Innovation Behind Bars: the Arrest of India’s First Bitcoin ‘ATM’ Operators
On what grounds were the creators of India’s first Bitcoin “ATM” arrested this October?
Earlier in October, the developers of India’s first Bitcoin (BTC) “ATM” were arrested in the city of Bangalore under criminal charges, in a case that has shaken the local startup community and cast a spotlight on the lack of clarity surrounding “the law of the land” in regard to crypto.
While the official Freedom of Information Report (FIR), detailing the charges against the men, is not in the public domain, the mainstream media has reported that they were booked under serious criminal charges, including criminal conspiracy, cheating, and forgery.
From the gravity of the alleged charges, you’d be forgiven for assuming the suspects were deceitful fugitives, yet they are two of the co-founders of the country’s first cryptocurrency exchange, Unocoin. Described by Kashif Raza, of the local blockchain advisory duo “Crypto Kanoon,” as being among India’s “brightest” tech pioneers, and an “icon of the crypto industry.”
Their high-profile arrest and remand in police custody for seven days thus carries undeniable symbolic clout, perceived as being tantamount to putting innovation itself behind bars.
Cointelegraph spoke with Kashif Raza to unravel the story, as well as consulting with local cyber expert lawyer, Prashant Mali, whose periodic interjections, “yeh kahan se aa gaya?” (“where did this come from?”), encapsulate the local crypto community sentiment in the wake of the arrests.
Bangalore, which earned the sobriquet of India’s “Silicon Valley” for its buzz of tech startups and venture capital firms, is perhaps unsurprisingly the home turf of the country’s “first entrant into the Bitcoin industry,” Unocoin, founded in the city in 2013.
Four years after its inception, the startup says it now employs 120 full-timers to run its BTC-INR (rupee) trading platform, to process transactions worth over 2 billion INR monthly, for over 1.3 million users.
Recent years were propitious for initiatives like Unocoin, which began to attract significant venture capital investment in fall 2016, just as Indians’ interest in Bitcoin was hitting a fever pitch as the government ushered in its bold — and still highly contentious — demonetization policy.
In a bid to clamp down on tax evasion, in November 2016, the Prime Minister, Narendra Modi, announced the invalidation of 500 and 1,000 rupee bills — which accounted for 86 percent of the currency in circulation at the time. Demand for crypto in the heat of the “cashless chaos” of that year soared, catapulting Bitcoin’s valuation to a 12 percent premium on the Unocoin exchange.
Unocoin president, Sunny Ray, revealed that Bitcoin trading doubled in the midst of a tumultuous, demonetized economic climate that was yet further stoked by that winter’s rumors of impending curbs on domestic gold holdings and possible restrictions on gold imports.
Trading euphoria showed little signs of letting up the following year, with popular Indian exchanges, such as Zebpay, forced to cap Bitcoin purchases in spring 2017 as their supplies failed to keep pace: the Zebpay Bitcoin Wallet India hit over half a million downloads in May, eclipsing many of the country’s stalwart banking incumbents on the Apple app store.
Yet 2017 also presaged an unfolding, increasingly crypto-skeptic agenda on the part of India’s government and monetary authorities. In February, the Reserve Bank of India (RBI) — steward of the country’s notoriously strict capital controls — chose to reiterate its 2013 warning against the dangers of investing or trading in virtual currencies, yet nothing in the statement as of yet went beyond striking an official note of circumspection.
Then, in March, a member of the ruling Bharatiya Janata Party (BJP), Kirit Somaiya, characterized Bitcoin as a risk-ridden “hypothetical currency” before parliament, urging RBI, the Securities and Exchange Board (SEBI), and the Finance Ministry, to step in as a matter of “urgent need” to rescue the populace from yet “another big Ponzi fraud.”
Somayia soon tipped over from alarmism to outright fallacy, when he falsely claimed that crypto was “illegal” in ensuing weeks, dismissing the robust self-regulatory initiatives of the country’s thriving exchanges as “nonsense.” And he wasn’t the only minister to do so.
