The Supreme Court of India opened the door to cryptocurrency in May of this year – if only by a crack. Not long before, in March, India’s highest court overturned a ban on cryptocurrencies that the Reserve Bank of India (RBI) put in place in 2018. These pivotal actions have freed up the market for cryptocurrencies and generated much enthusiasm among Indian investors.
Nischal Shetty, CEO of local crypto exchange Wazirx, said at the time, “Today’s a historic day for the entire Indian crypto ecosystem. This positive judgement will open doors to massive crypto adoption in India. It proves that we can now innovate, and the entire country can participate in the blockchain revolution.”
His enthusiasm was echoed in the Indian Parliament; “Cryptocurrency is inevitable,” MP Subramanian Swamy said.
Now that the door is ajar, what’s next? Will cryptocurrencies gain traction in India? What will drive market adoption there? What should crypto leaders be thinking about when entering this market?
Here are four key forces driving crypto adoption in India:
- Currency fluctuations and mismanagement
India citizens have long been subject to fluctuations in the country’s currency value relative to other trading currencies such as the US dollar and the euro. The country has to import most of its oil, which is paid for in US dollars, creating frequent hard currency limitations. As a result, the rupee has been subject to persistent erosion in its dollar-denominated buying power. Over the last 10 years, the rupee has gradually declined in value by almost half in US dollar terms.
Savvy Indian individuals and businesses are well aware of this problem. Buying imported goods in India is a tricky business when the currency isn’t stable. Furthermore, as India’s middle class develops, its appetite for imported goods rises, putting further downward pressure on the currency.
Inflation in India is persistent and has run from a low of 4.5% to a high of almost 10% annually for decades, further eroding purchasing power at home and abroad. To make matters worse, the Indian government demonetized the 500 and 1,000 rupee notes in a surprise move in late 2016. This action – the equivalent of invalidating the US $10 and $20 notes with immediate effect – was putatively aimed at so-called “black money” or money gained through illicit means such as bribery or criminal activity. Estimates vary, but it’s commonly believed that Indians hold about $1.5 trillion in black money at home and abroad.
Crypto industry leaders in India are divided as to whether some of the newfound interest in digital currencies is in fact driven by the aggressive monetary policies of central banks in response to the economic downturn from the Covid-19 pandemic.
“With massive money printing not only in India but globally, what it is doing is decreasing the purchasing power of the rupee gradually. There is a very small percentage of people in India who are noticing this and are hedging their portfolios towards crypto,” said Sumit Gupta, founder of CoinDCX.
Bitcoin has risen around 42% over the past year in rupee terms, partly propelled by depreciation in the Indian currency.
Declining confidence in the rupee and the government’s ability to manage it will be a major driver of interest in cryptocurrency in India, in an attempt to both preserve value and get away from the government’s apparently capricious confiscatory policies.
- Scale
India has a population of over 1 billion people, with a middle class of over 300 million. Wazirx CEO Shetty said, “With over an 1 billion population, the Indian market is a sleeping giant. I’m confident that this judgment will have a positive impact on the global crypto ecosystem. This will lead to more startups in crypto in India. Hundreds of startups will be created.”
This population consists of a large proportion of young, digital-savvy people who will be more open to cryptocurrency adoption, which will be enabled by improving internet standards across the country, as well as increasing access to smartphones at affordable prices. According to the EY Global Fintech Adoption Index 2019, India is one of the emerging markets that is leading the way with 87% of its population adopting fintech in some form.
There are also nearly 190 million unbanked adults in India. Blockchain has the potential to increase financial inclusion in the country by providing access to digital assets.
- Legalisation and regulation
Overturning the RBI ban is a key step in India’s adoption of cryptocurrencies, but it’s only the start. To ensure that the digital economy moves in the right direction, it’s vital that the RBI develops regulations around the technology. Most likely, they will follow the lead of other countries when it comes to defining the rules for crypto in India. It’s probable that they will regulate the ability of crypto exchanges to facilitate funds leaving the country. India spends a great deal of resources managing its currency and the RBI will be very careful to ensure that cryptos don’t have a back exit, which could lead to a devaluation of the rupee.
More importantly, as we are seeing with the introduction of the Payment Services Act in Singapore, the regulation of cryptocurrencies will legitimize their use in both business and individual contexts.
- Huge domestic and foreign remittances
India’s overseas diaspora is well known. The Indian government estimates the global diaspora to be “at over 30 million people… and recognizes the importance of Indian diaspora as it has brought economic, financial, and global benefits to India.” This overseas population sent over $79 billion back to India in remittances in 2018. When sent through traditional channels, these remittances are expensive and time consuming, but new cryptocurrency-based international remittances will be faster and cheaper and can be sent directly to the recipient’s mobile phone.
What’s less well known is that India also has a significant internal migrant labor population, numbering close to 139 million people, according to National Geographic Magazine. These people usually receive their pay in cash, and then they have to go to a bank to send it back home. A crypto-based system would make their regular remittances much faster, easier and cheaper.
The above factors will play an important role in the development of cryptocurrency in India in the coming months and years. The mass adoption of a digital economy will also be heavily influenced as the world experiences the full economic impact of the Covid-19 pandemic.
With a range of underlying factors supporting India’s case for using cryptocurrency and a growing appetite for it among its citizens, the country could well be the next “crypto hub.”
Pavel Matveev is the CEO and co-founder of Wirex Ltd and a strong advocate for the mass adoption of cryptocurrencies.