{ONE}
SOHAIL MERCHANT’S PHONE kept him awake through the night of 8 November. That evening, at 8 pm, Prime Minister Narendra Modi shocked the country by declaring that, from midnight, all Rs 500 and Rs 1,000 notes would no longer be legal tender. Modi presented this as a way to flush out “black money”—untaxed wealth, part of which is held as unaccounted-for cash. Demonetised notes could either be deposited in bank accounts, exposing their owners to official scrutiny, or left, Modi said, to become “worthless pieces of paper.” Some with stockpiled cash rushed to purchase goods with it, or convert it into other stores of value, while they still could. Jewellers and retailers of luxury goods reported a spike in business that night, and many stayed open late.
The first call came soon after Modi’s announcement. By morning, Merchant had received over 150 of them. They kept coming in the weeks afterwards, too, from all over India. “Everybody was talking in crores,” he said. “‘I want to convert 25 crores, I have 30 crores,’ like that. All in cash.” When he said he was in Mumbai and only handled cash transactions in person, many callers responded, “We are ready to come there.”
What Merchant had to sell was not gold, or foreign currency, or any tangible thing. He trades bitcoin: a cryptocurrency, generated and exchanged entirely over the internet, invented in 2009 by an unidentified person or group of people under the pseudonym Satoshi Nakamoto, who termed it “a peer-to-peer electronic cash system.” Bitcoin pioneered the use of the blockchain, a distributed database that acts as a public ledger. The blockchain relies on cryptography—hence the “crypto” in cryptocurrency—allowing users to operate with a high degree of privacy, and often anonymity. The entire history of bitcoin transactions is recorded and transmitted to each node in a vast worldwide network of computers. New transactions are approved only after being verified against this record, and all versions of the record are continually updated and synced, meaning it cannot be retroactively altered. Bitcoin is free of any centralised control; its validity, unlike that of traditional fiat currencies such as the rupee or the dollar, does not depend on a single authority, such as a central bank, vouching for it. This independence is one of the cryptocurrency’s draws, particularly for those who distrust banks and governments—a sizeable contingent especially at the time of bitcoin’s creation, in the aftermath of the 2008 global financial crisis.
Early on, a single bitcoin was worth a fraction of a US penny. But in 2011 the currency achieved parity with the dollar, and in November 2013 the price of a single bitcoin rose to around $1,200—the highest it has been to date. Bitcoin had seen massive fluctuations in value along the way, and soon the price crashed again. Since then, however, the price has generally trended upwards, and at the time of Modi’s demonetisation announcement its global price was hovering around $700.
There are three ways people can obtain bitcoins. First, they can earn them through “mining”: the work of processing bitcoin transactions—by verifying them against the record and then updating the blockchain—which is rewarded with new, automatically generated, bitcoins. As the system is designed, mining is the only way to bring new bitcoins into existence. Second, they can receive them as payment for goods or services sold. Third, they can buy them, handing fiat currency over to exchanges that offer bitcoins in return. India has very little mining capacity, very few sellers or service providers accepting payment in bitcoins, and restrictions on the cross-border flow of fiat currencies that make it difficult for Indians to buy bitcoins from foreign exchanges. As a result, the supply of bitcoins in the local market is limited, making Indian bitcoin prices consistently higher than global ones.
On 7 November, the Indian price of bitcoin stood at around Rs 51,500—roughly $775, or about 10 percent higher than the global price. In the weeks after demonetisation, that gap widened dramatically, with local prices in many instances rising to the equivalent of $1,000 and above—often around 30 percent higher than the global rate.
Merchant does business via Localbitcoins, an international platform for independent traders—a sort of eBay for bitcoin. He told me he accepted demonetised currency for about a week on the condition that clients provide him with official identification—he did not say how much he ended up taking—but then stopped. He explained that, given the risk that large bank deposits of old cash would attract attention, “even I’ll have to show my source of funds.” Still, he said, for weeks the volume of inquiries remained higher than he could handle.
Over the phone in early December, Merchant told me he was now receiving only four or five calls a day about converting old cash into bitcoin. But, he said, he was now answering lots of calls from people saying, “I have 100 bitcoins, or 200 bitcoins. I want to sell them all.” He explained that these callers had bought bitcoin at the time of demonetisation, and “now want to sell it and get the new cash.” Merchant said he had not been able to satisfy these callers because regulations for managing the post-demonetisation cash crunch meant that he could not withdraw enough cash fast enough from the banks.
COINDANCE, a platform that aggregates public data on bitcoin, showed that Localbitcoins saw Rs 1.1 crore exchanged for bitcoin in India in the week beginning on 12 November, and Rs 1.6 crore in the week after that. In the week beginning on 26 November, Localbitcoins saw exchanges worth Rs 2.8 crore—more trade by far, when measured by rupee value, than the site had ever recorded in a single week before.
It is likely that Indian traders on Localbitcoins did even more business over these weeks than the CoinDance numbers reflect. The site allows for payments by bank card, by electronic transfer, or in cash, and transactions are only registered if a buyer or seller voluntarily initiates a trade using the Localbitcoins system. It is easy to circumvent Localbitcoins, and the commission it charges, by dealing with customers directly. The profiles of most of the Indian traders I saw on Localbitcoins listed phone numbers alongside instructions to “call or WhatsApp” before initiating a trade online.
Besides Merchant, I spoke with four other India-based Localbitcoins traders. All but one of them reported a sharp uptick in business after 8 November. The profiles of all those I spoke to said they were open to in-person cash trades, though only Merchant and one other trader admitted to having accepted any amount of demonetised notes. Among the three traders who denied doing so, two specifically stated on their profiles that they were accepting old currency.
In mid December, the channel India Today broadcast a sting on several “bitcoin brokers” whom its reporters approached posing as customers looking to buy bitcoins using invalid cash. In one scene, shot with a hidden camera, a broker promises to convert Rs 50 lakh’s worth of demonetised notes into bitcoin and then back into rupees, using an exchange called Zebpay and charging a 20-percent premium on the exchange’s rate.
Sandeep Goenka, a co-founder and senior executive of Zebpay, posted a video response to the India Today sting, saying it had left the company “highly disturbed.” He explained that Zebpay only conducted transactions through banking channels, and not in cash. “We also want to tell all our users especially that we will cooperate with any government agency to ensure that our users follow all the laws of the country,” he said. “It would be foolish for any of our users to use our services outside the legal system.”
Besides Zebpay, India has three other large and reputed bitcoin exchanges—Unocoin, BTCxIndia and Coinsecure. These others, alongside Zebpay, also received unwelcome attention after demonetisation. On 10 November, the business newspaper Mint reported that these exchanges were receiving “frantic calls” from people looking to trade in old cash. Goenka told the paper, “I’ve had to put most of my operations guys in fielding calls and telling callers that this would not be possible.” Sathvik Vishwanath, the CEO of Unocoin, was quoted as saying, “We did get one or two such calls before, but today”—on 9 November—“it was a lot more.”
I spoke to executives at each of the four exchanges in December. They all repeated similar stories, of rebuffing inquiries about cash trades over the previous month. None of the four companies works with cash, and all hew to strict “know-your-customer” processes. Vishwanath explained how his company requires customers to submit identification and financial documents, and ties a verified phone number to each customer account. “We also make sure all transactions are occurring from a customer’s bank account to our bank account,” he said.
