The first time Bitcoin was known to facilitate currency flight on a large scale was during the Greek euro crisis of 2015. As the Greek economy went into a meltdown, there was an attempt to prevent currency flight by barring the exchange of euros for other currencies within Greece. The loophole was that Bitcoin isn't considered a currency. So, Greek traders got around this by buying Bitcoins and swapping those for the US dollar. Bitcoins have even facilitated enormous capital flight out of China in the past couple of years. Mainland traders have bought Bitcoins using the Chinese renminbi and then swapped those for hard currencies.
It is likely that Bitcoin has been used for the same purpose by Indians as well, especially after the Narendra Modi government’s demonetisation decision late last year. Rupee volumes of Bitcoin trades have risen considerably over the past 12-18 months. News reports also confirm that Bitcoin has been used as an alternative to conventional remittances as well. This avoids paying bank charges and arbitrages on the considerable premium of 5-10 per cent that Bitcoin receives in rupee-denominated trades. Non-resident Indians (NRIs) can buy Bitcoin in dollars and sell in rupees, picking up premiums.
Another major trend has been that of initial coin offerings (ICOs). There have been multiple types of ICOs. One is that of a start-up doing an IPO, which raises subscriptions in Bitcoin. These range from normal business ideas to wild schemes or frauds.
This is actually less popular now because the rise of Bitcoin has made investors reluctant to use it. Another type of ICO is the launch of yet another digital cryptocurrency – there are hundreds of Bitcoin imitations available now. Many of these ICOs are outright Ponzi schemes or based on dubious "blockchains" which are not actually blockchains and open to rampant manipulation. The advantage for a fraudster is that the ICOs are completely outside of normal regulatory controls because, after all, digital cryptocurrencies are not recognised as currency. China has overtly banned ICOs but it required special regulations.
This is very likely to happen in India as well. Once a signification proportion of India's major trading partners recognises these instruments and imposes controls, India will follow suit – it will have to. It would be good if that happened proactively, but the country is far more likely to follow in the footsteps of such controls being imposed abroad.
Will such recognition drive out a certain class of speculators? Sure. It will also make Bitcoin less attractive as a clandestine cross-border instrument. But it will enable its use for legitimate purposes. Right now, for example, you cannot buy a new car in India using Bitcoin because no auto-dealer would accept it. Ditto for Flipkart, Ola, Zomato, Paytm, etc, to name some businesses at the forefront of India's digital economy. If it is a recognised currency, that situation might change and allow for a more widespread usage. This could in itself reduce the arbitrage premium on rupee-denominated Bitcoin trades. So, be prepared for that particular shock if you are involved in Bitcoin trading.
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