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Panic selling in India caused crypto prices to crash as the country’s parliament introduced a bill to ban crypto.
Bitcoin tumbled 14.8% on the Indian WazirX crypto exchange two hours after the announcement. Other cryptos posted losses in the double digits as well. For instance, Ethereum dropped 15%, and the stablecoin Tether dropped almost 18%.
At one point, Bitcoin was trading at a 15% discount in India, compared to other exchanges. However, this spread has since dropped first to 3% and then to 1%.
The price discrepancy between local and global prices is not new for India. However, it usually goes in the other direction. Nischal Shetty, CEO of WazirX, pointed out that cryptos on the Indian market typically sell at a premium. Now, panic selling has reversed that trend.
“This event of panic selling has led the Indian market to correct and the prices to reach the global level,” he said.
Still, he said that it is not yet clear whether a total ban would happen or not.
The investors reacted to the proposed new bill that would regulate crypto in the country. The Cryptocurrency & Regulation of Official Digital Currency Bill of 2021 would ban all private cryptos.
Furthermore, it would make way for the new, official digital currency issued by the central bank.
The bill aims “to create a facilitative framework for creating the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India.”
However, it allows for “certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
It is not yet clear how the government will define private cryptos. However, it may refer to all cryptos, including Bitcoin, Ethereum, Cardano, Solana, etc. On the other hand, it could mean a ban on specific cryptos that offer privacy to their users, like Monero.
Last week, the Indian Parliament committee on finance concluded that they need regulations. Otherwise, they cannot stop cryptos.
“There are two factions within the government—one that wants to ban cryptos and one that wants to regulate it. But since the regulatory scenario wasn’t clear, the first group is the one that’s coming out on top,” an official source said.
Total Ban ‘Impossible’
Experts point out that a total crypto ban is likely not possible. For example, BTC Markets CEO Caroline Bowler said that the ban might not be as effective as the government hopes it would.
“The thing with cryptocurrency is that while governments may try to ban it or try to contain it, the very decentralized nature of the technology somewhat prohibits that,” she said.
While the governments can prevent people from exchanging crypto with the local currency, they can’t ban crypto wallets. Furthermore, P2P networks are also challenging to control. For example, any person can send funds via a bank account and get an equivalent sum in its wallet. However, the process is risky for those sending the funds first.
A crypto ban would mean that all crypto exchanges in India would have to close down or go underground. That is exactly what happened in China after it banned all crypto transactions.
Its crypto exchanges, like Huobi and OKEx, moved offshore. However, they continued to operate. Some offer renminbi to USDT exchange, which allows Chinese buyers to access the crypto markets. Once the Chinese traders have Tether, they can buy any crypto at a sale.
Moreover, industry experts still think that Chinese crypto traders significantly influence the crypto markets, including Bitcoin.
India’s Digital Currency
China has banned crypto from stamping out crypto mining and its high energy demands. It also did so to make way for its own digital currency, the Digital Yuan.
Now, India is taking steps in the same direction. In January, the Reserve Bank of India said that it is considering creating its digital currency. At the same time, the government drafted a bill to regulate crypto. Significantly, it maintained the exact wording as the bill brought to the parliament.
Later in July, the RBI deputy governor T Rabi Sankar confirmed that the central bank worked towards that goal. A Central Bank Digital Currency (CBDC), he said, would be the same as the legal tender. It would also be exchangeable with the legal tender, one to one.
“CBDC is a digital or virtual currency, but it is not comparable to the private virtual currencies that have mushroomed over the last decade. Moreover, private virtual currencies sit at substantial odds to the historical concept of money,” he said.
Experts estimate that about 20 million crypto investors in India, withholdings of $5.39 billion.