Unfortunately, as the surge in trades on Localbitcoins in November and my interviews with traders on the site suggested, such scrupulous behaviour does not exist across all of the Indian bitcoin economy. I, like many in India, became curious about the workings of this economy in the wake of demonetisation. But as I interviewed bitcoin entrepreneurs and enthusiasts, and looked into companies dealing in the cryptocurrency, I realised that whatever demonetisation-related malfeasance likely occurred in the bitcoin world represented only a small part of a much larger realm. This realm’s most definitive feature is its novelty—bitcoin, by most accounts, is groundbreaking, and will have far-reaching effects on our economic and technological future. But with that novelty come questions of how the cryptocurrency can and should be used. India, like the rest of the world, has only just begun asking these questions, let alone answering them. This makes the bitcoin economy a brave new financial frontier—untested, and so ripe with promise, but also unregulated, and so open to malpractice.
The bitcoin exchanges following know-your-customer rules are not required to do so. India has no specific regulations on how bitcoin, or other cryptocurrencies, may be used. The Reserve Bank of India has commented on cryptocurrencies numerous times, but the most it has done is urge caution in their use. In one circular, issued in November 2013, it warned “the users, holders and traders of Virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.” The other hazards listed in the document included hacking, dramatic losses due to speculation, and financial disputes that could not be mediated by any third-party authority.
As things stand, scrupulous bitcoin entrepreneurs are left to find ad hoc ways to fit their businesses within existing financial laws, and to guess at and fret over what regulations might in future be applied to the fledgling Indian bitcoin market. There are no hard numbers available on the size of this market, but I heard some educated guesses. When I first spoke to Goenka, in mid December, he told me that the country’s total of bitcoin users stood at 200,000—and that “if you would have asked me about two months back I would have said about a lakh.” An executive from one exchange, who spoke off the record, offered a “very broad estimate” that there are between 400,000 and 500,000 bitcoins in the Indian market—which, taking the higher number and as of early February, would value this market at Rs 3,450 crore at Indian prices, and almost $500 million at global ones. This makes India a backwater in the global bitcoin economy, where the total number of bitcoins in existence is currently around 16 million. Numerous entrepreneurs told me that the regulatory uncertainty around cryptocurrencies in the country is hurting the chances of this changing, as investors are put off by apprehension.
That uncertainty is not all that scrupulous bitcoin entrepreneurs have to worry about. The same lawlessness holding them back acts as an invitation into the bitcoin world for a sizeable number of those looking to make an underhanded profit. Bitcoin’s accounting is entirely transparent in that every transaction is recorded and publicly traceable in the blockchain, but there are plenty of ways that bitcoin users can avoid exposing their real-world personas in their online transactions. This means the cryptocurrency has been used for illegal activity—for instance, in online black markets such as the now-defunct Silk Road—and has spent much of its short existence under a cloud of public suspicion. In India, too, there is a danger that bitcoin will be maligned in the public mind, and here the danger stems both from its potential use in illegal commerce, and in its exploitation by scammers.
In India, as across the world, most bitcoin is held as a form of speculative investment. Much of the cryptocurrency’s value owes to belief in its future as a popular medium of exchange, but for now only a fraction of it is used for legitimate retail—even though a rising number of firms, including giants such as Microsoft, have started accepting it. The promise of rich returns combines with a general ignorance about the workings of cryptocurrencies and finance to attract plenty of greedy and gullible users—in other words, easy prey. Such investors exist online as much as offline, and the schemes that cheat them of their cryptocurrency are often similar to those that might dupe them of more traditional assets. Vishal Gupta, a prominent bitcoin entrepreneur, told me that scammers “are essentially looking for buzzwords, anything that is popular within society. Catch onto the buzzword, the scheme remains the same.” Bitcoin is not the cause of these scams, he said. “Bitcoin, essentially, is the victim.”
{TWO}
ON 4 JANUARY, Goenka hosted a live video chat for Zebpay customers, later uploaded to Facebook. He began with a glowing update about recent growth—Zebpay’s user base had just crossed 350,000, with 50,000 new clients arriving in the previous month alone. A few minutes in, Goenka’s tone went from bullish to cautionary. “We are aware that there are one or two alleged bitcoin mining schemes, which are extremely popular in India,” he said. “It has come to our notice that these mining schemes assure a fixed return in bitcoins, and some of them have promised returns as high as 10 percent of your bitcoin investment a month.”
Goenka did not mince words. “We are sure that these are scams,” he said. “Please be careful, please stay away, and do not invest your bitcoins in them. Please also be absolutely clear that Zebpay is not associated with any such schemes. In the situation that these schemes disappear with your investments, we are not liable to return your bitcoins back.”
This was not the first time Zebpay had issued such warnings. In March 2016, a brief post on the company’s blog urged clients to “use your discretion before investing” in mining schemes. In June, a post on its Facebook page, accompanied by a graphic that read “SCAM ALERT,” warned users of “bitcoin ponzi schemes” that are “rampant on the Internet,” including in India. In mid December, the customer-support section of the Zebpay website was updated with a similar message. This update named 14 specific companies that clients were told to approach with extreme caution. One of these was Gainbitcoin.
ON THE EVENING OF 3 DECEMBER, I arrived at a one-room office for Gainbitcoin marketers in west Delhi’s Janakpuri area, for an event titled “Introduction to Bitcoins” that I had seen advertised online. Diwali banners still hung from the office’s bright-white walls. I was met by a woman who silently ushered me to the cubicle of Kshitij Mehrotra, the only other person in the room. I realised that no one but me had shown up for the event.
Mehrotra and I sat down at a plastic table. Lanky and fresh-faced, he told me that he worked as a software engineer before he started “doing this bitcoin job” full-time. He lamented that he had only learnt about bitcoin in 2015. Had he known earlier, he said, “I would have been mining bitcoins on my laptop.”
He explained that Gainbitcoin is a “cloud-mining” company: it pools individual investments, in bitcoins, to pay for mining on specialised hardware, and rewards investors with a share of the new bitcoins generated. Mining involves difficult and probabilistic computation on sets of data known as blocks, and new bitcoins are awarded to the first node on the mining network to “solve” each block. This creates intense competition, since more powerful and better customised machines are more likely to succeed. In bitcoin’s early days, when the competition was relatively weak, mining was feasible on a personal computer. Today, it requires ASIC miners, specialised machines that are expensive to buy and maintain, and use large amounts of electricity. Most of these are manufactured in China, giving miners there a financial advantage over competitors in other countries who have to pay import duties for their hardware. China also has many areas with cheap electricity—including near hydroelectric dams built at high altitudes, with cool, dry climates that minimise the air-conditioning expenses otherwise associated with high-performance computing. Unsurprisingly, the majority of today’s bitcoin mining occurs in China.
Mehrotra told me that Gainbitcoin’s founder—an entrepreneur named Amit Bhardwaj, who “has been associated with bitcoin from 2011”—fully appreciated these realities. Bhardwaj, he said, initially coordinated cloud mining for a “closed community” of friends and family, running imported mining equipment in India. In 2013, Mehrotra continued, he “started placing the servers in China,” and in early 2015, he opened the project up to all comers, creating Gainbitcoin.
“It is a good venture,” Mehrotra said, “making a common person also able to mine bitcoin.” That mining, he continued, yields handsome rewards: Gainbitcoin’s investors are promised returns of 10 percent per month on their initial investments, which are locked in on 18-month contracts. Investors also receive hefty referral bonuses—5 percent of the investment from any new clients they bring in, plus smaller parts of the money put in by anyone recruited by their recruits.
Mehrotra said that, a few months earlier, Bhardwaj had launched a new initiative called GBMiners: a mining pool, which allows owners of mining hardware to combine their efforts so as to be more competitive, and split the rewards in proportion to the resources each was contributing. According to Mehrotra, GBMiners accounted for more than 5 percent of the global “hash rate”—the computing power of the entire mining network—and Gainbitcoin was “using the GBMiners pool to mine bitcoins.”
