The grey zone of digital currency

Sundeep Khanna's book is an up-to-the-minute and competently written chronicle of how India interacts with virtual assets

Crypto Storm:  How India Became Ground Zero of a Financial Revolution

Author: Sundeep Khanna

Publisher: HarperCollins

Pages: 240

Price: Rs 499

This book offers an anecdotal, journalistic history of cryptocurrencies (CC), with a special focus on the desi experience. It doesn’t pretend to be definitive in its coverage, nor does it offer policy prescriptions. It actively avoids technical details, and it doesn’t delve into the pros and cons of crypto versus fiat currency. What it does offer is many snapshots into the Indian CC ecosystem and it is, thus, valuable in its documentation of the social and behavioural trends driving CC adoption.

According to the author, over 100 million Indians have used CC and Indians are responsible for the third or fourth-highest volumes of CC trading. CC are more popular in small towns. The vast majority of Indian CC traders are between 18 and 35 years old.  There’s a bewilderingly long list of CC-related scams and crimes — this is global of course, but India is very vulnerable. Multiple India-specific scams are mentioned alongside Thodex, FTX, and Silk Road, which featured many Indian victims and a few Indian “perps”.

Unpacking all those data points, the Indian infatuation with CC may be underpinned by deep mistrust of the conventional financial system. Events such as bank collapses, Nirav Modi-style frauds, and demonetisation have fuelled this suspicion. High unemployment and underemployment, plus enforced idling during the pandemic led to more interest in CC. Again, this trend was global but it may have been accentuated in India’s hinterland.

There are lots of tech-savvy Indians from humble backgrounds who aspire to live on Bitcoin Beach in El Salvador.  The 18-35 demographic has high levels of technical skills and smartphone penetration. The policy push for digital fiat payments and cashlessness may have actively contributed to generic comfort with virtual assets. There’s a huge legal gap due to the absence of digital data privacy and protection laws. This forces Indians to live with insecure personal data on a daily basis, so Indians also shrug off the risk of cyber-scams.

The advent of CC dates from that first seminal paper written by “Satoshi Nakamoto” in October 2008. These virtual assets have existed for 15 years. One would assume this is long enough for economists, regulators and policymakers to have made sense of CCs but the policy confusion that reigns is evidence to the contrary.

As CCs have soared, crashed and soared again, governments have been ambivalent about what should be done and regulators have struggled to keep up. CC makes fractional reserve banking and hence, loans cumbersome. Cross-border transfers become faster and cheaper, and of course, CC offers a form of anonymity.

India has either deliberately, or through lack of regulatory expertise, placed CC in a grey zone. The Reserve Bank of India (RBI) famously tried to cut the links between CC and the conventional banking system through an executive order in April 2018. The Supreme Court struck that order down in March 2020 allowing the CC ecosystem to access bank finance again.

The government has not banned CC. Neither has it legalised CC. It has merely imposed the highest taxation slab upon profits from CC, which is evidence it tacitly accepts CC as legally permissible. Amazingly, ministers have twice stated in Parliament that the government does not gather data on CC activity. Since it does gather data on all sorts of other financial transactions, this leads suspicious minds to assume there is some good reason to avoid gathering CC-related data, or to deny doing so publicly.

The tax impost has led to trading volumes moving to exchanges abroad, outside the tax net. There’s strong anecdotal evidence CC is used to transfer remittances (India has official inwards remittances of around $80 billion per annum). CC is also used to carry out other cross-border transactions to cut bank charges, avoid red tape, and evade the stringent controls of foreign exchange laws.

The author has extensively interviewed people with technical skills in the crypto space. He has solicited the opinions of financial experts. He has profiled CC traders and entrepreneurs, including a few criminals who have pulled off pyramid schemes, floated trading “syndicates”, launched scam coins and hacked CC exchanges.

A lot of techies make a reasonable living doing gigs in blockchain and CC since labour arbitrage operates here just as it does in IT services. There are the engineering graduates (and a nanotechnology Phd) who started off as small traders, and grew bigger as entrepreneurs.

The infamous “Sriki” claims to have hacked multiple exchanges. He had the digital keys of eight million crypto wallets in his possession when arrested. Other “whitehat” hackers profiled here got interested in CC when somebody paid them in CC for services rendered. There are the lawyers, including Ashim Sood, who successfully opposed the RBI, and the financial experts.  There’s a descriptive tour of Web 3.0 and the NFT space along with the famous names who have tried to cash in on that concept.

Clearly, cryptocurrency is an integral, if mildly embarrassing aspect of “Digital India”.  Since CC has lasted for 15 years and evolved through several boom-bust cycles, these are also likely to remain part of the global financial system. This book is an up-to-the-minute and competently written chronicle of how India interacts with these virtual assets.