The Indian government has been signalling its discomfort with all things cryptocurrencies for several months now. It did this by decisions taken by various arms of the government and regulators to make trading in virtual currencies more and more difficult. It was only on April 5 and April 6 that it announced and clarified with no room for doubt that it was serious about keeping virtual currencies out of India.
To impartial observers of the cryptocurrency scene in India, the April notifications from banking regulator Reserve Bank of India were not surprising: financial regulation in India has always erred on the side of caution and the ministry of finance and RBI were only keeping to its conservative stance.
But, here’s the rub: it is not just the cryptocurrency investors, platforms and others who get hit by the latest government decisions. Developers and companies working on open blockchain projects that need and use tokens will face a tough time doing so, too — virtually signalling that blockchain technology in India will die before it grows out of its infancy.
This needs to be a wake-up call for a government that has publicly stated its “cryptocurrencies are bad, blockchain technology is good” position on the decentralised, publicly distributed technology, say experts. As they tell us in this story, never can the twain be separate.
Let’s back up a little first: in its April 6 notification, ‘Prohibition on dealing in Virtual Currencies’, the RBI covered all commercial and co-operative banks, payments banks, small finance banks, NBFCs and payment system providers when it said: “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs.”
In other words, nothing in the world of real currencies (called fiat) would be allowed to touch the world of virtual currencies. At least, legally. There would be illegal modes of cryptocurrency conversions always available but, if you were to play by the book, there would be no way to be able to play in cryptocurrencies. To be sure, there are a few options open like PayPal and others today but it’s only a matter of time before the government’s long shadow falls on them.
Blockchain development hurdle, migration
How do the cryptocurrency notifications knock out blockchain developers and companies in India? Because the two are closely interlinked in the real world of the emerging frontier technology.
A blockchain developer and crypto enthusiast, Sumukh Shetty says developers will find it hard to deal with regulatory uncertainty. “The current regulations make it hard to raise money as a blockchain startup and makes it impossible to legally build dApps in India,” says Shetty. dApps is industry jargon for decentralised apps.
Typically, developers working on blockchain projects get paid for their work in the form of crypto tokens from the projects. If you just look at the token allocation for various tokens in their ‘Terms of Token Sale’, you will see that a certain percentage of tokens are pre-allocated towards the developer pool – used to pay developers. What changes now is that an Indian developer may be able to receive tokens but there is no legal way to convert them into Indian rupees. Unless the developer is willing to go underground and accept conversion terms in the market that are essentially illegal, his or her tokens will be worthless.
Nitin Sharma, an investor with a couple of blockchain companies in his portfolio, feels that the amount of regulatory and compliance processes required – for instance, conversion into US dollars and then into Indian rupees – will deter most developers from that route.
What happens to an emerging tech employing thousands of developers and consultants in India working on international projects needs to be studied, says Sharma. “Some would argue that the new wave of global blockchain projects and ICOs presents a massive opportunity for Indian talent to contribute their skills and bring high-end jobs and income to India. However, many of these projects would come with token-based incentives. Has the government at least symbolically sent a negative signal about everything crypto, discouraging many who would be unsure of how to bring such income to India smoothly?” he asks.
Many in the market seem to have foreseen this. “Most companies were sceptical of Indian laws and had proactively moved their incorporation to Singapore. The guys who were trying to work with Indian laws are no more considering it an option,” says Shetty without naming companies.
Most ICOs, even the ones with Indian teams, had moved to jurisdictions that are more crypto-friendly as early as last year to avoid dealing with these uncertainties. Also, Shetty and others in the ecosystem talk about how blockchain startups, developers and cryptocurrency exchanges in India are planning to migrate their businesses overseas. Cryptocurrency exchanges including Zebpay, BuyUcoin, Unocoin, CoinSecure, and BTCX India are reportedly planning to move their company headquarters to crypto-friendly nations to continue smooth operations.
What will work well without hindrances, to be sure, will be private blockchain projects, but that doesn’t excite blockchain enthusiasts much.
“Blockchain was created as a decentralised tool for collaboration. The crypto economics helped keep the network strong. Most private blockchain projects are regular databases with user access controls. They could call it DLT, it doesn’t change what it is,” says Shetty. “ It’s sad that the government thinks DLT and blockchain are the same. This is as revolutionary as the invention of the internet and the government is being ignorant about its potential.”
Effect on blockchain startups
There are some who are sidestepping project startup troubles on account of Indian regulation coming in way of tokens such as Ether, meanwhile. Nilesh Trivedi is a blockchain developer who has been working on his project Indium, an Ethereum-compatible blockchain network with a focus on utility apps and public goods. The community-driven network already has over 125 developers, a majority of whom are from India, using it.
The Indium network uses a native token, also called Indium, which is allocated to app developers on its network via community consensus. Earlier on in the project development, Trivedi realised the challenges involved in building apps with platforms like Ethereum and decided to go for a native token instead.
“A lot of the developers will need access to protocol tokens like ether while developing decentralised apps or working on blockchain projects. Without a proper or legal way to access or purchase these tokens, it makes it very difficult for the developer to work,” says Trivedi.
Also, without a proper user base in India where tokens can be accessed and used without much hassle, blockchain developers and companies will not be interested in developing projects for India. No international company, investor or developer would want to work in an ecosystem whose future is uncertain, as is with the case in the India blockchain-cryptocurrency ecosystem.
According to a recent TechCrunch news report, the demand for blockchain developers is on a rise globally. Even in India, cities such as Bengaluru, Mumbai, Hyderabad and Pune have seen a rise in demand for blockchain developers, according to a recent report.
But this might all soon change with the recent stand taken by the government and its departments, “If thousands of developers miss out on actively building dApps on top of blockchains like Ethereum, Stellar, Lisk or EOS, it would be a lost opportunity for them. For all our talk of promoting innovation, we should see the convergent nature of how AI, blockchain, IoT etc. will interplay, not just look at them in silos,” says Sharma, who along with Shetty and Joel John, an analyst at venture capital firm Outlier Ventures, have formed Incrypt Blockchain, a community of blockchain developers and enthusiasts. It is in the process of making some recommendations to the government to benefit the blockchain ecosystem.
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Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.