Bitcoins: The New Money Trail

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Indians in pursuit of an online gold rush

BUNTY WAS A dangerous criminal. Too dangerous. Threatening, dacoity, even murder charges, you know,” says Sanjiv Tyagi, superintendent of police in Uttar Pradesh’s Auraiya district, over the phone. “He was calling people home, and then he was beating up people. People were afraid to even complain against him. Too, too dangerous.” Tyagi has the flourish of a small-town cop. Originally from Delhi and transferred to the UP hinterland, his speech is unguarded, often filled with exaggeration, and he seems to give little thought to the weight of his accusations.

About a month ago, a resident of Auraiya, Rajesh Kumar, who is now based in Agra, sought Tyagi out. Kumar had a problem, and the lower-level police were doing nothing to fix it. As Tyagi realised, Kumar had a complaint against Bunty—a man named Sandeep Chaturvedi. “He told me Bunty had robbed him,” Tyagi recalls. The robbery had occurred on April 6th. But the police had been reluctant to register a complaint, and even when they did so, almost two months after the incident, they were yet to question or arrest Bunty. So what was holding them back? As Auraiya’s SP learnt, the police reluctance was not bureaucratic indolence, but the nature of Kumar’s stolen goods. It was not money, jewellery or any other asset—he had been robbed of bitcoins.

Eight years after bitcoins mysteriously came into existence as a new form of currency—not paper, gold or silver, but just some lines of computer code—this cryptocurrency still confounds financial institutions and governments, including India’s. It is yet to be categorised as a currency, commodity or even a security. And now in UP’s back of beyond, a man’s bitcoins had allegedly caught the eye of a career criminal.

Kumar was a bitcoin trader in Agra on a visit to his hometown, Auraiya. Bunty, the alleged thug of the town, had apparently learnt of Kumar’s trade and ordered him to visit. “Bunty made it look like he wanted to understand bitcoins from Kumar. But he knew all about it already. And when Kumar arrived, Bunty got him to transfer his bitcoins to his [Bunty’s] account,” Tyagi says. It was a shakedown. And he even got Kumar to transfer bitcoins belonging to his mother, according to the policeman. Bitcoins worth Rs 20 lakh were thus allegedly taken away.

The police, who hadn’t heard of bitcoins, were nonplussed. “I have seen all sorts of cases. All sorts of cyber crimes also. But never like this one. Nobody knows about bitcoins here,” says Tyagi, “I am from Delhi, so I knew a little about it. But otherwise, what do you do? Nobody understood it here.” On Tyagi’s prodding, Bunty was arrested. And according to the SP, he even confessed.

For a long period, it was assumed that there was little interest or trade in cryptocurrencies in India. But if the Agra robbery shows anything, it is how quickly this virtual currency is catching on in India. “Our criminals are always ahead of their time,” says Saurabh Agrawal, a co-founder of currently one of the largest bitcoin exchanges in India, Zebpay. “The law is always catching up, even in bitcoins.”

Bitcoins first emerged in the aftermath of the 2008 economic recession. On January 3rd, 2009, a coder who claimed to be Japanese and called himself Satoshi Nakamoto created the digital currency for the first time. He had described the idea of a digital currency in an online paper the previous year. According to him, this new currency would be free of the machinations of bankers and politicians. ‘The root problem with conventional currency is all the trust that’s required to make it work,’ he wrote online in 2009. ‘The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve...’ The value of bitcoins, he claimed, would be based on ‘crypto-proof rather than trust’.

The rules of the game were spelt out. This new currency would be controlled entirely by software. There would be no central bank or government but a peer-to-peer network to administer it. And a total of 21 million bitcoins would be released over some 20 years.

At the heart of this decentralised digital currency is a technology called blockchain. This is a public ledger, to put it simply, that records every transaction and is open to anyone’s inspection but no single user can control. This way, there could be no double spending. And people can either earn bitcoins by mining them: that is, by using their computers to keep the ledger up to date. Or they can buy, spend or trade them.

Nakamoto would appear online for the next few years. But after 2011, he has not been heard of again, thus becoming one of those big unsolved puzzles of the modern age. It has been theorised that the technology behind bitcoins is so supreme that Nakamoto must have been the alias of a group of people comprising world- class programmers with a deep understanding of economics, cryptography and peer-to-peer networking. Whatever the reason for Nakamoto’s disappearance, what it did was provide the world an alternate currency with a powerful and appealing origin story.

