Bitcoin scams: They are not about Bitcoin at all
Fraudsters allegedly
amassed thousands of crores by luring gullible investors with the promise of
Bitcoin- or blockchain-backed get-rich-quick schemes. But at their core, they
are just classic Ponzi schemes.
15 Jun 2018
One of the two high-end
cars seized from scam accused Amit Lakhanpal's home in Mumbai on June 7; Praful
Gangurde/Hindustan Times via Getty Images
Jivesh
(name changed) is seething. "We are already fighting perception and
regulatory issues," the co-founder of a Mumbai-based cryptocurrency
exchange spits out. "These scams … they taint my industry more than it
already is."
India's attempts to make sense of cryptocurrencies evoke many images, none more apt than the headless chicken. Look closely at Jivesh’s words. When a complex new system comes into being, it is to prevent 'perception' from running amok that 'regulation' comes in. But try telling that to the country's crypto community, which has gotten creamed from both sides. The public’s dangerous exuberance. Followed by the regulator’s rush to stifle it without quite banning it. We have written about the madness before.
Now, the double whammy is a hellish trifecta. Thanks to scams. Bubbling over like froth on top of a rancid pool.
We are not talking about crypto-jacking and demands for Bitcoin as ransom from faceless actors, no. This story has a different cast. Amit Bhardwaj, Amit Lakhanpal, Aquaoin, and possibly many yet-to-be exposed ones. Together, the quantum of their fraud allegedly runs into thousands — or tens of thousands — of crores.
The thing is, there’s an unspoken bit in Jivesh’s lament for his industry: For god’s sake, can we stop calling these "bitcoin/cryptocurrency" scams? For all practical purposes, these are just good, old-fashioned acts of swindling. The modus operandi is time-tested. Dangle a shiny new mousetrap, in this case, Bitcoin or some other virtual currency, and spin a yarn about a magical money-multiplying opportunity. Gullible people looking to make quick money — or a citizenship in the Caribbeans and Swiss bank accounts — sign up in hordes. The swindler then uses the money from each new lot to pay the people who signed up first.
Until, like all Ponzi schemes, the scheme runs out of cash.
The most prominent crypto scam in India stars Bhardwaj, a self-acclaimed crypto guru, whose company GainBitcoin reportedly duped 8,000 investors of INR2,000 crore. He is now in jail.
Last week, the Mumbai crime branch busted another INR500 crore scam, devised by The Flintstone Group, a shady real estate company run by Lakhanpal. The company launched its own cryptocurrency, MoneyTradeCoin (MTC), and lured investors with the promise of high returns, Swiss bank accounts, and those Caribbean addresses.
Earlier this month, the Caravan magazine reported on Aquaoin, a company which claimed to have come up with a blockchain-based water-recycling technology 'Water2All'. The report says it is a dubious scheme with links to other Bitcoin scams — including Bhardwaj’s.
Sullying the good name of crypto
On April 5, the Pune police arrested Bhardwaj. On the same day, the Reserve Bank of India (RBI) issued its circular to banks prohibiting them from dealing in cryptocurrencies.
For conspiracy theorists, this was fodder that somehow 'scams' and 'crypto' or blockchain, the underlying technology, are proximate ideas.
ET Prime reached out to several players in the ecosystem to understand how these scams work, and whether blockchain has anything to do with them.
Of course not, says Koinex founder Rahul Raj. On the contrary, they would be exposed instantly if blockchain was involved, he says.
"These schemes do not have a standard operating procedure. It is just that shrewd marketers make lucrative claims about possible profit gains, and traders, who are not fully informed about the nature of the business, fall prey," says Raj.
There is a plethora of initial coin offerings (ICO) in the market from various companies claiming to be 'blockchain innovation products', of which 90% are scams, claims the co-founder of the Mumbai-based exchange quoted earlier.
Nischal Shetty, founder of a new crypto exchange, WazirX, says the people who run these scams "aren't even technologists". According to him, these scammers set up fake websites and "claim" they have cryptocurrency that can be the next Bitcoin — available for cheap right now. "Gullible investors end up buying them. They actually don’t have any crypto or a tech team," Shetty says.
What do the different scams have in common?
They promise assured returns; and the only connection they have with cryptocurrency is that they ask investors to pay them a certain amount upfront, generally in cryptocurrency itself, explains Ashish Singhal, founder of cryptocurrency aggregator coinswitch.co.
For instance: Amit Bhardwaj attracted investors by telling them he will deploy the invested Bitcoin in mining (a process by which new cryptocurrencies are generated), and promised them to return a certain percentage every month, which, on adding up, would be much more than the initial amount the investor put in.
"The payoffs generally happen for a few months and this is done to win the trust of the customer and convince him to bring in more users — just like multi-level marketing schemes," Singhal says.
There may be a correlation here. Joel John, analyst at blockchain-focused venture capital firm Outlier Ventures, says regulation of financial instruments are usually not made with a single objective or use-case in mind.
