A Study of the Impact of Crypto Currency on the Indian Payment system

Abhishek Kumar

Department of Management Studies, IMCU.

*Corresponding Author E-mail: abhishek.kumar@mba.christuniversity.in

ABSTRACT:

Payment systems form an integral part of any emerging economy. A payment system should be safe, secure, reliable, and accessible. It will help in expanding financial inclusion and bringing financial stability. An efficient payment system helps in the smooth flow of payments and mitigation of risks and smooth functioning of the economy. It helps in fostering confidence in individuals about the use of payment services. Technological development has helped in changing the face of payments system from cards (credit/debit card) to wallets (Paytm/Phonepe etc.) to Unified Payments Interface (UPI) and Quick Response (QR)codes. It has not only introduced us to new payment methods but also strengthen the traditional payment methods. It has become an important part of our daily life. It has empowered us and made our life easier by offering services at our fingertips round the clock. The latest addition to these is cryptocurrencies like Bitcoin, Ether, Ripple, etc. Cryptocurrencies are one of the first applications of Blockchain technologies.it has removed the need for intermediaries and exert pressure on the existing framework. The attributes of cryptocurrency framework like decentralized network, no intermediaries, and the lack of stable pricing factors do not let it unlock its true potential. The future of Cryptocurrency is uncertain. Whether it will be accepted globally or still be traded via unauthorized means. Every problem allows for finding a solution. The regulators should come up with policies, which will help in shaping the payments system for the betterment of the people, by using the positive attributes of cryptocurrencies and coordinating with the Global peers.

KEYWORDS: Cryptocurrency, Economy, Payments, Decentralized, Risk.

INTRODUCTION:

In April 2018, the RBI had banned banks from offering any services to support the cryptocurrencies. So, the crypto traders were forced to either close their business, move to other countries, or change their business model to crypto-to-crypto and over-the-counter trading.

Cryptocurrency trading became legal in India for a shorter period as Government is planning to come up with a legal framework rather than a circular to ban the cryptocurrency again (Sikarwar, 2020). When the Supreme court of India had lifted the ban on the trading of cryptocurrency in the country, it was received with a lot of zeal and the count of the users has seen a huge spike.

The law also decriminalized the investors who have already invested in various cryptocurrencies. This can be a gateway to new opportunities for India in terms of Investment, Economy, or market. But the RBI take on the decision is that it could be a risk for the banking system and give way to money laundering.

As per the report, the IT department had issued notice to around 500,000 crypto investors seeking information if they had paid taxes on the increase of the valuation of the crypto assets. Moreover, the indirect tax department had also issued notices to the crypto trading platforms asking as to whether the Cryptocurrencies being treated as supply of goods or services and if had paid Goods and Services Tax(GST)(Shukla and Sachin Dave, 2020).

The need of the hour might be a regulatory framework which will address all the concerns and allay the queries and the fear among the stakeholders. Companies need to come up with use case studies to promote awareness and focus on building sound infrastructure. So, that they can address regulatory issues and those related to customer identity, liquidity, and taxation.

LITERATURE REVIEW:

An efficient payment and settlement systems form the backbone of any economy.it helps in lowering the cost of services and goods exchanged. On the other hand, a weak payment system cripples the economy, hampers the development process, lowers the confidence in the system and leads to inefficient use of the financial resources(Department Of Payment And Settlement Systems, 2019). The digital mode of payments has revolutionized the ways of making a transaction. Moving from a barter system in ancient times to the modern contactless payments system. The payment system has come along way. Electronic payments provide an easy way in which people can pay for their fees, license, taxes, and purchases whether it is online or at the store round the clock as mentioned in the research paper (Kaur and Pathak, 2015). Another researcher (Shah, 2017) has focussed on the pros and cons of the payment system and how it has shaped the economy. He has also cited the four factors which have driven the cashless payments trend in India like Cash being expensive, Advancement in technology, Economical and Government initiatives. There are many modes of digital payments like Credit/Debit Cards, Unified Payments Interface (UPI), Digital Wallets, Immediate Payments Service (IMPS), Unstructured Supplementary Service Data (USSD), Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT), Aadhar Enabled Payment System (AEPS), Mobile banking and Bharat Bill Payment System (BBPS). Due to the smartphone revolution in India, there was an explosion in the digital payment options and after demonetization, e-money transactions increased at a rapid pace with year on year growth of 162.5% in 2016and growth in 2017 was 120%. As per the report, e-money accounts for about 26% of the online transactions(Department of Payment and Settlement Systems, 2019).

