Cryptostorm: How India Became Ground Zero of a Financial Revolution

By Sundeep Khanna

The colour of money is changing to crypto. With the regulatory environment struggling to keep up, there has been prolonged ambivalence on the legality of cryptocurrencies. This has led to chaos but has also allowed a few to make unprecedented gains. Like all bubbles, there is a looming threat of a big-bang bust and with stories emerging of people losing lifetimes' savings, there are serious fallouts that should be considered.

Even so, cryptos are an idea whose time has come. That is why no central bank now dares to place a complete and comprehensive ban on them. With bitcoin, which kicked off this revolution, now valued at a trillion dollars and many other virtual currencies worth billions, the genie has left the bottle.

From being agents of chaos, cryptos have gone mainstream and regulators are stuck between the proverbial rock and a hard place. Before reason and rationality dawn, though, there will be ferment. Of the thousands of cryptocurrencies in existence today, only a handful will survive. The ones that don't, will spell ruin for millions of gullible Indians.

This, the first book on the 'cryptostorm' that is sweeping India, reports stories of ordinary people whose lives have been touched and, in some cases, irrevocably changed by the promise and threat of cryptos. The individuals in this book populate a 'new India'. They believe they have seen a way to uplift their lives, unencumbered by governments and regulators. Their voice needs to be heard because it is the sound of tomorrow, which we ignore at our own peril.

• Language: English
• Publisher: HarperCollins India
• Release date: May 14, 2023
• ISBN: 9789356991262

Sundeep Khanna

Sundeep Khanna has been a business journalist ever since the first personal computers came into India, and writes regular columns for Money Control and Livemint. His books include The Liberalization Story, a collection of essays on one of the most seminal events in Indian business. He has co-authored Azim Premji: The Man Beyond the Billions, a biography of one of the world's best-known philanthropists.

Book preview

Preface

Money has a new name—cryptocurrency—whose resemblance to the old stops at being a medium of exchange. No central banks or governments control its issuance or decide its value; that’s done by users. Seems about right.

Say you have an old Technics SL-1200 turntable that I desperately want to buy, and you want to sell. We agree upon a price, which I pay using one of the 10,000 cryptocurrencies available to me. The next instant, the money is in your wallet and everyone in the crypto universe is informed of the transaction, though not of our identities.

Now, let’s stretch credibility a bit more. Say your stock among friends and family is high. You could even float your own coin, calling it AneeCoin, and before you know it, they are all using it to buy and sell goods and services among themselves. You could extend that to your community, your city, even the whole world. And every time someone uses AneeCoin, its perceived value goes up.

Notice what’s missing here? Intermediaries, banks and financial institutions. And they don’t like it. Their first reaction is to ban this new phenomenon, and when that’s no longer possible because it has already grown too big, they denounce it as pure evil. Do you know any eighteen-year-old who didn’t want to check out a certified evil?

That’s exactly what’s been happening over the last two to three years, as we hibernated to escape the worst of the Covid-19 pandemic. The visible signs are all around us, as Indians of all hues trade in cryptocurrencies with the excitement of six-year-olds given free rein in a toy shop. As the regulatory environment strains to keep pace with the rapid changes in this brave new world, there has been prolonged ambivalence on the legality of these currencies—a situation that has led to chaos, but has also allowed a chosen few to make unprecedented profits. But like all such bubbles, there is always the looming threat of a Big Bang bust. With stories emerging of people losing lifetime savings and some even resorting to suicide, many worry about the impact on society.

The numbers tell the tale of this new mania sweeping the world. A report titled ‘2021 Geography of Cryptocurrency’ by Chainalysis, a New York-based cryptocurrency investigation and compliance solutions company, found that global cryptocurrency adoption had skyrocketed, up over 2,300 per cent since 2019 and over 881 per cent since 2020.

India was no different. By the end of 2021, the year of plenty in the crypto universe, twenty million Indians had boarded this new vehicle and were holding assets worth over five billion US dollars. The trend has continued, with a study by BrokerChooser revealing that India has the fifth largest rate of digital asset ownership worldwide, at 7.3 per cent of the population. In an October 2021 report from Chainalysis mentioned above, India was ranked second in terms of digital adoption worldwide, just behind Vietnam and ahead of the United States. Notably, 75 per cent of digital asset investors in India are between the ages of eighteen and thirty-five years, according to NASSCOM data.