We had just reached the topic of demonetisation when we were joined by Hemant Khurana, another Gainbitcoin marketer. Khurana, a middle-aged former wristwatch salesman, had learnt of bitcoin just that September. Convinced of bitcoin’s ingenuity, he took all the money he had invested in the stock market—about 20 percent of his personal wealth, he said—and used it to buy bitcoin. He then invested much of this with Gainbitcoin. Khurana told me he is a loyal Zebpay user, but he seemed to have not seen, or at least not understood, the exchange’s repeated warnings about investing in mining schemes. “Zebpay always says that we don’t know any mining schemes or any mining company,” he said.
Mehrotra, I learnt, was also an investor in the cloud-mining scheme. Both men said they, like all Gainbitcoin marketers, receive no salary from the company, and work purely for the referral bonuses. Like Khurana, Mehrotra seemed naively uncritical in his view of Gainbitcoin. He was initially wary of the company, he said, “because previously there have been a lot of scams” where companies “have not been mining bitcoins and they were just claiming that they are mining bitcoins. … If you talk about any company that gives out good returns, what people do is they blindly trust.”
I asked Mehrotra and Khurana if they had seen a spike in interest in bitcoin after demonetisation. “Definitely,” Khurana said. “Because people who have big money, black money especially—”
Mehrotra cut him off, nudging him under the table. “See, I’ll tell you, no,” he said. “People have realised that the money they were trusting with the banks, or with the cash … they have understood that it is just a piece of paper.” This loss of faith in government-issued money, he said, led many to bitcoin as an alternative.
I asked if they had fielded any queries about converting black money into bitcoin. “We get calls, but we at Gainbitcoin don’t deal with the money part,” Khurana said. “We say, you buy your bitcoins from anywhere: from Sudan, from Somalia, from America, or—”
Mehrotra cut him off again. “Nahin, we got lots of calls, we got lots of calls regarding this conversion of black money, and we were like, no, once the PM has told you the 500- and 1000-rupee note is no longer legal tender, we are not providing you with the bitcoins. So, if you are interested in mining, we can guide you how to get bitcoins. There are lots of registered exchanges: Zebpay is there, Coinsecure is there.” Gainbitcoin has no know-your-customer protocols, Mehrotra said, but “that is under process.”
Gainbitcoin did seem to have seen increased investment after demonetisation. Mehrotra showed me a bar graph of the company’s monthly sales, available on Gainbitcoin’s portal for its registered clients. (I later created a Gainbitcoin account for myself, but never gave any money to the company.) It showed around 25,000 bitcoins of new investment in November, compared to 15,000 each in the two months prior.
Before leaving, I asked Mehrotra about a large drawing I noticed taped to a wall. It was a triangular diagram that showed nodes branching down, layer by layer, from a single point at the top. Many of the nodes and branches had numbers and letters scribbled beside them. I would not understand it, Mehrotra said, unless I had studied “multi-level marketing.” He explained that the diagram mapped out a series of bonuses disseminated after someone had invested 1,000 bitcoins—a sum worth some Rs 6 crore on the Indian market at that time. The investment came in before demonetisation, not after, he noted with a grin.
Three days after my visit, Mehrotra messaged me on WhatsApp to say he had discussed our interview with some colleagues, who suggested that I not identify any people or places associated with Gainbitcoin in my writing, or describe the diagram on the wall. “As a journalist be truthful,” he wrote, “but with a responsibility.” I responded that he could not retract anything that he had not specified was off the record at the time of the interview, and he replied that there was “nothing to retract from.” He also sent me links to Amit Bhardwaj’s personal website, Twitter page and LinkedIn profile, saying, “please find more information on the owner of Gainbitcoin.com and GBMiners pool.”
TO MANY WITH EXPERIENCE in the bitcoin world, companies that make promises such as the ones Gainbitcoin does are quickly recognisable as fraudulent. I met Stuart Trusty, an American bitcoin miner and an expert in high-performance computing, at a conference on blockchain technology in Delhi in December. After I explained that Gainbitcoin was promising 10-percent monthly returns, he told me that it “would have to be a Ponzi.” Such returns, he said, were “mathematically impossible” when it came to mining, especially given the network’s rapidly growing difficulty levels.
Gainbitcoin, as Mehrotra pointed out, is structured as a multi-level marketing scheme. Such schemes—also called “pyramid” schemes—encourage existing participants to recruit new ones by offering them a cut of the revenue from anyone they bring in. Multi-level marketing schemes are generally predatory, and lead the vast majority of their customers-turned-sellers—who typically have to pay a hefty membership fee or make a substantial “investment” to join—to lose money.
A January 2015 note from the Reserve Bank of India warned that pyramid schemes are illegal in India, stating that “acceptance of money under Money-Circulation/Multi-level Marketing/Pyramid structures is a cognizable offence under the Prize Chit and Money Circulation (Banning) Act 1978.” These schemes, the document noted, “promise easy or quick money upon enrolment of members,” but “any break in the chain leads to the collapse of the pyramid, and the members lower down in the pyramid are the ones that are affected the most.”
Multi-level marketing strategies are often combined with another kind of financial fraud: the Ponzi scheme. With these, scammers who conduct no economic activity yielding actual profit promise tempting returns to investors, then pay out those returns using money put in by new recruits. Here again, the scheme depends on ever more money coming in from ever more investors, and collapses once that stops. In India, multi-level marketing strategies have been defining features of notorious chit-fund scams such as those run by the Saradha Group and the Sahara conglomerate.
Schemes such as Gainbitcoin have been analysed and criticised plenty of times online. Many cryptocurrency-focussed websites offer guides to spotting scams, and a perennial point of advice is to avoid any schemes with multi-level marketing structures, or that promise unrealistically high, fixed rates of return. Since early 2016, there have been various threads about Gainbitcoin on the forum bitcointalk.org. A user under the name “tmfp” has posted particularly comprehensive takedowns of the company, picking away at its website and promised returns.
This January, the bitcoin-focussed news site CoinJournal published an article titled “The Founder of India-based Bitcoin Mining Pool GBMiners is Running a Ponzi Scheme.” In it, the journalist Kyle Torpey argued that Gainbitcoin’s 10-percent rate of monthly return “has no basis in reality.” Gainbitcoin contracts tell investors that each bitcoin they put in buys a particular amount of computing power. Torpey, using a reputed online calculator for predicting mining returns, found that the computing power Gainbitcoin promises on a one-bitcoin contract yielded only 0.04 bitcoins of return per month—far from the 0.1 bitcoins necessary to generate valid 10-percent monthly returns.
Torpey’s article was later updated with responses from Bhardwaj. To a question about the returns calculated for computing power promised in Gainbitcoin contracts, Bhardwaj said, “bitcoin mining calculators are good for people who want to run their own mining setup, and I assure you not good for cloud mining chaps.” When asked why Gainbitcoin’s contract prices had not changed despite the price of bitcoin doubling in 2016, he replied, “because the internal base price for Gainbitcoin is in BTC”—bitcoins. “Purchase and produce both are in BTC. So actual change in BTC price economics doesn’t impact the overall business.”
An editor’s note was appended to the piece following the update: “From CoinJournal’s perspective, saying things like the price of bitcoin does not impact a bitcoin mining business only confirms the fraudulent nature of the business.”
