The values of cryptocurrencies on Indian exchanges have fallen below global exchanges due to a decline in demand after the RBI on Thursday evening directed banks to wrap up all dealings with virtual currency players within three months. Earlier, cryptocurrency prices on Indian exchanges were at a 10% premium compared to global exchanges. Now in a reversal of fortunes their value has fallen 10% below prices reigning on international exchanges. Since the announcement, most people are avoiding trading, people in the know said.
The price of the most popular cryptocurrency bitcoin, for instance, was Rs 4.8 lakh on Indian exchange Koinex on April 5, before the RBI announcement. On American exchange Coinbase, it traded at $6,880 (Rs 4.47 lakh). But according to the latest values, the rates were Rs 4.04 lakh and $6,993 (Rs 4,54,545) on Koinex and Coinbase, respectively.
"The RBI has not banned trading in bitcoins altogether, but it does not want banks to support it. People fear some new unfavourable directive will be announced. So, they don't want to trade. They are likely to hold on for a week or two," said cryptotrader Aakash (23).
Cryptocurrencies are virtual currencies that are created and held electronically. They are unregulated and are mined based on blockchain technology. Like every commodity, their values are also based on demand and supply. However, their prices vary across exchanges. Since the RBI's directive, the demand for them on Indian exchanges has plunged.
Bangalore-based trader Prudhveep Datla said the fear among traders is that though banks have been given three months to comply with the RBI rules, they may decide to cut off all links tomorrow itself since there is no clarity.
"Then traders won't be able to convert their crypto trading into cash through Indian banks. They may have to opt for alternative routes like first converting it into US dollars and then to Indian rupees," he said. There is no clarity whether people can continue investing in these three months. A few people may take the risk of buying on Indian exchanges since prices are at a low and sell it on global exchanges, the traders said.
"The untimely directive from the RBI has definitely jolted the market as we saw a fall in token values and also a significant dip in daily trade volume," said Koinex co-founder Rahul Raj. He said the move raises many concerns for traders who were looking at long term investments.
There is also the risk of sparking illicit trade practice and black marketing as crytpocurrency holders might be in a rush to sell out the tokens for cash, he added.
On Thursday, RBI deputy director BP Kanungo announced, "We have decided to ring-fence the RBI regulated entities from the risk of dealing with entities associated with virtual currencies. They are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationship within a period of three months."
Crypto exchanges are hoping to hold discussions with the government and the RBI during this time period to arrive at a regulatory framework for virtual currencies. India, which is estimated to hold around 10 per cent of the virtual currencies in the world, has no legal framework for them.
The government had set up a committee led by department of economic affairs secretary Subhash Chandra Garg to come out with recommendations by March-end. But there has been no update so far. The government does not recognise cryptocurrency as legal tender. However, it has not classified it as illegal either.
In fact, the RBI is looking at bringing out its own digital currency, while the government has said it will explore using the underlying blockchain technology.