As per the latest RBI Report (RBI, 2019), it plans to develop state-of-the-art payment systems that are not only secure and safe but also fast, efficient, and reliable. There has been substantial growth in volume for retails payments.

Vision for 2021 for RBI includes:

· Enhancing the experience of Customers;

· Empowering payment System Operators and Service.

Providers;

· Enabling the Eco-system and Infrastructure;

· Putting in place a Forward-looking Regulation;

· Supported by Risk-focussed Supervision.

RBI aims to achieve the goals using by enhancement of competition in the payments area by authorizing new players, more the number of players will mean the services at affordable cost, the anywhere-anytime feature would add to the convenience factor, and customers confidence could be retained by raising the security standards.

According to the reports, by 2021 payments involving cheques will become less than 2.0% of the retail electronic transactions. The number of digital transactions by December 2021 will become 8707 crores and the increase is more than four times compared to 2069 in December 2018.

One of the main stakeholders of any Payments ecosystems is the end consumers. In India, Generation Y(People born between 1982 and 2004) or Millenium Children form a major part of the population, the inclination towards digital products is more compared to countries such as Japan and Europe which have an aging population. If the rewards are good this generation is always ready to try out new payment channels/systems. This offers a good opportunity for emerging payment service providers to create personalized loyalty programs and rewards. This will lead to mass adoption and engagement.

The new addition to the payment option is the Cryptocurrency, and it is obvious for the consumers to be inclined towards it because it offers privacy. In 2013, the US Treasury department said about the virtual currency that it is "a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency." Bitcoins satisfies these requirements (Francis, 2019). A bitcoin wallet is a software that facilitates sending, receiving, and storing Bitcoins. As mentioned in reports by the University of Cambridge researchers, that in 2017 there were approximately 2.9 to 5.8 million unique wallets that contained cryptocurrencies and the majority of them were bitcoin wallets (Hileman and Rauchs, 2017).

Bitcoin is a digital currency that is decentralized and does not need any third party or financial intermediary like a central bank. Each of the transactions is stored in a Bitcoin Blockchain, a publicly distributed ledger, and can be verified. Blockchain is a shared ledger that keeps a note of the transactions, it is replicated and frequently finalized to reach a consensus among the users(Francis, 2019).

Though Bitcoin the king among cryptocurrency is the most popular the people. There is also widespread confusion and biases among the people. Making people aware of the alternate form of cryptocurrency and educating them about its features will lead to widespread use.

After uplifting of the ban by the Supreme Court of India, the two major Indian cryptocurrency exchange platforms, CoinDCX and WazirX, saw an increase in the volume of cryptocurrencies.

According to the reports, (Coinpaprika and OKEx, 2020) on the Indian Crypto market, India is catching pace with the other global Crypto markets and transactions might increase in the year 2020-2022. The major factors which led to the recent developments of events are immigrants, finance, and government policies.

Cryptocurrency demand in India surged because it acts as a remittance medium for cross-border payments and used as a conversion medium to a more stable fiat currency. The average remittance fee in India in 2019 was around USD 6.72, while the global average stands at USD 7.4. In India, cross-border remittances are mainly done by banks. Non-Banks are only permitted for inward remittances and not outward. KYC/AML, Combatting Finance Terrorism (CFT), and multiple authentication processes have made cross-border remittances slow. So, to lower the remittance costs and make the system fast, efficient, and secure the cross-border payments system needs to be integrated.

As per the data, Mexico stands at the second number, after India, in terms of remittance by migrants Mexican PESO is converted to USD dollar using cryptocurrency as a channel. Ripple powered payment system is going to be launched by Santander, the Spanish Banking giant, to capture the share of the remittance market. Easing of policies in India can be pivotal in leading India on the path of Mexico.

