The cryptocurrency debate rages on. Even as Bitcoin prices recovered after a months-long dip, Finance Minister Nirmala Sitharaman said on August 17 that the cryptocurrency bill is ready and waiting for the Union Cabinet's clearance. The bill was supposed to be discussed during the Monsoon Session in the Parliament but was missed.
The crypto craze in India is also huge, with Indians having invested close to $6.6 billion in cryptocurrencies till May 2021. Around 1.5 crore Indians have said they have invested in the virtual currency. Currently, about 350 startups are working in the blockchain and cryptocurrency space.
In the latest edition of Crypto and India: The Way Ahead, hosted by Moneycontrol's Chandra R Srikanth and M Sriram on Twitter Spaces, Darshan Bathija, co-founder and CEO, Vauld; Pratik Poddar, Principal, Nexus Venture Partners; Jaideep Reddy, Leader, Technology Law, Nishit Desai Associates; and Gautam Chhugani, Director, Crypto Strategy, Bernstein spoke about future of the virtual currency
Excerpts from the conversation:
Why are investors showing interest in crypto despite the regulatory problems?
Darshan Bathija: A new wave of excitement around decentralised finance (DeFi) led to significant asset appreciation. Institutional investors at least grabbed some small positions in the crypto space, which led to further excitement. The moment the bull market picked up, the fundamentals of crypto companies have been very strong from a financial standpoint.
Pratik Poddar: One big reason is that the space has become too large to ignore; the second reason is more regulatory clarity. It will take time for the government to reach a solution that works for everyone. Still, with the advent of DeFi, it feels like we are on the cusp of actionable use cases, so it is easier for us to start learning about crypto. Investor interest is huge but not much of a change in regulatory terms.
Gautam Chhugani: When you talk about regulation, you need to separate the terms. One is how people trade crypto- on exchanges and how that can be regulated. The second is what Indian developers and founders are doing on building on the blockchain. When you talk about venture capital interest, all investors care for is whether Indian founders are building anything for the world; it is a large market, and these are the right founders.
Jaideep Reddy: I don't know if the numbers in India are outsized compared to the global numbers. I think the uptick in India matches the same globally; after March 2020, when the Supreme Court set aside the RBI circular restricting transactions in virtual currencies, that acted as an enabler for the Indian ecosystem. So India was able to join the global uptick in interest and use cases for blockchain. The second thing is a slight misconception that the bill will be a banning bill because, for now, we do not know the content of the bill. The latest report says that there will be some window for experimentation; although the content is not ready yet, a cabinet note is reportedly ready with why the law is necessary or not.
What has surprised you in the industry in recent times?
Darshan Bathija: The sheer amount of stimulus that the broader economies have infused into the markets just validated that the crypto has never been more relevant. The crypto world didn't surprise me, the fiat world did.
Pratik Poddar: The consumerisation that has happened of the products that are being built on blockchain is relatively new. For the first 4-5 years, it was only talked about in tech circles, but now with all the popular culture, it is being talked about more, which I did not imagine last year.
Jaideep Reddy: In the last year or two, it has become very entrenched in regular legitimate activity; although everyone who understood the space knew that it was not a suspect space but an impression was created that this is an under the radar kind of space. Post the Supreme Court judgment, no regulator has moved to issue clarity where required. Crypto is a borderless phenomenon, and India's exchange control regime is real friction between FEMA and crypto. I feel like there is urgent clarity required from FEMA so people can plan better.
Will you look at companies that are insulated from local regulations?
Pratik Poddar: The companies that we have been comfortable with are companies that are building for global markets in India. The regulatory challenges are low, and distribution channels are solved better. The other approach I have taken is to invest in picks and shovels businesses, to begin with, because I don't understand which market will grow or which token is doing better. If the market remains and people are exchanging tokens and storing assets, would an asset management platform be needed? If yes, would the rest make sense? Over time we will go deeper and understand what is happening, but this is the starting point.
What is a picks and shovels business in a crypto context?