Unfortunately, many of Gainbitcoin’s clients will likely never see tmfp’s posts or Torpey’s article. Mohit Kalra, the CEO of Coinsecure, told me he had received many complaints from customers who had invested in Gainbitcoin but not received the promised returns. But, he said, schemes such as Gainbitcoin typically target “people who don’t know bitcoin—who are not internet-friendly, who are never online on forums.” Even when these people get conned, he said, “they have no place to go online and show people they got scammed.”
Torpey echoed this in a public video chat discussing his article, which was uploaded to YouTube. “I think this article probably won’t even do much good,” he said. “To everyone in the bitcoin community, it is obvious that this is a Ponzi scheme. But they’re not targeting the bitcoin community, they’re targeting the normal, everyday guy in India, who doesn’t know any better.”
Gainbitcoin and its marketers seem to be trying to head all suspicions off at the pass. When I met Mehrotra, he told me about his Youtube channel, Bitcoin Kshitij. On it is a series of eight video testimonials, with a thumbnail for each one reading “Gainbitcoin: Legit? Or Scam?”
Kalra told me that Bhardwaj has been frozen out by much of the Indian bitcoin community. “We have a small group on WhatsApp for all the bitcoin guys and companies and owners,” he said. “We had Amit Bhardwaj over there initially, but when we all figured out that he has been scamming a lot of people, we had to remove him.” Kalra also shared a screenshot of a public notice, published as a classified in the Delhi edition of the Hindustan Times on 21 June 2016. In it, an entity calling itself the Asia Investors Economic Prevention Anti Money Laundering Activity, claiming an address in Hong Kong, warns the Indian public that it has “black listed and launched a joint operation” against a list of MLM companies which were collecting investments in cash “without having a permission from SEBI”—the Securities and Exchange Board of India. These companies, the notice continued, “have a money laundering business with a promise of giving huge and unwanted and illegal returns.” The notice lists Bhardwaj and Gainbitcoin, and another eight entities. However, I did not find any online references to the Asia Investors Economic Prevention Anti Money Laundering Activity, and did not see it listed at the Hong Kong address included in the notice. The notice also included a URL, www.aiepamla.com, but it is not active.
One Indian entrepreneur with a years-old bitcoin-based business, who asked not to be named, told me that Bhardwaj had earlier put the idea of starting Gainbitcoin before other bitcoin enthusiasts and businesspeople, who generally thought starting a mining company “was a great thing.” But, he said, “we were not very keen on starting it on a multi-level marketing platform.” Eventually, those invested in bitcoin’s future in India “wanted to disassociate with Amit, because we were very apprehensive of his ways of working.”
{THREE}
BHARDWAJ WORKS MOSTLY out of Dubai. I spoke to him twice, over the internet, before visiting the Janakpuri office—first in late November, and again in early December. Both times, he started his story in 2013, when he founded HighKart—a retail site only accepting bitcoin as payment. “What we realised is people were using bitcoin as an investment tool,” he said, so using it just as a medium of exchange was “not a scalable model in India.” Bhardwaj told me he had been mining bitcoin in some capacity, so in 2014, after HighKart proved unsuccessful, he made mining his primary venture. He said he started mining mostly for corporate clients, many of them international—none of whom he would name. In August 2016, the story continued, he started GBMiners.
Some of the details Bhardwaj gave me did not square with what I went on to hear from Mehrotra and numerous other Gainbitcoin investors. I was to discover that much of what I heard from Bhardwaj contradicted even things that he told me himself.
During neither of the first two interviews did Bhardwaj mention having any role in Gainbitcoin. Bhardwaj’s LinkedIn page and his personal website are devoid of any mention of the cloud-mining company. The Gainbitcoin website makes no mention of Bhardwaj either. In our second conversation, when I asked whether he knew of Gainbitcoin, he told me only that it was a cloud-mining company. I asked whether he knew if the company was based in India. “Gainbitcoin is based in Singapore, I believe,” he said.
In mid December, I spoke to Bhardwaj for a third time. I asked him directly why his online profiles lacked any reference to Gainbitcoin. This was a “good PR strategy,” he said, “because the moment you put it, there are so many people who just want to criticise you for nothing.” Both cloud mining and multi-level marketing suffer from a “general perception” that is “very negative,” so “we have to be cautious about what we are saying and what we don’t say.”
I asked Bhardwaj for proof that his investors were receiving timely returns. “I can show you 100,000 proofs of that,” he said. “I have a customer strength of 100,000 people across the globe.” When I asked him about the total investment in Gainbitcoin, he said the “amount of bitcoins invested is 10,000 bitcoins only.” By these numbers, every Gainbitcoin investor has only put in 0.1 bitcoin—the minimum possible investment in the scheme.
Bhardwaj’s figure for total investment contradicted the graph Mehrotra pointed me to on Gainbitcoin’s portal for investors, which showed over 50,000 bitcoins coming in from September through November alone. When asked about this, Bhardwaj said, “That is an inflated graph, don’t worry.” I asked why the company showed misrepresentative figures to his investors. Bhardwaj replied, “They feel good, right? When they get high information.”
In late January, 45 minutes of shaky video appeared on YouTube, showing a meeting between Bhardwaj and what appears to be a group of Gainbitcoin investors. (I tried to trace the user who uploaded the video, to ask about his relationship with Gainbitcoin, but could not.) In it, Bhardwaj says that the company has investments totalling 125,000 bitcoins—worth Rs 862 crore at the rates on Indian exchanges, and $123 million at the global exchange rate, as of the start of February.
In the third interview, I pushed Bhardwaj on the question of what mining pool, or pools, Gainbitcoin was using to benefit its users. “We are using many pools,” he said. “It is not only GBMiners. GBMiners is one part of it, but we use F2Pool, we use BW, we use AntPool”—three well-known mining pools. But soon afterwards, when I asked him to elaborate on the relationship between GBMiners and Gainbitcoin, he said that there was “no relationship” between them, and that absolutely none of the output from GBMiners was going to Gainbitcoin users.
Every Gainbitcoin user I spoke to said GBMiners is the mining pool being used by the cloud-mining company. I told Bhardwaj this, and he responded, “No, no, they told you that GBMiners is also belong to Amit Bhardwaj”— not that it was related to Gainbitcoin.
The website blockchain.info aggregates data from bitcoin’s public ledger. In mid December, it showed that GBMiners’s share of the global hash rate was 3 percent, and not 5 percent as was widely reported when the pool started, in August 2016. (Some fluctuation in a pool’s hash rate is to be expected, because the probabilistic nature of mining means it depends on luck as well as computing power. A sustained decline in hash rate, however, indicates that a pool is becoming less and less competitive.) When I pointed this out to Bhardwaj, he claimed that he still controlled 5 percent of the hash rate—3 percent via GBMiners, and the remaining 2 percent via other sources, which he did not name, whose mining output went to Gainbitcoin.
Going by Bhardwaj’s assertion to me that GBMiners contributed nothing to the cloud-mining scheme, I asked if 2 percent of the global hash rate was enough to pay the promised returns to all of Gainbitcoin’s investors. “Let’s say there are 100,000 people who are investing 0.1 bitcoin in total,” he said, sticking to the figures he had given me earlier. “So how many total bitcoins are invested in Gainbitcoin? 10,000 bitcoins. What is the 10-percent return for that? 1,000 bitcoins.” Roughly averaging that monthly return out over a month, he said, “I need to only generate 30 bitcoins every day.”