Calling the entire industry "Ponzi" is irrational, John says. One does not call the banking sector a scam because some people use banking channels to trade in drugs. There are tens of billions of dollars worth of transactions happening on blockchains. Scams are a fraction of that. In India, the real problem is low financial literacy and lack of proactive regulation.
India's attempts to make sense of cryptocurrencies evoke many images, none more apt than the headless chicken. Look closely at Jivesh’s words. When a complex new system comes into being, it is to prevent 'perception' from running amok that 'regulation' comes in. But try telling that to the country's crypto community, which has gotten creamed from both sides. The public’s dangerous exuberance. Followed by the regulator’s rush to stifle it without quite banning it. We have written about the madness before.
Now, the double whammy is a hellish trifecta. Thanks to scams. Bubbling over like froth on top of a rancid pool.
We are not talking about crypto-jacking and demands for Bitcoin as ransom from faceless actors, no. This story has a different cast. Amit Bhardwaj, Amit Lakhanpal, Aquaoin, and possibly many yet-to-be exposed ones. Together, the quantum of their fraud allegedly runs into thousands — or tens of thousands — of crores.
The thing is, there’s an unspoken bit in Jivesh’s lament for his industry: For god’s sake, can we stop calling these "bitcoin/cryptocurrency" scams? For all practical purposes, these are just good, old-fashioned acts of swindling. The modus operandi is time-tested. Dangle a shiny new mousetrap, in this case, Bitcoin or some other virtual currency, and spin a yarn about a magical money-multiplying opportunity. Gullible people looking to make quick money — or a citizenship in the Caribbeans and Swiss bank accounts — sign up in hordes. The swindler then uses the money from each new lot to pay the people who signed up first.
Until, like all Ponzi schemes, the scheme runs out of cash.
The most prominent crypto scam in India stars Bhardwaj, a self-acclaimed crypto guru, whose company GainBitcoin reportedly duped 8,000 investors of INR2,000 crore. He is now in jail.
Last week, the Mumbai crime branch busted another INR500 crore scam, devised by The Flintstone Group, a shady real estate company run by Lakhanpal. The company launched its own cryptocurrency, MoneyTradeCoin (MTC), and lured investors with the promise of high returns, Swiss bank accounts, and those Caribbean addresses.
Earlier this month, the Caravan magazine reported on Aquaoin, a company which claimed to have come up with a blockchain-based water-recycling technology 'Water2All'. The report says it is a dubious scheme with links to other Bitcoin scams — including Bhardwaj’s.
Sullying the good name of crypto
On April 5, the Pune police arrested Bhardwaj. On the same day, the Reserve Bank of India (RBI) issued its circular to banks prohibiting them from dealing in cryptocurrencies.
For conspiracy theorists, this was fodder that somehow 'scams' and 'crypto' or blockchain, the underlying technology, are proximate ideas.
ET Prime reached out to several players in the ecosystem to understand how these scams work, and whether blockchain has anything to do with them.
Of course not, says Koinex founder Rahul Raj. On the contrary, they would be exposed instantly if blockchain was involved, he says.
"These schemes do not have a standard operating procedure. It is just that shrewd marketers make lucrative claims about possible profit gains, and traders, who are not fully informed about the nature of the business, fall prey," says Raj.
There is a plethora of initial coin offerings (ICO) in the market from various companies claiming to be 'blockchain innovation products', of which 90% are scams, claims the co-founder of the Mumbai-based exchange quoted earlier.
Nischal Shetty, founder of a new crypto exchange, WazirX, says the people who run these scams "aren't even technologists". According to him, these scammers set up fake websites and "claim" they have cryptocurrency that can be the next Bitcoin — available for cheap right now. "Gullible investors end up buying them. They actually don’t have any crypto or a tech team," Shetty says.
What do the different scams have in common?
They promise assured returns; and the only connection they have with cryptocurrency is that they ask investors to pay them a certain amount upfront, generally in cryptocurrency itself, explains Ashish Singhal, founder of cryptocurrency aggregator coinswitch.co.
For instance: Amit Bhardwaj attracted investors by telling them he will deploy the invested Bitcoin in mining (a process by which new cryptocurrencies are generated), and promised them to return a certain percentage every month, which, on adding up, would be much more than the initial amount the investor put in.
"The payoffs generally happen for a few months and this is done to win the trust of the customer and convince him to bring in more users — just like multi-level marketing schemes," Singhal says.
There may be a correlation here. Joel John, analyst at blockchain-focused venture capital firm Outlier Ventures, says regulation of financial instruments are usually not made with a single objective or use-case in mind.
Calling the entire industry "Ponzi" is irrational, John says. One does not call the banking sector a scam because some people use banking channels to trade in drugs. There are tens of billions of dollars worth of transactions happening on blockchains. Scams are a fraction of that. In India, the real problem is low financial literacy and lack of proactive regulation.
