In India, the current status of cryptocurrencies is all muddled up, meaning neither it is legal, nor it is illegal. While not being completely banned after the apex court reversed the ban of decentralized currencies by the country’s central bank – the Reverse Bank of India in March 2021 unofficially instructed the financial institutions in the country not to transact with cryptocurrency platforms.
Amid all the uncertainty, HDFC, one of the largest banks in India, has come out with a report with an interesting comment on the future of cryptocurrencies in the country. The report titled “Cryptocurrencies: Fad or Forever?” predicts cryptocurrency as a potential asset class that can be used to hedge against volatility in other major asset classes. But, with the Reserve Bank getting involved in the crypto sector, crypto space needs to closely monitored, says the HDFC Bank report.
A Matter of Time
The chief economist of HDFC Bank, Abheek Barua, said in the report that “it is just a matter of time before Indian investors have legal access to crypto plays.” Additionally, in terms of portfolio diversification, the report was optimistic, that like gold, bitcoin, too, can evolve into a major asset class. “We find a positive correlation between gold and Bitcoin’s daily returns. Though the correlation was weak to start with, it has been rising. From a portfolio diversification perspective it has the properties of being a good hedge,” says the report. The report also cautioned that a strong correlation between the price of bitcoin and google searches implying that it is possibly more of a fad.
One of the key positives highlighted in the report is the significant increase in interest in cryptocurrencies. The report emphasized the performance of Bitcoin, its returns, and the increasing number of non-zero balance Bitcoin addresses- 33 million in 2020 v/s 3.9 million in 2014. “This indicates that the digital currencies are here to stay and are not going away in a rush,” the report added.
Banks Cutting Ties With Indian Crypto Exchanges
On the other hand, some of the other leading financial institutions in India, such as ICICI Bank, Paytm Payments Bank, and Yes Bank, have cut ties with the crypto industry. Thus, most of the cryptocurrency exchanges are left to fend for themselves to find a solution to the tremendous challenges thrown in front of it by the major Indian banks. But for the moment, the government of India is in the process of forming a new committee of experts to formulate a bill on cryptocurrencies.
Are India’s Crypto Exchanges Mulling the Legal Route Again?
The cryptocurrency exchanges in India are reportedly considering the legal route once again and may approach the top court against the central bank’s directive. This comes days after an informal statement given by the Reserve Bank of India. Almost all the crypto exchanges in the country had to pause taking deposits in Indian Rupees in the country as banks withdrew their services.
Reports indicate that the crypto exchange platforms are now mulling to approach the apex court to get a possible solution. The primary complaint of these crypto exchanges is that the RBI’s appeal, although unofficial, overlooks the Supreme Court’s judgment from March 2020. The Supreme Court of India had called the unofficial ban on cryptocurrencies unconstitutional and canceled the ban. As per the RBI’s directive in 2018, financial companies in the country were asked by the central bank, from working with crypto firms.
Yet, it can be argued that the banks have the right to withdraw services from anyone whom they find untrustworthy. They may even claim that regardless of RBI’s outlook on cryptocurrencies, the bank believes the market is too unstable for lending. Meanwhile, the crypto exchanges may have to argue and prove that such thinking is speculative and bias towards them.
What is the Possible Solution?
To make things easier, an official order from the central government is what the crypto sector needs to close all the uncertainty. There was a possibility of a crypto bill being passed in the Budget session of 2021, but it seems to have been laid off. An Economic Times Report had also disclosed that the Indian government has a change of heart regarding cryptocurrencies. Instead of banning them, the government now wants to study the ways to regulate them. Thus, they are forming a new committee on cryptocurrencies, which may submit a report soon to the government. The report says that the Indian government believes that the previous Subhash Garg Committee’s report on cryptocurrencies has become outdated. Thus, a new report is required for a fresh outlook on cryptocurrencies.
Additionally, the central bank has made announcements about creating a central bank digital currency (CBDC) for the Indian rupee, which could be one of the probable reasons for banks to take a negative stand against cryptocurrencies in India.