Yet even as politicians whistled the tune of illegality, ASSOCHAM, one of the country’s most veteran trading bodies, devoted a global summit to the topic of Bitcoin’s status in India that April.
An Inter-Disciplinary Committee within the Finance Ministry was formed to proactively investigate the legal status of Bitcoin, and in May, the government appealed to the public to provide input as it evaluated the possibility of regulating the market.
Positive glimmers on the crypto regulatory front surfaced that summer, yet soon lapsed into inconclusive inertia, and from there, to an increasingly bleak prognosis. An as-yet-undisclosed draft of proposed regulations was rumored to lean towards a more stringent stance, just as the failures of Modi’s botched demonetization were widely becoming incontrovertibly apparent.
With crypto’s future in the country in limbo, Unocoin nonetheless sealed a partnership with major wallet provider, Blockchain, in September 2017: the bullish news was paired with signs that RBI was mulling the issuance of its own digital rupee-backed coin, while continuing to voice its unease with regard to decentralized, so-called “private” cryptocurrencies.
In October, tight-lipped officials were still refusing to comment on the authorities’ evolving crypto regulatory plans, yet the following month, word of a Chinese-style exchange ban was leaked to India’s mainstream media.
Even with seemingly implacable negativity continuing to spill out from central bank officials that November, some were accusing the government and regulators of inexplicable dithering on the crypto front; landing the matter in the country’s highest judiciary, the Supreme Court.
Yet the inauspicious backstage drama and regulatory purgatory did little to dampen Indian investors’ enthusiasm in the winter 2017 crypto bull run, with exchanges reporting “unprecedented” droves of as many as 400,000 new traders per month entering the market.
On the cusp of the new year, the Finance Ministry steeled itself for an antagonistic stance, condemning cryptocurrencies as Ponzi-like threats to investors’ hard-earned money. The tone would turn out to be the dominant chord for the rest of 2018, with RBI issuing its now-notorious circular April 6, directing all domestic banks to extract themselves from existing relationships with crypto exchanges and traders “within three months.”
The central bank’s controversial blockade came into force this July, and has prompted both public and industry-led petitions, with some appealing to the courts on the grounds that the decision is unconstitutional.
As the final verdict on the RBI prohibition continues to be repeatedly stayed by the Supreme Court, the judiciary has now thrown the ball back in the executive’s court, setting a deadline for the government to clarify and finally cement its official position on crypto by mid-November.
Sowing the seeds of confusion
While April 6 is thus well-known as a red-letter day for crypto in India, the extraordinary welter of half-truths that have circulated in response to the country’s first Bitcoin “ATM” can in fact be traced back to February, to the immediate aftermath of finance minister Arun Jaitley’s 2018 budget speech.
“The government does not recognize cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these crypto assets in financing illegitimate activities or as part of the payments system.”
The mainstream press responded at the time by declaring the “end of the road,” for crypto in the country: Quartz India cited a local lawyer who said he expected “a legislative mechanism […] to ensure that dealing and trading in cryptocurrency is made illegal and to penalize entities and individuals who are involved in their trade and circulation.”
The social media echo chamber only compounded the flurry of misunderstandings:
Unocoin presciently took pains to clarify a panic-stricken public, as the price of Bitcoin plummeted from $10,300 on Jan. 31, to around $9,500 on Feb. 1:
Unocoin’s claims of “business-as-usual” may, with the benefit of hindsight, appear overly optimistic.
Yet at the time, all the founders of India’s crypto exchange triumvirate — Unocoin, Zebpay, and Coinsecure — were attempting to calm investors and to underscore that “not being legal tender” did not warrant the FUD-like furore that had erupted. It was, rather, an alegal classification, which applied equally to traditional stores of value such as gold.
In the ensuing weeks, a fresh spate of alarmist reports from the likes of the Financial Times and Quartz again stoked investors’ anxiety by falsely reporting on the government’s redoubled and “aggressive” pursuit of crypto tax “evaders.” The action at hand was in truth simply a “going through the motions” of a pre-agreed plan that had been announced the previous year.
Fact and fiction continued their song and dance throughout winter 2018, with the latter more often than not appearing to shape the course of events.