“Bitcoins are at that stage where the internet was back in 1994, just before mass adoption happened. This mass adoption is going to happen soon. And it is going to disrupt everything we know” - Saurabh Agrawal co-founder, Zebpay

In the years since its creation, the value and usage of bitcoins have surged globally. While a single unit was worth less than $0.01 in May 2010, its value over the weekend, in the US, touched an all-time high of $4,200. According to a Cambridge University study published in April this year, there as many as six million people around the world who have virtual wallets where bitcoins are stored.

In India, the bitcoin scene has been, until recently, in its infancy. There are several bitcoin exchange firms now that function like other trading platforms. There are bitcoin investors and traders, bitcoin brokerage firms, places where you can pay for your movie, meals, clothes, or where you can recharge your phone in bitcoins. Along with the emergence of this new currency have come elaborate bitcoin scams and ponzi schemes. Also under the radar for now are start-ups with business plans based on bitcoins. Taking notice of all this, perhaps, career criminals are joining the trend. Earlier this year, a kidnapping took place in Patiala for which, according to a newspaper report, the ransom was demanded in bitcoins.

Zebpay, one of the largest bitcoin exchanges in India, has close to 1 million users. Two years back, Agarwal says, the company did transactions worth Rs 100 crore annually. Now it is doing more than Rs 200 crore every month. Agarwal believes this is just the start. “We are at that stage where the internet was back in 1994, just before mass adoption happened. This mass adoption is going to happen soon globally, and here in India, in a few years’ time. And it is going to disrupt everything we know.”

Zebpay was first formed by Mahin Gupta back in 2012, under the name , but it was refashioned as Zebpay with Agarwal and Sandeep Goenka joining as co-founders in 2014. “When we understood what it was about, we knew that it could disrupt the financial system. I really liked it and wanted to be in it,” Agarwal says. “But we knew that for people to get into it, because it is complicated, we needed to make it very simple. Like WhatsApp is for instant messaging system. We wanted something similar and simple, Zebpay for bitcoin exchange.”

According to Sohail Merchant, a former bitcoin trader and now the founder of a new bitcoin exchange platform, PocketBits, the usage of this currency in India is growing rapidly and it will soon probably figure among the top four countries that use the most bitcoins. The 2017 Cambridge study also mentions that bitcoin exchange volumes are rising especially fast in some countries. In Asia, these emerging countries are India, China, Malaysia and Thailand.

The biggest stimulus, it appears, was the recent demonetisation of Rs 1,000 and Rs 500 notes. Although several bitcoin businesses try to underplay its effect, perhaps for the likely association of digital cash with unaccounted-for wealth, the purchase rates rose sharply in the period right after November 7th, 2016. According to local bitcoin traders, before the move was announced, the global price of bitcoins was around $700, and in India it was around $757. But after that, it shot up to levels over $1,000 per unit in the country, while it remained relatively stable elsewhere. “I used to go to foreign bitcoin platforms, purchase bitcoins there and sell it here to cash in on the surge. I made around Rs 5 lakh just in that window period of four or five days,” says Prayank Gahlot, then a bitcoin trader. “I had to stop because I started getting scared after some time.” Zebpay saw around 50,000 users join their platform in November alone. Merchant also traded in bitcoins then. Before demonetisation, he would see people buying around Rs 5,000 worth of bitcoins from him at a time. But after the announcement, he began to get calls to exchange several lakhs into bitcoins. “Even Rs 30 crore worth [of bitcoins],” he says. “I realised this was not legal, and I wouldn’t be able to audit myself. So I insisted that each person can only buy bitcoins worth Rs 5 lakh in a day, and that too after sharing KYC [know your customer] papers. This deterred most people.”

Later in December, a TV station carried out a sting operation showing how some brokers claimed they could convert demonetised currency notes into bitcoins and then get the money back into the financial system as valid tender. The increase in bitcoin volumes perhaps also had to do with rumours of how the Government could be planning a ban on gold imports, as the value of this metal also began to appreciate sharply.

“I used to go to foreign platforms, buy bitcoins there and sell it here to cash in on the surge. I made around Rs 5 lakh in a window period of four or five days” Prayank Gahlot, founder, Bitserve

Something of this kind was observed in hyperinflation- battered Venezuela, where droves of people, trying to beat the wild economic fluctuations of their market, began to invest their money in this virtual currency. “Bitcoins have emerged in India as an asset class. A place and opportunity to invest your money,” Agarwal says. An asset, although wildly fluctuating all the time, that could—based on past trends—yield higher returns than fixed deposits, mutual funds, gold and even real estate.

To many, demonetisation resulted in a break of faith in normal currencies. “Logically, if you realise that your cash can be invalidated overnight, people will lose trust in it. In money, everything is based on trust and faith. People will then start to buy gold and other things. The same thing happened with bitcoins,” Gahlot says.