Pratik Poddar: Fundamentally, what we are building is a tool for traders and investors investing in these coins. For example, Mudrex (Nexus’ latest crypto investment) started by saying that they want to create algorithms and buy and sell coins. They helped the traders with back-testing systems and tools to quickly make algorithms, but then they realized that 70-80% of people could not create good algorithms. So then they opened the marketplace so that people who are creating good algorithms will manage money for others, create better returns for everyone, and make some money in the process. When they built that out, it blew up. In this process, the only crypto insight I need is that if the system remains and the volatility is high, then Mudrex could be the Vanguard of the crypto world.
Is there an opportunity for consumer-centric crypto use cases? The government seems to be clamping down on crypto for payments.
Gautam Chhugani: We always think about using crypto for payments only when buying a pizza or a coffee. The big word being thrown around is the metaverse, which is essentially trying to build a new digital world where people play games, use finance and Defi-based banks, and buy NFTs(Non Fungible Tokens); it's an entirely new world. When people buy NFTs with Ethereum, is Ethereum a currency? Of course, it's being used as a currency to buy Ethereum; you can say Ethereum is an asset. My view on this asset versus currency is that we invent these narratives to pick into an existing regulatory framework or way of thinking.
Still, when we build something new, completely new use cases emerge. They are spending crypto for NFT payments. When people are playing a game, Matic is being used as a currency. Whenever something new is created, new use cases are native to that. It's not just going and buying a pizza. FTX (a crypto exchange) has a card that is a normal visa card backed by crypto, so when people buy pizza, they pay it with their cards like they usually pay, but what is being deducted from their account in crypto. This is the most obvious payment example, but we should not forget what is happening in the crypto world where people are spending Ethereum and Matic as currency, and some are holding it like an asset. So it's a flexible definition as of now.
How can India grab the opportunity of inviting miners since China has banned bitcoin miners?
Darshan Bathija: I don't see any intent for miners to move from China to India because of the lack of clarity around crypto. Given that they are investing in relocation, they would want to move based on a couple of parameters that make mining ideal—one being a very cold environment and the second being affordable and ideally a renewable source of energy. India is not known for that, so I don't see India being a mining hub, especially for these reasons.
Will we ever see a crypto token aligned to the performance of the company?
Gautam Chhugani: It is already happening; when you look at coins of exchanges like Binance, they have a burn and buyback mechanism linked to their revenues. 20% of their revenues get burnt for most exchange tokens. Whenever the performance is good or a major dislocation in market share between exchanges, the coin deflects that. At the same time, these coins are also used in the broader ecosystem, so the Binance smart chain ecosystem has BNB (Binance's native coin) as its native token. Hence, as the exchanges expand to broader decentralized ecosystems, you do that.
Darshan Bathija: So it is not just supply and demand but also the performance of these underlying performance of contracts. So there are some really strong decentralized products tied to the government token’s performance.
One of the main advantages of Bitcoin is transactions without fees. UPI is already providing seamless transaction service; the INR is fairly stable as well; why would an ordinary Indian get into using Bitcoin?
Jaideep Reddy: For domestic payments, maybe UPI is outperforming everything else. Of course, there is room for more competition. However, for cross-border payments, the traditional ecosystem is still quite flawed; it is slow, payments get lost, it's inefficient, and fees are high, so there is a use case in cross-border payments if there is clarity under FEMA. And second, any blockchain developer looking to do something interesting has to hold some crypto to pay the fees. So that's another reason any Indian software developer looking to write a program for a public blockchain would need crypto to pay the fees on the network.
Should SEBI be the crypto regulator in India?
Jaideep Reddy: It's more about the enabling framework created, which will decide who it is. For trading, it makes sense to have the competence of SEBI in terms of regulating how exchange functions, what are the best practices, etc. But again, SEBI may not have competence in other areas relating to crypto. The essential thing about crypto is, it's like the internet. It depends on how you are using it. The internet is being used for finance, but it is not that the IT ministry regulates it; it's the RBI that regulates that. Internet is being used for stock trading, and SEBI regulates. So I think it should be an activity-based test as to which regulator would have jurisdiction.
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