What if India Bans Crypto?

India Mar 25, 2021

It's a common question: is Bitcoin legal in India? The short answer is yes—for now. While past bans have been repealed and the current effort seems stuck in a will-they-won't-they holding pattern, reliable reporting from Reuters makes it seem all the more likely that a ban on crypto in India is coming soon. What's more, proposed Indian Bitcoin legislation would likely be much more total than restrictions in, say, the neighboring developing country of China. So the question at hand is what might happen if India makes Bitcoin illegal? In particular, what effects might this have on the crypto economy writ large? In a return to Coinmap's crypto world tour, we examine the state of digital currencies in the world's second-most populous country and what might happen next.

Bitcoin in India today

As we've discussed before, emerging economies like India seem to be natural fits for Bitcoin. As home to the second-largest population of unbanked individuals and one of the top receivers of remittances, India could benefit from crypto as a large-scale, low-cost way to manage, move, and spend money. What's more, distrust in government economic policies—like the overnight invalidation of fiat banknotes in 2016—are a strong motivation for many to find alternative ways to secure their assets. And though India has not been unscathed by the 2020 economic slump, the country is projected to have the world's highest economic growth rate in 2021, meaning there may be more people seeking opportunities to easily participate in the world economy.

India has the second largest unbanked population in absolute terms.
India has the second largest unbanked population in absolute terms. By Global Findex and the World Bank.

And indeed it seemed as if Indian policymakers were realizing the potential of blockchain-based systems when, in early 2020, India's Supreme Court formally legalized trading and holding crypto. This coincided neatly with COVID-inspired moneyprinting and weakened rupee to usher in a brief surge in crypto trading volumes on the subcontinent. And amidst all of this, the decades-long rise of IT centers in India has meant there is no shortage of technologically inclined young people eager to work, invest, and hit it big in new fields like crypto.

So how did we get here?

On the surface, it seems that the 2021 crackdown on crypto is part of a years-long anticorruption and anticrime push by Prime Minister Narendra Modi. Similar justifications—cracking down on black markets, fraud, and scams—were used to remove large-denomination banknotes from circulation in 2016 and to initially ban crypto in 2018. While one can certainly see the logic there, a total crypto ban was painting with an extremely broad brush, especially after last year's court ruling. So it's unlikely that some renewed commitment to anticorruption is the only—or perhaps even the real—reason behind the resurgence of anticrypto efforts in India.

One need only look at the increasingly authoritarian turn of the Modi government and how similar strongmen have dealt with crypto to conclude that there are larger forces at work. It appears to be a growing trend that highly centralized economic superpowers like India, China, and Russia see crypto as a threat to those countries' ruling elites. Instead, these countries are taking steps to preserve for as long as possible the traditional financial systems that have made them powerful up to this point—India's is merely the latest. It also appears to be the harshest step, given that the rumored legislation would criminalize trading, mining, issuing, and possession of cryptocurrencies and could carry penalties from large fines to multiple years in jail. Comparable countries, meanwhile, have regulated only mining and trading or have regulations that are easy to work around.

Howdy Modi! Prime Minister Narendra Modi has pushed his party farther toward nationalism, and a crypto ban may help him retain power.
Howdy Modi! Prime Minister Narendra Modi has pushed his party farther toward nationalism, and a crypto ban may help him retain power. Public domain photo.

What effects might we see if India bans crypto?

In the short term...

Of course, it's a fool's errand to attempt to foresee specific effects of sweeping economic policies, especially in such a large and diverse country as India. It's also not clear how or even if a ban could be enforced, though some have proposed banning the IP addresses of crypto exchanges. Even less clear is whether enforcement action would be carried out uniformly given the country's struggles with corruption. All that said, there are some clues to what an Indian crypto ban may trigger.

In the six months following a ban—the timeline proposed by those in the know—Indian crypto holders, presumably including companies, would have a chance to liquidate their crypto assets legally. Depending on how many hodlers there actually are in India—some estimate around 7 million—and how many choose to comply with the new law—likely a much lower number—there could be a short term influx of crypto sellers in the markets. Depending on the enforcement measures that accompany legislation, we could look to Nigeria where, thanks to legal uncertainty, Bitcoin was trading at a 46% premium on peer-to-peer exchanges in the country earlier this year. In this case, regional prices could skyrocket.

Nigeria's massive trade volumes and high Bitcoin prices may be a blueprint for a post-ban India.
Nigeria's massive trade volumes and high Bitcoin prices may be a blueprint for a post-ban India. By UsefulTulips

If crypto holders want to try to liquidate through exchanges, this could be a signal to investors elsewhere—especially institutional investors that have shown a recent interest in crypto—of more crypto on the market ready to be snapped up, and competition may ensue. In this case, too, prices very well may rise, though this time on a wider scale. On the other hand, if too many Indian hodlers try to liquidate all at once, it could well become a buyer's market and prices could dip slightly until all those who want to get out are out.

...and in the longer term

But interestingly, it doesn't seem that many want to get out. Rumors of a crypto ban have actually increased interest in Bitcoin in India, according to analysts as high up as the CEO of Binance. New users and record trade volumes are already pushing prices up, and noncustodial wallets may make it even harder to enforce already difficult-to-enforce actions—meaning those who are able to get their hands on crypto before a ban could hold on to it with very little trouble. In this case, trade volumes may fall some but prices may remain unaffected and the status of crypto might remain somewhat stable.

Even if crypto becomes a legal gray area (or worse), it seems that the seeds of crypto have been well and truly planted—and even members of the government seem to see the redeeming qualities of crypto technologies. There doesn't seem to be any question about there being a push toward banning cryptocurrencies, but none other than India's Finance Minister has stated that there will still be "a window available for all types of experiments in the crypto world." At minimum this suggests that there maybe carve-outs for blockchain-related businesses or perhaps even CBDCs even as individual trading is made more difficult. And who knows, this ban may be quickly overturned as well.

So there you have it for your passage to India, crypto-style. Though there is plenty still to play out in South Asia, what is certain is that events in the second-largest country won't leave the crypto economy unchanged. To keep up to date with these and other happenings, stay tuned to Coinmap! And don't forget to follow us on social media, including on our brand-new Instagram page!

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