On November 9, 2016, India’s Prime Minister Narendra Modi surprised the nation by taking the two highest denomination notes, 500 and 1000 rupees, out of circulation in a daring move towards becoming a cashless society. The demonetization aims to reduce corruption, counterfeiting, black money and terrorism financing, which all rely on cash transactions. To recuperate GDP lost in India’s $460 billion black market economy, Modi wants Indians to conduct all financial transactions digitally going forward so that they can be traced and accounted for.
While the new currency policy caused chaos in India in the first few weeks of its implementation, it also created a boom in the digital payments space and boosted demand for the world’s leading cryptocurrency bitcoin.
India’s three main bitcoin exchanges have reported a surge in user sign ups and bitcoin trading volumes as Indians are looking at bitcoin as both a new transactional currency but also as an investment asset similar to gold.
Zebpay, Coinsecure, and Unocoin have all reported an increase in demand for their services and a boost in trading volumes. Zebpay reported 25 percent growth in trading volumes from October to November, and its user base increased by 50,000 in November, which is more than double its monthly average of new sign ups. Coinsecure reported a 300 percent increase in users and Unocoin reported a threefold increase in its user base since the announcement of the new currency reform in early November.
RBI Issues Warning Against Bitcoin Use
On February 1, the Reserve Bank of India issued a notice warning bitcoin users against the risk of transacting in the digital currency. The press release by the RBI states:
“The Reserve Bank of India advises that it has not given any license/authorization to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.”
India’s demonetization of its highest denomination notes and the government’s push towards a cashless society has been a key driver of the price of bitcoin since November, as the demand for bitcoin in India has been skyrocketing. However, as bitcoin is a very volatile currency and its infrastructure is still in development, it is understandable for the Indian central bank to warn users against the risks of holding the cryptocurrency.
While India’s central bank wants to embrace blockchain technology and the digitalization of its currency, the main concern surrounding bitcoin is the lack of regulation and security in its infrastructure, which are viable concerns when talking about an alternative transactional currency.
Despite the RBI’s warning against the risks of holding and transaction in bitcoin, the central bank is exploring bitcoin’s underlying distributed ledger technology and how it can be implemented into India’s financial system.
India’s move towards becoming a cashless society where digital payments will be the norm creates a great ecosystem for bitcoin to flourish. It will be interesting to see how the Bitcoin economy evolves in India and what innovation will come from Indian bitcoin and blockchain startups.