SHUBHAM NAWARIYA CALLS himself a full-time trader. Just 23 years of age, with one of those prized degrees in India— computer science—in Jaipur, he has forsaken a traditional career, much to the dejection of his parents, to trade in all sorts of cryptocurrencies. He works at home, mainly on a couch in his bedroom, tracking and trading bitcoins and other cryptocurrencies, and “watching”, as he says, “the money roll in”. There are several like him across the country who are betting big on cryptocurrencies. There is big money to be made, but it comes at a high risk. Agarwal warns that people should be careful when they invest in bitcoins. Prices are often volatile and people can lose all their savings overnight. But the likes of Nawariya seem unperturbed. “My friends who did their Master’s [in technology] and joined corporate offices, I earn a lot more than them just sitting here in my bedroom,” Nawariya says. “It may not look permanent, but it is a lot more settled than anyone thinks.” Nawariya started trading some two-and-a-half years ago with Rs 50,000 borrowed from a friend. “The way I looked at it, if I lose, I will lose like Rs 10,000. I would be able to manage it,” he says.

That principal amount has stayed in bitcoins. And over the years, he has pumped in more money into bitcoins. And if he makes a substantial amount in a sale, he deposits the profits in newer and cheaper cryptocurrencies, thereby reducing the risk of a fall in the hope that the prices of these other virtual currencies hold up well enough to make up for the loss (and more), and puts the rest back into bitcoins.

Bitcoin prices have been on an upswing in the past few days. One unit was selling at around Rs 1.70 lakh in India in the first week of August. By August 14th, it surged to Rs 2.60 lakh. The prices in Indian exchanges tend to be higher than several foreign exchanges, because the demand for bitcoins is higher than the coins in circulation.

Bitcoins operate in a grey area under Indian law. The Government hasn’t made it legal tender but it hasn’t banned it either. According to reports, a government committee has apparently been set up to study if and how bitcoins can be regulated. If it is regularised and a well-defined framework issued for it to operate, and, as a result, more people enter the space, the hope is that it will stabilise prices and bring them to parity with those internationally.

The tendency in India right now is to hoard bitcoins. It is less a medium of exchange and more a store of value. For bitcoins to go mainstream as a currency, it will have to be widely accepted. While only a few things can be purchased through bitcoins in India, the list is gradually increasing. “Bitcoins are not just a commodity or investment. Not for trading and increasing your money. It can be used as a currency. That was Satoshi’s main motive,” Gahlot says. To see that happen, Gahlot, along with two other bitcoin enthusiasts, has set up what he calls Bitserve Technologies. They aim to create a number of online business projects involving bitcoins. Their first project, Flybit, an online platform that sells flight tickets for bitcoins, offers low prices as a lure. This is enabled by the break-even basis of its business model. “We believe in bitcoins as a currency,” he says. “There is financial freedom here. Nobody will freeze your account or charge you for something. I don’t think it will ever really become the default currency of the world. But a lot more people will begin to use it eventually. What we are trying to do is to get those potential users.” Gahlot himself tries to patronise as many businesses as possible that accept bitcoins. The administrator of the server his website is hosted on is paid in bitcoins. He purchases discount coupons, recharges his phones and orders online goods through his preferred currency.

Among the newest entrants to India’s bitcoin scene is PocketBits, whose appeal is speed. Unlike other exchange firms, it claims it can verify and process a transaction in around an hour or less. It is also trying to created allied businesses. One such platform, which is already operational, allows users to buy products from ecommerce sites in India with bitcoins. A customer has to use bitcoins to purchase a voucher from it which can then be redeemed at an online store. But why would users not buy such a product directly with regular money? According to Sohail Merchant, founder of PocketBits, this is because bitcoin users tend to be finicky about using credit or debit cards online. “Our platform is not for regular people. It is for the community of millennials, of bitcoin users who care for their privacy.” Another idea, under development, is that of a platform for merchants that lets them convert bitcoin payments immediately into rupees to minimise the risk of price volatility. Merchant adds that there are several small companies and e-commerce platforms who want such a mechanism.

Nawariya’s parents, meanwhile, still worry about him. They ask him to continue his studies or find a job. “My feeling right now is I am going to stick on a little longer. I feel bitcoins will reach 10,000 [dollars this year]. Maybe 20,000 [dollars] by next year,” he says.

What about his parents’ demand that he find a job? “I don’t know,” he says. “Maybe I will cash out at some point, and be settled forever. What will I need a job for?”