It’s a cohort that ensures our conventional reading of market behaviour is constantly challenged. When we are told there is a bull run in stock markets, we accept it without questioning. If the big boys in the markets say there is one, who are we to challenge it? However, discerning observers have often pointed out how the timing of these is clearly manipulated.

When we apply these same filters to the crypto markets, we come up short. In November 2021, for instance, as reports emerged that the Government of India would table a bill in Parliament seeking to regulate cryptocurrency trading, there was a media frenzy about a crash in their prices. The reality belied the apparent turmoil. Of the top hundred cryptocurrencies by market value, the prices of forty-one actually rose that week. One such cryptocurrency, Gala, was up 149 per cent in the twenty-four hours since news of the proposed bill came out. A single token of Gala, valued at fifty-four US cents, went up a staggering 54,733.3 per cent between 1 January and 25 November 2021.

Indeed, in the first eleven months of 2021, eighty-five of the top hundred cryptocurrencies had given returns of more than 100 per cent, underscoring the rush for digital tokens among Indians, across social groups and demographics. More than the 1.46 crore taxpayers in India have traded in one or more of these virtual currencies at some point in the last two years.

These numbers point to the mother of all disruptions, which is threatening to upend the very foundations of our traditional financial systems. Twice before in the last hundred years, global money has seen cataclysmic change of this kind. In 1933, the then US President, Franklin D. Roosevelt, took his country off the gold standard, a monetary system where every country’s currency or paper money had a value directly linked to gold. It marked the beginning of fiat money, or currencies which are accepted as a means of payment by order of the government. Then again on 1 January 1999, nineteen countries in Europe decided to adopt the euro as their common monetary unit, in the process agreeing to extinguish their national currencies as legal tender.

On both occasions, confusion and conflict in the immediate aftermath was followed in the long term by accelerated business activity and new dimensions in global trade. The euro, for instance, led to an explosion of business among the participating European countries, with the EU becoming one of the strongest trading blocs in the world.

Will we see a similar upheaval with the crypto mania sweeping India and the world? Along with the rapid adoption of digital payments, Indians have taken to cryptocurrencies with remarkable ease. While recent market reverses have led to pronouncements of the imminent death of cryptos, the breadth of the underlying revolution is undeniable. In the smallest of towns and cities, young men and women are lying awake at night moving between the various coins and exchanges where they are traded. Cryptos are now the subject of chat room discussions and social media threads, but the real action is in the thousands of private conversations across various media platforms. As young men and women take up crypto careers, the phenomenon is fast acquiring respectability. Of course, with a long history of scams involving teakwood, chit funds, stamp papers, banking instruments and fake certificates, the whiff of scam and the hint of scandal always looms large over the current craze. Even the government sees it as a potential threat, with the Prime Minister Modi himself issuing a warning about their illicit use.¹

But cryptos are an idea whose time has come. Which is why very few central banks, perched on the frontlines of the assault from digital currencies, have dared to place a complete and comprehensive ban on them. With the valuation of Bitcoin, which kicked off this revolution, peaking at a trillion US dollars before dropping in recent months, the genie is out of the bottle. India’s Supreme Court acknowledged this in its 2018 judgment that lifted the Reserve Bank of India-imposed ban on crypto trading in India. The signal from the government, which has repeatedly postponed the introduction of a proposed bill on the subject, is that it will not seek to prohibit crypto trading. Instead, it will impose rules and regulations to govern these currencies.

That would be wise. We now live in a world where traditional institutions play second fiddle to community support, and the latter is firmly in favour of the new money. Clearly, from being agents of chaos, cryptos have gone mainstream and the regulators are stuck between the proverbial rock and a hard place.

But before reason and rationality dawn, there is going to be ferment. Of the thousands of cryptocurrencies in existence today, only a handful will survive. The ones that don’t will spell ruin for millions of gullible Indians. Like the myriad Ponzi schemes we have witnessed over the decades, this one will also have its share of villains and victims. Already the crypto universe is reeling from the collapse of FTX, once among the biggest cryptocurrency exchanges in the world.