Though the Subhash Garg committee report (Department of Economic Affairs, Ministry of Finance New Delhi, 2019) in its findings, recommended banning cryptocurrencies in India because of the volatile prices, and the risks associated with it. However, it also recommended that the Government can form specific groups and come up with a model of digital currency in India and suggested RBI as an appropriate regulator. The committee highlighted the benefits of DLT (distributed ledger technology) and said that DLT based systems can be used by financial institutions and banks for the process of collateral management, claims management in insurance, fraud detection, loan-issue tracking, and as a reconciliation system for the securities market.

Bloomberg, in its report(Bloomberg-Crypto-Outlook, 2020), mentioned the rise of cryptocurrencies(especially Bitcoin). During these uncertain times, when the Global stock markets were trading at low levels. Bitcoin though being 5X times more volatile than SandP 500 last year, was down only about 5% compared to 22% of the stock index. COVID-19 has highlighted the vulnerabilities in the cash-based transactions. JPMorgan’s proposed JPM Coin which could transform payments in 2020. A first-mover advantage exists for large institutions that create settlement platforms that are less costly and efficient.IT Giants like Microsoft and IBM backed by JPMorgan and Wells Fargo are competing to revamp the market by leveraging the Blockchain technology. Bitcoin, the benchmark of crypto assets, is increasingly becoming the digital version of gold (Bloomberg-Crypto-Outlook, 2020).

In its report on the Future of Payments by Deutsche Bank Research (Deutsche-Bank, 2020), it discusses the pros and cons of a cryptocurrency and its role in shaping the future of the payment system. The report emphasizes on the fact that there could be a shift in the epicenter of global economic power if China (and India) could come up with a cryptocurrency backed by its central bank. China has already announced a People’s Bank of China (PBoC) digital currency in 2019 and will become the first major economy to do so if the plan moves as expected. This will put pressure on other economies.

Moreover, Binance, a leading cryptocurrency trading platform, has joined the Internet and Mobile Association of India’s (IAMAI) digital asset exchange committee in June 2020. It wants to shape the Indian Blockchain industry for growth and development. It will work on implementing global best practices to drive the development of India’s crypto and Blockchain industries (Haig, 2020).

Ripple, a cryptocurrency firm, has published a white paper that suggests a method and regulatory framework to the Indian authorities like the Securities Exchange Board of India (SEBI) to control and regulate the cryptocurrency. It has also recommended removing the ban on the cryptocurrencies and allowing companies like itself in the Gujarat International Finance Tec-City (GIFT City), to test and come up with use-cases and models in the Indian context(Jain, 2020).

OBJECTIVE OF THE STUDY:

The objective is to study the impact of Cryptocurrency on the Indian Payment systems.

Research Methodology: To complete the study secondary data has been used. The study is based on Literature analysis and study of the current trends.

IMPACT ON FINANCIAL INSTITUTIONS:

1) Conversion from INR to other stable currencies:

The value of Indian Rupee is always fluctuating. Situations like the Covid-19 pandemic have tested its mettle. During these times of uncertainty, Rupee has depreciated constantly, leading to a loss in the business.

The graph shown above represents the dominance of USD dollar over Indian INR. Indians look to convert their currency to a more stable fiat currency, but due to strict regulations in place by the Government of India, it is not possible to do so. Cryptocurrency came to aid at this point. Buying bitcoins using Rupee and then converting it to USD dollars using the C2C trading platforms like Paxful and LocalBitcoins. During the time of the pandemic, this method was practiced by most people to preserve the value of the falling Rupee.

2) Lack of Regulatory Policy in India:

The trading exchanges witnessed an increase in trading volumes on the local crypto trading exchanges, CoinDCX and WazirX, since uplifting of the ban. During the 2020 Q1, the number of new users rose by 4100% as per OKEx.Kraken, the world’s second-largest trading exchange, will enter India by 2020. Still, there exists an unclear picture of the regulatory policies and tax obligations. Moreover, the Internet and Mobile Association of India is working on a draft version of the code of conduct for the cryptocurrency companies in India concerning the KYC process, anti-money laundering, and other regulatory aspects. Regulations and technological advancement should evolve sufficiently to address this concern. Government, in advanced and emerging economies, around the world have already started regulating the cryptocurrencies. Moreover, In India, there is no direct regulation of third party payment service providers compared to countries like China, Japan, Brazil, and South Korea.