Even taking these figures for granted, Bhardwaj’s accounting seems suspect. A total monthly return of 1,000 bitcoins averaged out over a full year, to account for months of varying length, actually works out to a necessary yield of 32.9 bitcoins per day. The way that bitcoin functions, the total rewards doled out for mining are fixed—currently at 1,800 bitcoins per day. The returns from a pool with 2 percent of the hash rate should average out to 36 bitcoins per day. If about 33 bitcoins a day go towards paying Gainbitcoin investors their promised 10-percent monthly returns, the remainder seems impossibly low to account for any of Gainbitcoin’s presumable operational costs—most importantly, fees for running mining hardware—not to mention the 5-percent referral bonuses.
In the YouTube video of his meeting with investors, Bhardwaj contradicts the claim that GBMiners does not contribute to Gainbitcoin. He claims that his share of the global hash rate is 8 percent. When someone points out that that GBMiners’s hash rate on blockchain.info was, at that moment, 5.5 percent, and had recently dropped to as low as 3.5 percent, Bhardwaj tells him that, in addition to GBMiners, there is another pool feeding Gainbitcoin’s payouts. When asked to name it, Bhardwaj responds, “Pata lag jayega, market mein aane doh” (You will find out, let it come into the market). So far, there have been no reports about any other mining pool working for Gainbitcoin’s benefit.
In the video, Bhardwaj claims that his average daily mining output is between 200 and 220 bitcoins. This does not square with his claim in the meeting of controlling 8 percent of the hash rate—which would translate to an average daily yield of 144 bitcoins.
Bhardwaj’s claims in our third interview got less and less believable. He claimed that he calls all his investors “to Dubai on weekly basis. And then we sit together, then we have a cup of coffee, tea, have a session. And then they go back.” I asked whether he meant all 100,000 investors each week. He said yes. “On the phone?” I asked. “Not on the phone—I call them to my office in Dubai,” he said. “They travel to Dubai. … And they will tell you that I answer their WhatsApp any time they want.”
No Gainbitcoin investor I spoke to mentioned visiting Bhardwaj in Dubai. In the YouTube video, some of those in the meeting seem frustrated by Bhardwaj’s, and Gainbitcoin’s, evasiveness. “Sir, you sit in Dubai,” one participant tells Bhardwaj. “So communicating with you is a bit difficult.” Others seem frustrated by Bhardwaj’s lack of clarity on his operations. “If we want to give proper information to those who we want to join, we have to explain things to them,” one man says. “I will gain confidence when I understand that whole system. And for that I need knowledge.”
In our third interview, Bhardwaj became uncomfortable with my questioning. “If you are media, present us rightly, we will give you numbers also,” he said. “We will wait for a couple of articles. If the articles are good, we will give you more information.” He also asked me, with exasperation, if I was a police officer. “Tum bata dogi ki tum police se ho. … You are so deliberately and so effort-wisely drilling down, like I am a criminal or something.”
EVEN PEOPLE WORKING directly with or under Bhardwaj seem not to know the details of his businesses, or at least not to agree with him on the details of their work.
Darwin Labs, a start-up firm based in Gurugram, presented itself on its website until February as a “technology partner” for GBMiners. In early December, at the Darwin Labs office, I spoke to Nikunj Jain and Ayush Varshney, who are executives of Darwin Labs and lead day-to-day operations for GBMiners. When I asked them about Gainbitcoin, Jain said, “We think Amit runs it. We don’t know, honestly.” I asked whether they knew if GBMiners was affiliated with Gainbitcoin. “Not to our knowledge,” Jain said. He said Bhardwaj meets them once every month or two, but had never mentioned Gainbitcoin.
Bhardwaj, in our first interview, told me GBMiners had about 30 clients. In the third interview, he told me the company had 17 or 18 of them. Varshney and Jain told me in the Darwin Labs office that GBMiners had 300 clients—a number they repeated to me twice. On an earlier phone call, Jain had told me that this number was “in the double digits.”
Bhardwaj told me that many GBMiners clients were corporations. Jain said all of them were “essentially individuals, largely HNIs”—high-net-worth individuals. Bhardwaj told me the company’s approach to attracting clients is “totally word-of-mouth,” and that employees for recruiting clients were “not required.” Varshney and Jain told me GBMiners has two staffers specifically for recruiting clients.
A week later, I headed to Ansal Bhawan, a boxy office building near Connaught Place, in central Delhi. Earlier, I had seen a YouTube video, uploaded in September, in which three foreign men appear in a hallway of the building. One of them tells the camera, “We are visiting today the Gainbitcoin office, or the Bitex office. … The CEO is also here.” They head into a wood-panelled suite with several people at work inside, and enter a small office where Bhardwaj sits at a large desk—the same office where the YouTube video of Bhardwaj’s apparent meeting with Gainbitcoin investors was filmed. The men ask him to say a few words to “the European people,” and Bhardwaj says, “See, Europe is the best part to take bitcoin up, because it is the most forward-looking financial domain right now. And I wish all the best to all of you guys.” With a little research, I tracked the office down.
The insignia outside the office only identified it as the premises of The Bitex. Some ten people were milling about inside. Several of them told me The Bitex was a bitcoin exchange, and that the office belonged only to this enterprise. They denied that the office was linked to Gainbitcoin. I pointed to decals that read “Gainbitcoin” stuck to numerous surfaces around the office, and was told these were only for decoration. (Later, I asked several Indian bitcoin insiders, including executives from two exchanges, whether they had heard of The Bitex. None of them had.)
A man named Himanshu Singh, who said he oversaw accounting for The Bitex, took me into the room where Bhardwaj had appeared in the video. Singh told me the room was not reserved for any particular individual, and was used by “the team.” I asked him who had founded The Bitex, and he replied, “See, it is a confidential thing.” I asked whether Bhardwaj was linked to The Bitex, and Singh shifted with discomfort. “See, there are some certain things which I don’t know if I have to share or not,” he said. “So I don’t want to answer.”
Singh claimed not to know of the YouTube video with Bhardwaj sitting in the office. When I showed it to him on my phone, he said, “This is the office, I cannot deny it.” Past that, he refused to elaborate.
In my third conversation with Bhardwaj, I asked whether the Ansal Bhawan office had ever housed Gainbitcoin operations. “There was never a Gainbitcoin office in India,” he said. I also asked him about The Bitex, and why so few people seemed to know of it. “It is a simple exchange, similar to Zebpay,” Bhardwaj said. “But we are not marketing it very much.” Nevertheless, he claimed, “You take all the exchanges together in India, add up their daily turnaround, and we alone do that. The major problem is we do it internally, we do not do for external customers.”
Singh told me that The Bitex’s volume of trades was displayed openly on its website. I checked the site numerous times between December and February, and it generally showed a daily turnover of some 20 or 30 bitcoins. On 31 January, the site showed 5.8 bitcoins bought, and 25.5 bitcoins sold, for a total trade volume of 31.3 bitcoins. Zebpay’s trade volume for that same day, reported on the website exchangewar.info, which collates data from multiple exchanges, was 1,278.9 bitcoins. The Bitex is not listed among the exchanges on the site.
Bhardwaj called me a couple of days after I visited the Ansal Bhawan office, after finding out that I had been corresponding with Himanshu Singh about a follow-up interview. He demanded to know why I did not ask for his permission to visit the office, or to contact his employees. “They are not comfortable speaking with you,” he said. “Don’t be a sensational reporter. You are just a child.”
Gainbitcoin might not be based in India, but Bhardwaj does have six India-based corporate holdings, none of which burnish his credibility. Public documents from the ministry of corporate affairs show that he has been declared a defaulter in connection with Hans Clouding IT, in which he is a designated partner and which has never filed mandatory annual returns with the ministry since it was incorporated in 2014. Three other companies that list Bhardwaj as a director, founded between 2009 and 2015, have also never filed their returns. This includes Radox Infotech, which Himanshu Singh, at the Ansal Bhawan office, told me is the parent company of The Bitex. Bhardwaj’s two other India-based companies have failed to file balance sheets for at least the last year. The punishments for these offences, specified in the Companies Act, 2013, include hefty fines and possible imprisonment.