Through 2023, many central banks across developed and developing nations will launch their own sovereign digital currencies. Among them will be one in India. This will be an inflection point, since India’s own digital currency regime will present an existential dilemma to the thousands of private cryptocurrencies and the dozens of startups that offer an exchange and a wallet for these digital tokens to be traded and stored. Many of these start-ups, backed by overseas investors, could potentially go belly up, dragging down those who have invested through their platforms.

It was against this background that I began my search for the meaning of this startling revolution, which was clearly being driven by a generation of Indians born after the reforms of 1991. The intention was to seek out these men and women and look at the birth of this new world of money, called decentralized finance (DeFi), through the lens of their motivations, actions and impulses. I planned to look at the emerging trend from the bottom up and share the experiences of ordinary Indians whose lives have been touched in good and bad ways by the promise and threat of cryptos.

The natural starting point was the Supreme Court decision, which triggered an almighty rush into the world of cryptos. With the threat of another ban always on the horizon, there was investment in coins of all hues, and for the next two years, peak irrationality prevailed. And then abruptly, in May 2022, the surge stopped as prices of major virtual currencies collapsed, in some cases by over 90 per cent. Overnight, the mood changed and sobering reality dawned.

This book is an attempt to capture the two years of exuberance followed by the mayhem in May 2022 when many cryptocurrencies lost as much as 99 per cent of their value virtually overnight. That was six months before the spectacular heamorrhage of FTX and the arrest of its founder Sam Bankman-Fried. It isn’t for me as an author to comment on the legality or sustainability of cryptocurrencies, nor indeed to cluck over their fickleness. We live in a world where for one crazy week in August, the market cap of a tiny Hong Kong-based firm, AMTD Digital, surpassed that of the giants of global finance like Goldman Sachs Group Inc. and Bank of America Corp. One reason given for the crazy rise in its stock price was that its ticker symbol, HKD, was the same as the abbreviation for the Hong Kong dollar! Soon, the stock dropped back to more reasonable levels. But it had already pointed to the anomalies in the traditional financial system, which crypto advocates are rebelling against. To them, it is also proof of the hypocrisy of traditional finance’s high priests railing against the violent fluctuations in decentralized finance that cryptos represent.

Thus, in May 2018, when the world’s most famous investor, Warren Buffett, was asked by CNBC for his views on Bitcoin, the ‘Oracle of Omaha’ didn’t hold back: ‘If you and I buy various cryptocurrencies, they’re not going to multiply. There are not going to be a bunch of rabbits sitting there in front of us. They are just going to sit there. And I have got to hope next time you get more excited after I have bought it from you and then I’ll get more excited and buy it from you. We could sit in the house by ourselves and we could keep running up the price between us. But at the end of the time, there’s one Bitcoin sitting there, and now we’ve got to find somebody else. They come to an end.’

Over time, he didn’t seem to have seen anything to change his mind, even as Bitcoin prices rose and rose. In January 2021, he dismissed Bitcoin as ‘rat poison squared’, a worthless delusion. Meanwhile, his business partner Charlie Munger compared cryptos to a venereal disease and called for the US to ban it.

So how can something so reviled by the wisest of investors, who have made billions of dollars for their shareholders, suddenly become so popular? One well-informed newspaper editor calls it a revolution in technology and finance, and says not accepting it is stupid. ‘While older people like us are dinosaurs and are looking for things like a central authority, underlying asset, etc. young people don’t care about such things,’ he says. His cryptic comment that he is ‘not comfortable with cryptocurrencies but also uncomfortable with writing them off merely because we don’t understand them’, really sums up the diversity of opinion on the subject.

Sure, there is plenty of misinformation floating around, leading to blind faith in the power of cryptos, which can often seem misplaced. On 1 April 2022, Value Research, India’s leading purveyor of data and analyses on mutual funds and stocks, announced on its well-frequented site that henceforth, it was switching to focusing only on covering cryptocurrencies. If the date didn’t ring a bell, the message also added, ‘in case that leaves our research team with too much time on their hands, we will add horse racing to the types of investments we cover’.

The affable founder of Value Research, Dhirendra Kumar, who is a popular figure on radio and television, where he constantly advises investors to be cautious, says that he was flooded with responses on mail as well as on Twitter. Many, of course, were from those who got the joke. But many were from those who didn’t, including those who hailed the move.