3) Crypto Exchanges:

Most of the crypto exchanges are not regulated or guided by any protocols and may be situated in other countries. Majorly the cryptocurrencies are traded on these exchanges are prone to cyber-attacksThere have been instances when in unregulated markets, computer programs were written to manipulate the prices of the cryptocurrencies. Coincheck, a cryptocurrency exchange based out of Tokyo, had reported that in January 2018 hackers had stolen GBP 400 million(Deutsche-Bank, 2020).

4) Money Laundering:

BIS in its Quarterly review(Wooldridge, 2020), mentioned that the Cryptocurrencies or Digital assets provide a channel for global payments. According to a recent study, Bitcoin accounts for $76 billion of illegal activities per year (Foley et al (2019)). As per the data of (CipherTrace 2019, 2020), an industry group in the area of crypto exchange compliance with AML/CFT standards, Banks have globally paid more than US$ 6.2 billion in AML fines in 2019.

A researcher of repute (Dyntu and Dykyi, 2019)has mentioned about the Dark wallet, which complicates the crypto transaction in such a manner that it becomes difficult to trace the origin. Moreover, criminals can use “dirty money” to purchase cryptocurrency and convert it into “clean money”. The main reason that cryptocurrency became popular because they offer anonymity. However, a Blockchain keeps the track of every transaction but they are not revealed publicly. It might be possible to reveal the identities of those who have carried out these transactions by using the information on the Blockchain, which might prove beneficial in case of anti-money laundering and criminal activities. But it relies on the infrastructure in place and cooperation among the stakeholders.

5) Economic Stability and Reliability:

Cryptocurrency has witnessed a lot of volatility because there is no intermediary, which is its basic virtue. If there is a regulatory body, may be appointed by the Government, cryptocurrencies might possess some price stability making them less risky to invest and hold. Of all the known cryptocurrencies, Bitcoin enjoys most of the market share and is also the most volatile. As per the reports of Blockchain.info, between January 2015 to December 2017, the average price bitcoin across markets fluctuated between $177 to $20,000. The price fluctuations deter bitcoin from becoming a means of exchange and making its place among the payment instruments. Such price instability could lead to bubble formation and hyperinflation which can be compared to that of Germany in the 1920s and Argentina, Venezuela, and Zimbabwe. It will become difficult for an e-seller to price his goods due to price fluctuations(Deutsche-Bank, 2020).

6) Tax Evasion:

Cryptocurrencies can be used to convert one currency to another, thus hiding from the eyes of the Government. Some cryptocurrencies have been used for paying for goods/services without converting them to cash. Some of the crypto exchanges have vanished suddenly thus wiping all transaction records. Thus all of these activities can be attributed to the evasion of taxes by individuals.

7) ICOs:

Initial Coin offering in the Crypto world is similar to an Initial Public Offering (IPO). It is a crowdfunding method to introduce a new cryptocurrency to the market. A digital token like bitcoin is created by the founders and sold to the public(Francis, 2019). After Supreme Court consents many new ICOs are coming up. These pose a major risk to the investors because the exchange rate of such new coins to the currency is highly volatile as there is no standard measure.

8) Mob psychology:

Cryptocurrencies have high volatility because they are not backed by any tangible assets like the paper currency and the markets in which they trade is unregulated. since there are no tangible pricing factors, the price of the cryptocurrencies is determined by the forces of demand and supply, which in turn is determined by the emotions of the crowd trading in these cryptocurrencies.so, it can be said that the feelings and emotions of crypto traders determine the market price of a cryptocurrency. A trader holding a huge volume of cryptocurrency can drive the market price which is an irrational economic process. Mob psychology gives us more insight into the behavior of cryptocurrency traders. Thus, in the case of Initial Coin Offerings (ICOs), cryptocurrency traders who are novices and hold unrealistic dreams of getting rich can be duped by traders who conduct these ICOs (Popper and Lee, 2018).

CONCLUSION:

Cryptocurrency to be banned or legalized has always been a burning question. The future of the use of cryptocurrency in India is still uncertain.

Considering the financial disruption that is coming ahead, a loosely regulated digital currency is not the best response. An alliance must be forged between the different stakeholders like Financial institutions, Mobile apps, and retailers. Some countries that have a strong banking framework have taken initiatives to consider cryptocurrency.

Cryptocurrency needs to be studied in great detail so, that the government has clarity on designing in the regulatory framework. They should get in touch with the Crypto organizations to study the pros and cons of the new currency system.

Cryptocurrencies can prove to lead the disruption in the financial sector. It will be interesting to see which countries take the first-mover advantage and lead the change by regulating it and forge partnerships with the stakeholders.

CONFLICT OF INTEREST:

The authors declare no conflict of interest.

REFERENCES:

1. Bloomberg-Crypto-Outlook. (2020). Bloomberg Crypto Outlook. June, 1–11.

2. Cipher Trace 2019. (2020). About CipherTrace. January.

3. Coinpaprika and OKEx. (2020). Mapping out India’ s Blockchain Ecosystem. 1–10. https://www.okex.com/academy/en/mapping-out-indias-blockchain-ecosystem-coinpaprika-okex-report

4. Department of Economic Affairs, Ministry of Finance New Delhi, I. (2019). Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies. February.

5. Department of Payment and Settlement Systems. (2019). Benchmarking India’S Payment Systems. June, 71.

6. Deutsche-Bank. (2020). The Future of Payments Part III. Digital Currencies: the Ultimate Hard Power Tool. January 2020.

7. Dyntu, V., and Dykyi, O. (2019). Cryptocurrency in the System of Money Laundering. Baltic Journal of Economic Studies, 4(5), 75. https://doi.org/10.30525/2256-0742/2018-4-5-75-81

8. Francis, J. C. (2019). Bitcoins, Cryptocurrencies and BlockChains. SSRN Electronic Journal, 1–20. https://doi.org/10.2139/ssrn.3371051

9. Haig, S. (2020). Binance Joins Indian Internet Association Amid Regulatory Uncertainty. https://cointelegraph.com/news/binance-joins-indian-internet-association-amid-regulatory-uncertainty

10. Hileman, G., and Rauchs, M. (2017). 2017 Global Cryptocurrency Benchmarking Study. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2965436

11. Jain, R. (2020). Ripple suggests a regulatory framework to keep India from banning cryptocurrencies — yet again. https://www.businessinsider.in/finance/news/ripple-regulatory-framework-india-cryptocurrency-ban/articleshow/76480315.cms

12. Kaur, K., and Pathak, A. (2015). E-Payment System on E-Commerce in India. International Journal of Engineering Research and Applications, 5(2), 79–87. http://ijera.com/papers/Vol5_issue2/Part - 1/M502017987.pdf

13. Popper, N., and Lee, S.-H. (2018). As Bitcoin Bubble Loses Air, Frauds and Flaws Rise to Surface. https://www.nytimes.com/2018/02/05/technology/virtual-currency-regulation.html

14. RBI. (2019). Payment and Settlement Systems in India: Vision-2021 Empowering Exceptional (E)payment Experience. RBI Report, Ccil, 1–17.

15. Shah, Z. A. (2017). Digital Payment System: Problems and Prospects. EPRA International Journal of Economic and Business Review, 05(8), 194-201, e-ISSN: 2347-9671| p-ISSN: 2349-0. www.eprawisdom.comwww.eprawisdom.com%0Awww.eprawisdom.com

16. Shukla, S., and Sachin Dave. (2020). RBI to seek review of Supreme Court order on cryptocurrency. https://economictimes.indiatimes.com/news/economy/policy/rbi-to-seek-review-of-supreme-court-order-on-cryptocurrency/articleshow/74503345.cms

17. Sikarwar, D. (2020). With a law, India plans lasting ban on cryptos. https://economictimes.indiatimes.com/news/economy/policy/with-a-law-india-plans-lasting-ban-on-cryptos/articleshow/76330403.cms

18. Wooldridge, P. (2020). BIS Quarterly Review International banking and financial market developments BIS. March. http://www.bis.org/publ/qtrpdf/r_qt2003.h

Received on 06.02.2021 Modified on 26.02.2021

Asian Journal of Management. 2021; 12(3):310-316.

DOI: 10.52711/2321-5763.2021.00047