The documents show that all of Bhardwaj’s companies have very small amounts of paid-up capital—the money a company has on hand to conduct its business. Going by the latest filings for each of the companies, two of them have paid-up capital of Rs 5 lakh—the highest sum shown for any of the companies—and three of them have paid-up capital of Rs 1 lakh—until 2015, the minimum required to register a company. A chartered accountant who looked the filings over said even Rs 5 lakh is far from the kind of money necessary to run most businesses. He also said that posting very small amounts of paid-up capital would typically raise suspicions over a company’s operations.
Over Skype last month, I questioned Bhardwaj about his companies’ public filings. Their paid-up capital was low, he said, because most of his business is done outside of India. I asked why even Radox Infotech, which Bhardwaj told me owns The Bitex, has paid-up capital of only R1 lakh—less than $1,500. “We don’t need more than that,” he said, and claimed that almost all the employees I had seen at the Ansal Bhawan office were actually employed by another of his companies, Nexgen. I pointed out that Nexgen also showed paid-up capital of just R1 lakh. “Nexgen paid-up capital has been updated long back,” he said. “You have not seen the right document.”
In a follow-up exchange of texts, Bhardwaj insisted that the documents from the ministry of corporate affairs were incorrect. “Please recheck the data,” he wrote, “all bal sheets r already filed.” He denied that he had ever been declared a defaulter.
{FOUR}
IT IS NEARLY IMPOSSIBLE to keep up with all the questionable cryptocurrency-based schemes operating in India and around the world.
For instance, Power Hashing, a company with many of the same characteristics as Gainbitcoin, and that has also marketed cloud-mining contracts to Indians, is not on the Zebpay list. When I spoke to one of the company’s founders, Abhishek Bhandari, in mid January, he described it to me as “a cryptocurrency consultant firm” with an office in Delhi. He said Power Hashing initially set up mining machines in Dehradun, but rising competition on the bitcoin network meant the operation started losing money. Bhandari said the company was no longer mining for profit, but still kept a small fraction of its machines running for display purposes, and “if anyone wants to see it, we just take them and show them how mining works.”
Later, scrolling through Power Hashing’s Facebook page, I saw that as recently as in July the company was promising investors returns as exorbitant as Gainbitcoin’s. One post from that month offers several 25-month contracts, ranging in value from the “Alpha”—with an investment of $100, yielding a fixed 8-percent monthly return—to the “Sigma”—worth $10,000, yielding an 11-percent monthly return. By September, Power Hashing stopped posting on Facebook about contract options. However, there was no post on the Facebook page alerting investors to any cessation of mining operations.
When I visited the Power Hashing website in January, it contained no mention of mining. By mid February, however, the site had been redesigned, and, in the “About Us” section, said, “You purchase mining contract with us that is used to mine Bitcoin and we pay you daily profits on your share of all Bitcoin being mined. When you spread the word and help educating others and they get on board and help in increasing the hashing rate, your earn profits through that as well.”
I sent multiple messages to Bhandari in mid February, asking about the new contract offer and requesting a follow-up interview, but he did not respond.
Not all suspicious cryptocurrency-based schemes are built on claims of cloud mining. Some simply promise to double investments in a matter of days without an explanation as to how, others operate using worthless “money,” and some are almost transparently Ponzi scams.
The long-time bitcoin entrepreneur told me to watch out for Onecoin, which, he claimed, in terms of its reach in India, is “ten times bigger” than Gainbitcoin. “You live in Delhi, right?” he said. “That is why you are hearing more Gainbitcoin, Gainbitcoin, Gainbitcoin—because Amit is based out of Delhi and his primary market and everything is around Delhi.” Elsewhere in the country, he told me, Onecoin is more dominant.
Onecoin markets what it claims is a digital cryptocurrency with a private, instead of a public, blockchain. The idea of a cryptocurrency managed by a central company is self-defeating, since it can draw on neither the backing of a government nor the verifiability of an unalterable public record for legitimacy. Onecoin also operates on a multi-level marketing structure, and offers handsome referral benefits. Authorities in Bulgaria—where the head of Onecoin, Ruja Ignatova, is from—as well as Finland, Sweden and Norway, have issued warnings against it. In April last year, several Onecoin marketers in China were arrested. In December, Italian authorities issued an injunction against Onecoin, describing it as “an illegal pyramid sales system.”
I spoke over the phone to three Onecoin investors: a businessman named Kishor Nirhali and a former real-estate broker named Javed Mansoor Shaikh, and the man who had introduced them to the scheme, Umesh Panchal, who earlier worked in sales for various telecommunication firms. Nirhali said he had joined Onecoin four months earlier, and had already done Rs 2 crore’s worth of trade selling onecoin, making a profit of Rs 60 lakh. Shaikh said he started marketing onecoins in December, initially “expecting that I will do it part-time,” but after he “saw the flow of income” he decided to take up the work full-time. He told me Onecoin had 65,000 investors in India. Panchal learnt of Onecoin in July, and said he had since opened accounts for 80 to 85 people, reaping 10-percent bonuses on the investment from each.
Shaikh told me that onecoins, unlike bitcoins, could be used almost anywhere, with a special debit card from Mastercard. After we spoke, he sent me an image of what looked like one of these cards, with a Onecoin logo on it. I found various online reports stating that Mastercard denied having anything to do with Onecoin. I sent enquiries to Mastercard myself, and heard back from the company’s South Asia office: “Despite what some websites may allege, there is no Onecoin program/product with Mastercard.”
On a conference call with Shaikh and Panchal, the topic of the debit card came up again. When I told them about reports dismissing the existence of it, Shaikh said, “This is new to us.” Panchal responded aggressively. “I changed my life in five months, and Onecoin is very important for me,” he said. “I am living in the India, but the Indian government is not creating any situation like the Onecoin.” Over the last five months, he said, he had pocketed over Rs 1 crore. “Main poore desh bhi chhod dunga, agar usko galat bola to. Main China jaake rahunga” (I will leave the country if it is declared wrong. I will go live in China).
I wrote to the official email address on the Onecoin website asking for an interview with a representative, but only received an automated response that pointed me to the company’s social-media pages.
Perhaps the most egregious online scam in India today is MMM. It was started in the early 1990s in Russia, by three people whose last names all start with the letter M, promising exorbitant returns to its investors. Taking advantage of a hyperinflation crisis that left Russians scrambling to protect their savings, MMM attracted a huge investor base. In 1994, the scheme collapsed, investors lost an estimated $100 million, and Russian authorities declared MMM illegal.
Despite this, Sergei Mavrodi, one of MMM’s founders and the public face of the organisation, was soon elected to the Duma, Russia’s main legislative body. He evaded punishment for years by arguing that the Russian government, not MMM, was responsible for the company’s collapse. He was finally arrested in 2003, and went on to serve four years in prison.
Mavrodi re-started the scheme in 2011, brazenly retaining its earlier name and logo, and began to target developing countries, especially ones in Africa and Asia. In its revamped form, MMM generally promises 30-percent monthly returns, with promotional offers often promising even more. It does not claim to be investing in anything at all. The home page of the MMM Global website reads, “YES, IT IS POSSIBLE TO EARN 100% PER MONTH HERE, BUT THIS IS NOT A HYIP”—a high-yield investment programme. Instead, the site says, “This is a community of ordinary people, selflessly helping each other, a kind of the Global Fund of mutual aid. This is the first sprout of something new in the modern soulless and ruthless world of greed and hard cash. The goal here is not the money. The goal is to destroy the world’s unjust financial system. Financial Apocalypse!” MMM participants are asked to “provide help” to their fellows—that is, transfer money into their MMM accounts. Later, MMM promises, they will be able to “receive help” totalling more than what they sent out to others in the scheme.