They are a piece of the crypto mania that has swept the country: men and women who are convinced there is money to be made from this latest option. To them, Kumar has this to say: ‘There’s money to be made, but only by stealing from the pockets of savers and investors.’²

That may be so. But in July 2022, the venerable of London launched a new cryptofinance digital hub, which would be home for all its crypto coverage, including a handy crypto glossary, profiles of crypto’s biggest players and opinion pieces from chief economics commentators. It also started a weekly premium newsletter in response to reader interest in the digital asset industry. It isn’t the first publication to do so. Others including in India have been sending a weekly newsletter on the subject for months now. ‘ readers are deeply interested in cryptofinance as a topic,’ said Adam Samson, market news editor of , in an email to . ‘Their interest tends to go beyond which coins are going up and which coins are going down. Instead, readers tend to be really interested in what’s happening under the hood of the crypto market, intelligence on the main movers and shakers in the sector, and how innovations in crypto are affecting traditional finance.’

It is evident that crypto represents a generational shift in attitudes. An earlier generation, brought up in an environment of want and scarcity, tended to be more risk-averse and trusted institutions. The post-1990s generation, by contrast, has had a different upbringing laced by ambition and aspiration, in which you grew by doing the unthinkable, or at least the untried. Controls, which the earlier generation accepted as a part of this universe, is something that the new generation chafes at. Traditionalism, the need to do things in a manner defined by certain authority figures—parents, governments, banks—is increasingly giving way to a new way of life, in which the most important element is having some kind of agency over one’s decisions.

This is the generation that forms the core of the growing cult of crypto. Of course, there is no running away from the fact that this is all about money. There is no do-gooding here, no creative impulses being unleashed, no save-the-world goals and certainly no democratization of wealth. But speaking to them has given me an insight into new India and the Indians who populate it. Young people believe they have seen a new way to uplift their lives, one unencumbered by governments and regulators. Given what we have seen of the old elite’s monopoly over markets, their voice needs to be heard because it is the sound of tomorrow, which we can ignore only at our own peril.

Ultimately though, the fate of cryptos isn’t important. At best, they will be the future of money manifesting in ways we can’t see yet. At worst, they will be an experiment in financial products that didn’t work. What is undeniable is how they are a fork in the road for the young, a departure from the norm. This also means that even if bitcoin and Ethereum and the hundreds of other currencies collapse for good, it won’t be the last such effort to break free from the asphyxiating hold of banks and the various financial powerhouses that hold the world in a vice-like grip.

1

Ashim Sood’s Story: Crypto in the Top Court

The Supreme Court of India is hardly the place to recount an ancient Greek fable. The imposing building of the country’s top court in New Delhi’s leafy central zone, designed in an Indo-British style by the chief architect Ganesh Bhikaji Deolalikar in 1958, is more suited to weighty arguments by grave-looking men in dark suits and women dressed in equal formality. It is a place that inspires awe and dissuades any levity or even departure from the norm.

But at thirty-three, Ashim Sood had learnt to take his chances, having worked around the globe in complex arbitration cases, after beginning his career in the chambers of the legendary jurist Soli J. Sorabjee.

Sood was arguing against an order passed by the country’s top financial regulator in a matter that had the government in a tangle. A bit of poetic licence wasn’t out of place. For the record, he was litigating on behalf of the Internet and Mobile Association of India (IMAI, the petitioner) versus the Reserve Bank of India (the respondent).

When Sood came back from the US in 2012 to set up his own law firm in India, he could scarcely have imagined that five years later, he would be standing before a bench of the highest court, arguing in one of the country’s most significant cases. Having done some minor trading in cryptocurrencies in the past, he had a passing acquaintance with the new rage. But when in 2018, industry grouping IMAI and its president Subhajyoti Ray, engaged him as a litigating lawyer in the case filed against the RBI order banning cryptocurrencies, he realized he needed a lot more information on the subject. For one, it was a massive case involving some of the country’s top legal minds. In his corner were heavyweights like Aryama Sundaram, Gopal Subramanium and K.V. Viswanathan. They were joined by the eminent