§ Companies that guarantee a return based on cryptocurrency are
scams, say experts. If a miner is guaranteeing you a return, it’s a scam. There
is no such thing as a fixed return. It could be totally possible that you buy a
Bitcoin from an exchange and it becomes worthless tomorrow. In the case of Amit
Bhardwaj, he lured investors to invest their Bitcoins in mining, promising a
10% monthly return.
§ Tempted to take part in an ICO? Make sure it isn’t an exit scam.
Once again, to identify a potential fraud ICO, first see if it is guaranteeing
profits. ICO projects are open source, and potential investors can assess their
code via a repository link like GitHub. If it is an empty repository, or if
your ICO doesn’t provide a link at all, then it’s more than likely a fraud.
§ Apart from an empty repository, a plagiarised or poorly written
white paper and an unrealistic roadmap are some signs of a fraud ICO.
§ Imbalanced allocation of coins also hints at exit scams. The
company that launches the ICO should not hold more than 10%-25% of the coins as
per industry standard. If it does, it has illegitimate intentions (read price
manipulation), the co-founder quoted earlier says.
§ There have been cases of luring investors on Facebook and
selling alternative cryptocurrencies (altcoins). John says, “Would you see
anyone selling stocks on Facebook? No, because it’s a regulated industry and
the BSE and NSE provide a good outlet to do those transactions. Lack of
regulation is forcing people to move to peer-to-peer channels, and this could
create a trap for retail investors to fall into.”
§ “A user might want to sell his altcoins to another user directly
to avoid the exchange fees,” says Sinha of Coinswitch.co. “However, [buyers]
have to be really cautious about who they are dealing with, as this industry is
not regulated in India and there is no one to protect the interest of the user
if he/she loses money.”
Regulatory
framework crucial
If Singhal is to be believed, in India, at some point, these Ponzi schemes had more customers than legitimate crypto exchanges.
"These scams were so widespread that they masked the incredible potential that Bitcoin and blockchain presented. Even the government took a while to understand the legitimate part of the technology," he says.
Shetty of WazirX agrees. He says it could be entirely possible that leaving the industry in a grey zone is giving a freeway to scammers, since they don’t face too much competition from legitimate businesses.
We had earlier written that India has around 50 lakh people who hold Bitcoin or other crypto-currencies. After the RBI's directive, the number may have come down. Both after finance minister Arun Jaitley's speech during the Union Budget for 2018, clarifying that Bitcoin is not a legal tender, and the RBI's crackdown, the price of Bitcoin fell sharply, but after a few days, it bounced right back. Several exchanges even reported hundreds of new signups on their platforms every day — signalling that there is still a set of investors who refuse to give up on crypto.
According to John, there are legitimate businesses in this sector, and that’s why there are 120 hedge funds handling USD5 billion between them which have made returns for their investors. But at the same time there are Ponzi schemes and hacks too. Strong regulations — not ban — are required to keep bad actors away from this space. The approach taken by the Securities and Exchange Commission in the US and the Financial Services Agency in Japan hold good lessons.
Reports have come out saying the RBI did not conduct any research or consultation before placing a ban on cryptocurrencies. In response to a Right to Information application filed by startup consultant Varun Sethi, the RBI said no committee was ever formed to analyse the concept of virtual currencies before its decision to bar banks.
The RBI has been challenged in the Supreme Court, and the case is scheduled for hearing on July 20. It remains to be seen if the taint of the scams influences the final outcome.
(Graphic by Hemal Sheth)
If Singhal is to be believed, in India, at some point, these Ponzi schemes had more customers than legitimate crypto exchanges.
"These scams were so widespread that they masked the incredible potential that Bitcoin and blockchain presented. Even the government took a while to understand the legitimate part of the technology," he says.
Shetty of WazirX agrees. He says it could be entirely possible that leaving the industry in a grey zone is giving a freeway to scammers, since they don’t face too much competition from legitimate businesses.
We had earlier written that India has around 50 lakh people who hold Bitcoin or other crypto-currencies. After the RBI's directive, the number may have come down. Both after finance minister Arun Jaitley's speech during the Union Budget for 2018, clarifying that Bitcoin is not a legal tender, and the RBI's crackdown, the price of Bitcoin fell sharply, but after a few days, it bounced right back. Several exchanges even reported hundreds of new signups on their platforms every day — signalling that there is still a set of investors who refuse to give up on crypto.
According to John, there are legitimate businesses in this sector, and that’s why there are 120 hedge funds handling USD5 billion between them which have made returns for their investors. But at the same time there are Ponzi schemes and hacks too. Strong regulations — not ban — are required to keep bad actors away from this space. The approach taken by the Securities and Exchange Commission in the US and the Financial Services Agency in Japan hold good lessons.
Reports have come out saying the RBI did not conduct any research or consultation before placing a ban on cryptocurrencies. In response to a Right to Information application filed by startup consultant Varun Sethi, the RBI said no committee was ever formed to analyse the concept of virtual currencies before its decision to bar banks.
The RBI has been challenged in the Supreme Court, and the case is scheduled for hearing on July 20. It remains to be seen if the taint of the scams influences the final outcome.
(Graphic by Hemal Sheth)
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