Over email and online chat, I corresponded with Sumit Singh Bhadoria, a 32-year-old Delhi-based doctor who said he has lost money to MMM. He first put money into the scheme in October 2015, sinking in just Rs 1,000 “to check if this system works.” He got the promised returns, and so he put in more, this time sending out Rs 10,000 of “help.” But, Bhadoria wrote, MMM soon froze all accounts “saying the system has restarted and now I could not withdraw any money which I invested.”
Bhadoria told me this kind of thing is common. “What these MMM guys do is they restart the system every few months,” he wrote. “So the money is gone. Only those people (managers) who do not invest their own money and add people to this system and make them invest benefit from this system.”
On 16 September 2016, a post on the MMM India Facebook page announced that the scheme would restart again in a few days, and that accounts would be unfrozen after their holders underwent a confirmation process. “Dear participants! Everything is beginning, virtually, from scratch now,” it read. “We took into account all our past mistakes and changed the rules a little. J” The changes enumerated in the post included a reduction in the rate of return, to 30 percent from an earlier 50 percent. The post also said, “A 3% bonus for providing help (via Bank) in rupees is abolished, instead, a 3% bonus for proving help in Bitcoins is introduced.”
The MMM India Facebook page shows numerous screenshots of “payment confirmations” from the MMM India website. In recent months, the mode of payment indicated in most of these has been bitcoin. One MMM participant, Shashikant Patil, who claimed to have signed up over 1,000 recruits since 2012, told me that this trend started “because of demonetisation,” after which “people have started to use bitcoin, and stopped using INR”—Indian rupees.
MMM’s history of freezing accounts goes back many years. On the MMM India website, I found a letter dated 23 November 2013, by one Satish Hate, calling for MMM participants to rally following another freeze and reset of the scheme. Hate identifies himself as a “Mavrodian”—the term MMM enthusiasts use for themselves. He writes:
This is humble request to you all Indian Mavrodians to gear up and see that MMM India is back to its feet again. Its our DUTY to help our fellow Mavrodians who had done provide help in the month of December 2012, to March 2013 and also after the 1st restart in May 2013. … Its now a year they are still hoping to get their money which lies as DEBT in their respective Virtual Accounts. … There is no other system in the world which is as clear as MMM India. Only we have spoiled with our own thoughts. But now we have realized our mistakes and now we pledge to make MMM India strong and healthy. We all must provide HELP again so that they system starts rolling again and all the mavrodians get their money. Please remember there should be NO GREED FACTOR in MMM India.
When I emailed Hate, he told me he was no longer working with MMM India. “Poor management and people not following rules,” he said, had led “to crash and restart of the system number of times,” and now “the faith in the system is no more.” Instead, Hate said, in November last year he began working for MMM FSTP, a “similar platform of helping” that follows “the same ideology of the founder of MMM”— Mavrodi. Hate was careful to add that Mavrodi “is not the founder” of MMM FSTP, and said that nobody knows who is. All he could tell me was that the organisation was “running from UK Glasgow.” Hate said MMM FSTP has several features that make it more secure than MMM—one of which, he explained, is that the new scheme only allows its users to transact in bitcoin.
Trusty said that if people are not realistic about how bitcoin can allow for “a high degree of opaqueness, you are not going to have a really realistic picture of the whole scope of the thing.”
Mavrodi himself, as far as I could tell, does not have any social-media accounts or publicly available contact information. I emailed an interview request to Alexei Muratov, who is listed as the scheme’s regional leader on the MMM India website, but got no response. In May 2013, Muratov, along with five others affiliated with MMM, was arrested in Assam on charges of fraud, though he was later released. Also around this time, a Goa-based couple that managed publicity and online operations for MMM was arrested. That July, the Economic Offences Wing registered an FIR against 17 people involved in MMM (no developments have been reported in the case since).
The “Contact us” feature on the MMM FSTP website was not working when I tried to use it in February. I sent queries to the Facebook page listed on the company’s website, but received no response.
If the precedents in India are not enough, MMM and MMM FSTP users should draw caution from recent failures of MMM schemes elsewhere in the world. In September, MMM froze the accounts of all of its 66,000 users in Zimbabwe. These were soon activated again, but users who tried to withdraw their money suffered losses of 80 percent. In December, MMM froze all of its 2.4 million accounts in Nigeria. In both countries, authorities had warned citizens against investing money in the scheme.
{FIVE}
PRATEEK BAGARIA IS AN ATTORNEY with Nishith Desai Associates, a law firm that has published widely cited papers on the legal questions surrounding cryptocurrency in India. He told me that for victims of bitcoin-based pyramid schemes or Ponzi scams, there are already “sufficient safeguards under the criminal regulation … here you can institute proceedings.” But, he said, India needs to create “regulation and law to come on cryptocurrencies, on how the various intermediators in the market should work, what is allowed and what is not allowed.” Cryptocurrencies raise novel problems, and “it is better to address specific issues in a regulation than for lawyers to get creative and hunt down old laws” to protect victims of cryptocurrency-based financial fraud.
But the debate continues over what any regulation should look like if it is to rein in scams and possible tax evasion without stifling the legitimate growth of the cryptocurrency economy, or of promising new applications of blockchain technology. There are also questions as to whether it is prudent to already start regulating cryptocurrency at this early stage of its development, and even whether something such as bitcoin should be treated as a currency at all.
Among the Indian bitcoin entrepreneurs and enthusiasts I spoke to, some insisted that bitcoin’s very nature made it impervious to abuse. For instance, Kamesh Mupparaju, the founder of the exchange BTCxIndia, told me, “Frankly speaking, the bitcoin does not have any privacy. Now they have the tools to find out where you are receiving the bitcoins.” Others disagreed. Sandeep Goenka, of Zebpay, told me that there is a “grey market” with off-the-books trading of cash for bitcoin, although “it is impossible to find out” how large it might be. Mohit Kalra, of Coinsecure, said that in all markets in India, “whether you take real estate, you take gold,” half of all investment comes from “black” sources and the other half from “white” ones. “I think with bitcoin itself, it is a 50-50-percent market,” he said.
At the conference on blockchain technology that I attended in Delhi in December, Stuart Trusty, the miner and computing expert, spoke in part about the different ways available for hiding one’s transactions in cryptocurrencies. Demonetisation was a big topic on the minds of the conference participants, and, Trusty said, there was some talk about what it would take to have a complete know-your-customer process, “so that some of these black-money channels are not there.” He listed some of the technologies available to people seeking near-absolute privacy, including anonymous cryptocurrencies that can be converted to and from bitcoin, and Tor software, which enables anonymous browsing of the internet. Trusty said that if people are not realistic about how bitcoin can allow for “a high degree of opaqueness,” they “are not going to have a really realistic picture of the whole scope of the thing.”
Sunil Aggarwal, a researcher who has taught on cryptocurrencies and blockchain technology at the National Academy of Legal Studies and Research in Hyderabad, told me that Indian cryptocurrency users looking to hide their identities can do so even without precautions of the kind Trusty described. “See, you do not need Tor for that,” he said. “Bitcoin network is itself pseudonymous, and this pseudonymous category is nearly anonymous—because no investigative agency in India has the capability of tracking transactions.”
