One of India’s oldest and largest cryptocurrency exchange, ZebPay has shut down, making it one of the first major casualties of the Indian government’s indecisiveness on cryptocurrencies.

Zebpay, operated by Ahmedabad-based Zeb IT Service Ltd, announced its plans to shut down exchange operations late last week blaming the regulatory chokehold as the reason it chose to shut down.

“The curb on bank accounts has crippled our, and our customer’s, ability to transact business meaningfully,” Zebpay said in a blog post last week. “At this point, we are unable to find a reasonable way to conduct the cryptocurrency exchange business,” the post said.

In April 2018, India’s central bank told entities like banks that come under its regulatory purview to stop providing services to businesses and individuals dealing with cryptocurrencies. People who owned cryptocurrencies could no longer convert it to fiat or the other way around.

For central banks around the world, the adoption of cryptocurrency is a cause for concern as they render the regulatory tools to control Money ineffective. As we’d written earlier, these include monetary tools like capital controls, money supply, and interest rates as well as law enforcement in the form of anti-money laundering, taxation, and financial investigation.

Some Indian exchanges introduced peer-to-peer transactions to stay afloat. Peer-to-peer transfers don’t need banks in middle and users can simply transfer cryptocurrencies to each other. Zebpay had over 3 million users. So the move to shut operations comes as a surprise to many.

India’s current regulatory climate not only affects Zebpay but also all the other exchanges that operate from the country. Many of them have restructured operations or introduced a new platform anticipating the chilling effects of the Reserve Bank of India (RBI) notification.

Mumbai-based WazirX and Koinex, for instance, launched peer-to-peer (P2P) cryptocurrency transaction platforms in addition to their exchange that allows users to transact in cryptocurrency.

Bengaluru-based cryptocurrency exchange Unocoin also launched its crypto-to-crypto (C2C) exchange called Unodax. Other exchanges like Giouttus and Instashift also launched Rupee-based P2P trading. Coinsecure, which was allegedly hacked in in April and lost over 438 BTC, is currently in the process of reimbursing its customers for their losses.

Since the C2C and P2P markets are not restricted by geographic boundaries, traders often rely on over the counter(OTC) and P2P markets that allow transactions using cash, gift cards and bank transfers. This has increased trading volumes on platforms like Bisq, LocalBitcoins, Paxful and HodlHodl among others. According to data from Paxful, the platform saw weekly BTC trades volumes from India rise to reach a peak of Rs 50 lakh earlier this month. Even though the due diligence required to trade on these platforms is higher, as fraudulent transactions are possible, investors and traders see these methods as better for trading than not having any at all.

Peer-to-Peer to the rescue

Mumbai-based cryptocurrency exchange WazirX launched its service on 8th March 2018, just a month before the RBI notification prohibiting banks from dealing with cryptocurrency exchanges.

Launching an exchange into this regulatory atmosphere was not the most perfect scenario for Nischal Shetty, founder and CEO of WazirX. “Within a month, the news about the RBI ban that would come into effect from July came out.” Three days after the ban kicked in, Shetty launched a peer to peer service using which people could cash-in and cash-out of crypto without needing to deposit money into the company’s bank account.

WazirX and Koinex were some of the first Indian exchanges to offer peer-to-peer crypto trading options which came as a lifeline to exchanges and customers at this time.

How the P2P system works

When a user places a buy request, the exchange matches the user with another user who has placed a sell request on the platform. The buyer is then shown banks details of the seller to directly transfer money. This way, the exchange doesn’t have to have its own bank account that deals in cryptocurrency. Once the seller receives the money the exchange is notified and it transfers the cryptocurrency/token from the seller’s wallet to the buyer’s wallet.

The revenue for the exchanges usually comes from the fees on the C2C platform.

“Crypto trading is not illegal in India, the only thing that the RBI has said is that exchanges cannot have banking services, which we don’t anymore. But we do facilitate the trading of cryptocurrencies,” says Shetty. WazirX sees transactions worth 40 Bitcoins every day. That’s nearly Rs 2 crores a day based on current prices.

FactorDaily has reached out to Zebpay and other exchanges on their future plans and will update the copy once we receive a response.

What next for the cryptocurrency ecosystem

The roots of the problem for cryptocurrency exchanges in India lies in the April 2018 notification from the RBI, a sort of warning shot fired by the central bank to signal its intentions. With the notification, the bank cut out businesses and individuals dealing in cryptocurrencies from the formal economy by denying them access to banking and other services regulated by the RBI. The cryptocurrency ecosystem has challenged the notification in the Supreme Court and a hearing on the subject is due soon.

According to Anirudh Rastogi, founder at New Delhi-based Ikigai Law, the outcome can go either way but the ecosystem does not have much to lose. “If the ruling were to uphold the ban then nothing changes, because that has been the case since the RBI circular came into effect from July and business will continue to operate as they currently do. On the other hand, if the court were to strike down the circular the business stands to benefit. But that again depends on the conditions under which the RBI circular is struck down,” says Rastogi, whose firm, earlier called TRA Law, rebranded to Ikigai Law in September this year.

Meanwhile, cryptocurrency traders say that they aren’t affected by Zebpay shutting down. “Those currently invested in cryptocurrencies are the ones who are in it for the long haul and not here to make some quick money. The slump in the market is not due to the regulatory atmosphere but more so because the market is currently undergoing a correction,” Says Chandan Choudhury, a cryptocurrency analyst and trader from Bengaluru.

If the situation doesn’t change, it might push traders underground where tracking and controlling exchange will become tougher.

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