Indian investors are flocking to cryptocurrencies like never before and the trend could be a dangerous one.

Indians had parked nearly $6.6 billion in cryptocurrencies until May this year, as compared to around $923 million until April 2020. The country ranks 11 out of 154 nations in terms of cryptocurrency adoption, as per blockchain data firm Chainalysis.

Many believe that this growth is still just the tip of the iceberg and many more Indians will likely flock to digital coins in the near future. “India has a population of 1.39 billion that is predominantly young which is seen as tech-savvy and more adaptable to crypto saving,” Harish BV, co-founder of Unocoin, which has a userbase of 13 lakh in India, had told Quartz in May.

While this growth has given Indian cryptocurrency exchanges a reason to celebrate – and attract funding from global investors – the boom is happening in the absence of any stringent guidelines from the central bank or the government. This is particularly problematic because of the Indian government’s past relationship with cryptocurrencies.

Popularity of cryptocurrencies

In April 2018, almost overnight, the Reserve Bank of India had restricted banks from engaging in cryptocurrency-related dealings. The decision was turned down by the supreme court in March last year, which led to a manifold rise in demand for virtual currencies.

Most recently, on May 31, the central bank issued a statement where it advised banks not to cite its 2018 circular for denying services to cryptocurrency platforms or investors. But since then, the authorities have gone silent.

Representational image. Photo credit: Pxfuel (CC0)

For now, cryptocurrency exchanges and investors seem to have perceived the RBI’s latest circular as a stamp of approval. This could possibly be a generous interpretation, and the extent of risks given the scale of investments may be damaging.

The RBI’s regulatory move may be a sign of pulling away from a blanket ban, but there are still no proper guidelines for virtual currency. So, there needs to be some caution about any future policy changes.

Besides just the government’s stance, the lack of regulations also leaves Indian investors vulnerable to other threats. “The biggest regulatory risk is that bad players might come into the ecosystem,” Nischal Shetty, co-founder of WazirX said. “While we, at exchanges follow a regulatory code of conduct, which is self-imposed, we cannot prevent others who do not follow it.”

The cryptocurrency ecosystem in India has raised many issues pertaining to payment solutions, taxation, and legal status, which could all be sorted if the government and the Reserve Bank of India clarified their long-term view on the sector.

“The global cryptocurrency ecosystem is growing rapidly with many projects and innovations happening,” said Avinash Shekhar, co-CEO of ZebPay. “These are investors, innovators, and businesses that offer job opportunities for many. Regulatory clarity around crypto can definitely help grow the crypto ecosystem in India.”

Shekhar suggests that clarity on regulations for virtual currencies will enable cryptocurrencies to “be a part of the economy as an asset class alongside the sovereign currency”.

Crypto cold war

The enthusiasm of investors has refused to die down even as the Indian government is considering the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 that could ban all private cryptocurrencies in India and provides for the creation of a legislative framework on an official digital currency.

Last week, finance minister Nirmala Sitharaman reportedly said the government has prepared a draft policy on cryptocurrencies, which envisages a window for pilot projects and experimentation for fintech companies. “We have taken stakeholders’ inputs,” Sitharaman said in an interview to The Hindu BusinessLine newspaper. “The cabinet note is ready. We have to see when the cabinet can take it up and consider it so that then we can move it.”

Some believe that the delay comes as the RBI signalled it is “very much in-game” and is working on its own central bank digital currency like the Chinese digital yuan.

“The fact that it is technology, and it is new has kept them sceptical about crypto markets,” Shetty said. “All the regulators are connected to the financial domain, but not technology domain. All of a sudden there is a new thing in front of them which is financial and also deep-rooted in the tech world. For them, it is also going to be challenging to regulate this market.”

This article first appeared on Quartz.