This October, the Economic Times reported that unspecified intelligence agencies had issued a warning about the potential dangers of “virtual currencies such as Bitcoin” being used for illegal activity, including hawala transactions. One unnamed official told the paper, “At present we have no mechanism to deal with such mediums.” (Queries to numerous government bodies—the RBI, the Economic Offences Wing, the Narcotics Control Bureau and the Central Bureau of Investigation—went unanswered.)
Governments that have regulated cyptocurrency to any degree so far have taken widely varied approaches. Canada subjects users of cryptocurrencies to the same anti-money-laundering standards as users of fiat currency. China permits individuals to hold and trade bitcoin, but prohibits banks from doing so. In the United States, authorities have specified that income generated in bitcoin is subject to tax. A few countries have taken more draconian approaches. One of them is Bangladesh, which announced, in 2014, that anyone using virtual currency would be jailed under anti-money-laundering laws.
India’s approach for now, going by signals from the RBI, seems to be to watch and wait. In a television interview in December 2014, the RBI’s governor at the time, Raghuram Rajan, told the audience, “I think we are still watching the evolution of these kinds of currencies.” The institution continues, however, to warn both the government and individual users of the pitfalls of cryptocurrency as it is currently used. In a 2015 report, it said that virtual currencies’ “anonymous nature that goes against global money laundering rules rendered their very existence questionable.” In a statement put out last month, it warned all those wishing to invest in virtual currencies that they “will be doing so at their own risk,” and stated that it “has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency.”
Many, including the RBI, are already looking beyond bitcoin, seeing great promise in novel applications of the technology that underpins the cryptocurrency: the blockchain. The kind of public and unalterable ledger that keeps a complete record of bitcoin transactions could, among much else, also be used to maintain transparent government records, or improve the functioning of fiat-currency-based financial systems. The RBI report from 2015 spoke of how, “With its potential to fight counterfeiting, the ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments system.” A December 2016 blog post on Huffington Post India, written by a blockchain entrepreneur, proposed creating blockchains for voting data, for the finances of all government offices, and for the accounts of “the major sources of black money—liquor houses, toll-tax, property registrations, medicines and drugs, city corporations, etc.”
How far all these proposals can go remains to be seen, but there are already serious experiments underway. This January, the research arm of the RBI completed a test of the use of blockchain technology, in a project that involved regulators, banks and other financial institutions. In October, ICICI Bank announced that it had completed a blockchain-based money transfer to a major bank in west Asia. Such transfers, if they become standard, could bypass the cumbersome bureaucracies that now control international remittances, allowing, for instance, migrant workers to send money home faster and at much less expense. The National Stock Exchange is presently working to integrate blockchain technology into its systems.
Raunaq Vaisoha, who leads that effort at the NSE, told me, “In my opinion, bitcoin is very much the fragile component of the whole ecosystem.” He said the potential for tax evasion and other illegal activity with cryptocurrencies was huge, but that if the government were to regulate cryptocurrency it would “spend way too much money to figure out if people are obeying the law or not,” and even then identifying wrongdoers would be very difficult, if not impossible.
Vitalik Buterin, a noted cryptocurrency pioneer and a co-founder of Bitcoin Magazine, whom I interviewed at the Delhi conference in December, also expressed scepticism about regulation, but for different reasons. “One of the problems is that if you regulate too early, before you understand what you are regulating, then you just end up with a law where you are not even sure if it has any benefit,” he said. “The first stage should always be understanding what people are doing with blockchains, and also, of course, understanding what the problems are, and making sure that any regulation you are going to make does not accidentally interfere with India’s regular people, who are trying to make some microfinance business.”
Any question of regulating bitcoin ultimately comes back to its definition—is it an asset, a currency, a commodity, something else? Kalra, like many others I asked, said that bitcoin should be treated as an asset. All that Indian bitcoin users want to do, he said, “is buy bitcoins for cheap, as soon as the price goes up, sell, and if they think the price is dropping again, buy again and sell.” If the government were to declare bitcoin a currency, “it becomes a much bigger game for the regulators, and the government itself, to take care of.”
However bitcoin might be understood, Bagaria said, it is most important that the government take a clear stance on its definition. “Otherwise you will have situations where various consumers and various users are using this in their books in different ways,” he warned. “And then you will have, eventually, the tax authority waking up and saying this is not this, this is that, then the foreign-exchange authority taking a different position.”
The executives I spoke to from the four big Indian exchanges said they would welcome regulation. Mupparaju told me that clear government policy would ensure “that we can go in an aggressive way, and do business very fast.” He compared the status of bitcoin service providers to that of e-commerce businesses until about a year ago, when the government announced clear regulations for the online market in fiat currency.
According to Sohail Merchant, the Localbitcoins trader, “the whole community is waiting for RBI to regulate,” or to simply declare “what will be the framework of this thing?” Merchant told me he was planning to open a bitcoin exchange of his own, but said that a lot of people looking to found bitcoin-related businesses right now were nervous that, if or when the government steps in, “the industry might go down if the regulations are too harsh.”
AT THE END of my third interview with Amit Bhardwaj, in mid December, he sent me a link to the website of a new venture of his—Satoshi Studios, which describes itself as “Southeast Asia’s first blockchain incubator.” Bhardwaj drew my attention to the fact that Roger Ver, a prominent investor in bitcoin start-ups, was listed on the site as one of the venture’s partners. “I am funding and Roger is funding,” he said. “This itself is news.”
I emailed Ver to ask about his role in Satoshi Studios. He responded that he had not invested in it, but that he might in the future. He wrote that he had exchanged a few emails with Sahil Baghla—an associate of Nikunj Jain and Ayush Varshney, the two Darwin Labs partners I met in Gurugram. But “a search for Bhardwaj shows zero results in my email inbox,” he continued. “I don’t think I’ve ever had any interaction with him.” Ver said he was not familiar with Gainbitcoin, and that, while he was not certain whether it was a legitimate cloud-mining business, “10% per month profit for cloud mining sounds unlikely.”
In February, the Associated Chambers of Commerce and Industry of India announced that it was holding a national conference on bitcoin and blockchain technology in early March. GBMiners had pledged sponsorship of Rs 5 lakh. Bhardwaj, Baghla and Jain were all scheduled to speak, alongside government officials such as a deputy governor of the RBI, and PP Chaudhary, a union minister of state for law and justice, as well as electronics and information technology.
Last year, in October, the ministry of consumer affairs issued a set of guidelines for direct-selling entities—companies whose customers are also their salespeople. Bhardwaj, in our interview in mid December, told me that Gainbitcoin had recently become “one of the very few companies who got the acceptance of the application” under those guidelines, and that with “clearance from the government of India we don’t really need to be behind the curtain so much now.”
Dharmesh Makwana, a director at the department of the ministry that put out those guidelines, told me last month that the department had asked all direct-selling companies to submit applications for clearance. The application window closed in late January, and the applications were yet to be reviewed. “Nobody can claim that they have been accepted,” he said, only that “they have submitted a document and have received an acknowledgement of submission of document.”
When I followed up with Bhardwaj about this, he went back on his earlier claim. “No, no, we have submitted the application,” he said. “Nobody has gotten the approval yet.” He also claimed that Gainbitcoin was preparing a know-your-customer process that it would impose on all its investors as soon as it received approval under the ministry’s guidelines.
I asked Makwana whether a company that rewards its direct sellers for signing up other direct sellers—as Gainbitcoin, Onecoin and MMM all do—could be approved under the guidelines. Such practices, he said, are “absolutely not allowed.” