Tackling Corruption Backfires
While most people had their eyes on the U.S. presidential election last week, India’s Prime Minister Narendra Modi announced that 500 and 1,000 rupee notes will no longer be in circulation.
Making sure that large denomination notes were no longer legal tender was part of PM Modi’s plan to tackle corruption, but it has also led to a rise in bitcoin usage. Many Indians are wondering how to keep their cash liquid and out of government coffers. (Source: “India’s rupee restrictions are boosting demand for bitcoin,” CNBC, November 15, 2016.)
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The number of Google searches for “buy bitcoin” surged in India, not to mention that downloads for Bitcoin-related apps skyrocketed. For instance, “Zebpay,” a smartphone app which acts as a bitcoin exchange, passed 100,000 downloads soon after.
As a result, bitcoin prices are trading higher in India than elsewhere in the world. This discrepancy is possible because people still have to buy bitcoin with their local currency, meaning that prices on some exchanges can overheat and distance themselves from global prices.
According CryptoCompare, rupee-denominated bitcoin was trading $20.00 above U.S. prices at the start of September. Since then, it has catapulted to a $70.00-$100.00 premium, suggesting that many Indians are looking for alternate currencies in which to store their wealth.
There was a similar situation in China earlier this year, as increased demand from within the country drove up the yuan-denominated price of bitcoin. Stringent capital controls limit the amount of money that can leave the country, yet a series of stock market crashes had many people looking askance at the yuan. Its value was constantly undermined by the central bank.
So those citizens found an alternative way to funnel their cash out of the country.
India’s ban on large notes was slightly different, in the sense it was aimed at “dark money,” which facilitates corruption. It was a surprise announcement that only gave a short window for people to exchange their cash for smaller bills, although that may be a feature rather than a bug.
Regardless, the outcome in India and China has been the same: when people face government restrictions on their use of cash, they turn to cryptocurrencies like Bitcoin.
