The recent arrest of Unocoin founders Sathvik Viswanath and Harish BV for setting up a bitcoin ATM has sparked fear among cryptocurrency players in the country.
These players have expressed concerns over the arrest as the machine, reported by the media to be a bitcoin ATM, was just meant for subscribers to deposit and withdraw cash to and from their Unocoin account.
In a bid to bypass the Reserve Bank of India's (RBI's) April 6 diktat to banks on freezing the accounts of cryptocurrency exchanges, Unocoin had recently unveiled a bitcoin ATM in Bengaluru.
The ATM enabled KYC-verified customers to deposit and withdraw cash in legal tender to and from their respective Unocoin accounts.
However, it was taken down by Bengaluru's Cyber Crime department for having been installed without the necessary permissions.
"The ATM kiosk installed by Unocoin in Bengaluru's Kempfort Mall has not taken any permission from the state government and is dealing in cryptocurrency outside the remit of the law," the Cyber Crime department of the Central Crime Branch was quoted as saying in a News Minute report.
Unocoin said it had moved the ATM temporarily and blamed negative media reports for the police action.
"Our machine didn't go well with few mainstream media reports who projected it under a negative light," Unocoin said in a tweet.
Other exchanges considered Unocoin's ATM a bold step to bypass the central bank's direction. Ever since the RBI essentially blocked bank funding for them, cryptocurrency exchanges have been looking for alternative ways to deal with the challenge.
"Unocoin did it with a good intention, but had to pay the price for their innovation," Rohit Kukreja, Founder of KryptoMoney.com, told Moneycontrol. He added that it was a black day in the history of India's cryptocurrency market.
Industry players fear that the recent development may force cryptocurrency exchanges to take a step back and stop innovating. The RBI diktat has affected them, but they maintain that cryptocurrency transactions still take place in the country.
For WazirX, which moved to a system of trade based on hyperlocal peer-to-peer (P2P) transfers, growth over the past seven months has been continuous in terms of transactions, Nischal Shetty, the company's founder WazirX told Moneycontrol.
"The exchange has been reporting a 35 percent growth every month," Shetty said, adding that WazirX sees more than one transaction per minute.
In a P2P transaction, people holding cryptocurrencies such as bitcoin register with the exchange, which holds the rupee equivalent of the currency in an escrow account.
An escrow account is one held by a third party on behalf of two other parties engaged in a transaction. Assets held in escrow are watched over by the escrow agent till contractual obligations have been met. In this case, the escrow agent is the cryptocurrency exchange.
The cryptocurrency community in India feels that the reason behind the RBI's directive is a lack of knowledge about how these cryptocurrency transactions take place.
"The lack of knowledge about cryptocurrency transactions led to the ban," Shetty said.
The continued attempts by these exchanges indicate that the cryptocurrency community still has hopes to survive in India. It also expects the RBI to revisit its order and take a balanced approach to let the crypto space boom.
"I hope they set up a committee to understand the cryptocurrency space," Shetty said.
Regulating these tradings may seem like a win-win situation for the cryptocurrency community and the government as it would add another source of tax for the latter and provide a space for exchanges to flourish.
These exchanges believe that a complete ban may give rise to a different set of issues. In case the government does not regulate it, there may be a massive surge in such transactions in the black market, where people would buy and sell bitcoins in cash, Kukreja said.
Referring to Zebpay, which recently shut operations in India, he said that if the regulator does not take a balanced approach, the country may lose innovators and lag behind other economies in the cryptocurrency space.