The crypto industry went from strength to strength around the world in 2021.
The pandemic-driven change in investment preferences, that spilled over across asset classes, drove a trove of global investors towards cryptocurrencies. The price of major cryptocurrencies surged. Data from crypto media outlet Coindesk show (at 8:06 PM IST):
- Bitcoin rose nearly 64% year on year: from just below $29,000 per coin. It currently trades at $47,289
- Ethereum has multiplied nearly five times, at 403% year to date from $731 per coin to $3,723
- Dogecoin – a literal joke that’s based on a meme, has rallied 3,544% this year. It started the year costing a little less than half a cent. It now costs you 17 cents for a coin.
In India too, the crypto industry boomed, building on a solid year in 2020. According to an estimate, nearly 10 crore or 100 million people trade in cryptocurrencies. Crypto research firm Chainalysis showed that Indians had cumulatively invested $6.6 billion in cryptocurrencies in a report in June this year, up 612% year-on-year from $923 million in 2020.
But while cryptocurrencies may have arrived, the regulatory ecosystem did not. This left a booming and a seemingly arcane industry operate in a regulatory grey area, where alluring and bombastic advertisements for investors are rampant and little tax clarity on gains made through cryptocurrencies.
The Government of India listed bills twice in Parliament aiming to regulate the cryptocurrency industry: once during the Budget Session (in February) and once in the Winter Session (late November to December). Both legislation listed common aims: to ban “private” cryptocurrencies, to provide a regulatory framework to regulate a central bank digital currency issued by the Reserve Bank of India and to leverage the power of blockchain (the underlying technology behind cryptocurrencies).
However, both attempts failed to see the light of day.
May I have some regulation, please?
The Indian cryptocurrency industry got a fillip with the Supreme Court striking down a 2018 circular by the Reserve Bank of India in March 2020. The circular prohibited banks and NBFCs from providing accounts and other financial services to crypto exchanges.
The scrapping of the circular was well timed as it bolstered cryptocurrency exchanges in India right before the first lockdown; and has carried over in 2021. With no law in Parliament, cryptocurrency and blockchain currently remain an unregulated space: it is not expressly illegal, but there is no specific law applicable to it.
Since the RBI was not regulating cryptocurrencies, banks took it upon themselves this year to restrict crypto transactions. Banks like HDFC Bank, the State Bank of India and entities like SBI Cards started citing the scrapped RBI circular in correspondences with their customers to try and get them to desist from such transactions and warning them of possible action. The RBI had to step in to ask banks not to cite a circular that was legally scrapped. However, the RBI said banks could continue their due diligence on cryptocurrency-related transactions under all applicable laws.
On the legislative front, while cryptocurrencies did not see any bill being passed by Parliament on two different instances, the issue did have its fair share of attention. In the Winter Session of Parliament, the government answered a flurry of questions on the issue as it prepared to introduce the bill in Parliament (which eventually did not happen).
In a series of written answers to Lok Sabha, it said that it did not have data on the number of traders in cryptocurrencies and in the same response, clarified that bitcoin or other cryptocurrencies were not being considered by the government as a currency. In a separate response, the government said that it had no plans to “boost” the cryptocurrency sector in India, but outlined the benefits for an RBI-backed central bank digital currency.
The rise of dogecoin
The beginning of the year witnessed the ‘Reddit Revolution’, where an online rabble of retail investors took to memes and Reddit to boost the prices of offbeat yesteryear stocks. Hedge funds had bet against, or shorted, these stocks, and this period saw them incur notable losses.
This phenomenon spilled over into such persons buying dogecoin, which is a ‘meme-coin’: it is a literal joke that has its foundation in a shiba inu breed dog-based meme.
The first half of the year also witnessed Elon Musk influence the prices of dogecoin, bitcoin and his company Tesla’s stock. Musk is a nearly messianic figure for followers for cryptocurrencies, and he is popularly called ‘Dogefather’ due to the disproportionate influence his tweets wield over these prices.
Its investors want to “take doge to the moon”: a colloquial for taking its prices higher and higher. The price aim, according to Reddit, is $1 per dogecoin. Currently, dogecoin is just a little more than a tenth on its way there. Though dogecoin’s rise in prices is impressive – which created some millionaires along the way – the cryptocurrency is only a seventh of its value as of May 8, when it was 74 cents.
The cryptocurrency also received some institutional support, though not as much as the more established bitcoin, that too from the companies associated with Musk. His space venture, SpaceX will accept dogecoin as payments to launch their Doge-1 Mission to moon in the first quarter of 2022.
The joke is – dogecoin will at last be going to the moon.
Beauty is in the eyes of the beholder
Art is peculiar and unique, and the value attributed to it is subjective and varying. This idea for peculiar objects, limited to those that exist exclusively digitally took this year by storm through non-fungible tokens (NFTs). These blockchain-backed tokens could be anything – videos, media, memorabilia, URLs or digital collectors’ items, all united by the fact that they exist exclusively online.
Digital artwork created by an artist called Beeple sold for $36 million. Iconic auction house Sotheby’s has sold $100 million through NFT auctions. Overall, the NFT industry is tipped to reach $17.7 billion by the end of the year, up from just $340 million at the end of 2020.
The uniqueness of NFTs also bought them a second purpose – those of fan tokens. In India and abroad, celebrities have associated their name with their own brand of NFTs, which often represent digital snippets from their own illustrious history. Buying these fan tokens often grant their holders voting rights towards certain non-binding decisions, and access to exclusive insights of the celebrity or organisation.
In India, Amitabh Bachchan, Yuvraj Singh and Salman Khan are among the celebrities to launch NFTs. This year, when footballer Lionel Messi moved from football club Barcelona to Paris Saint Germaine, he accepted a part of his pay package as $PSG coins: the fan token of that club.
Also Read: Explained: All You Need To Know About NFTs
Case in point: El Salvador
In September this year, El Salvador became the first country to make bitcoin as legal tender alongside the US dollar, which is its official currency. This is the latest in a string of evidence that bitcoin is gaining more institutional support. This means that citizens could settle all debt and settle all taxes in bitcoin. However, official accounts would still be in dollars.
In November, El Salvador’s maverick president Nayib Bukele announced ‘Bitcoin City’, a hub based on a bitcoin-economy that would be powered by a volcano and would have zero direct taxes or emissions. It’s financing would be through bitcoin-backed bonds.
This introduction of bitcoin as legal tender by Bukele has been controversial, as on the one hand the move was touted by the president as a move to bring global investment, but on the other has had a rocky rollout and met local criticism due to the unstable nature of bitcoin.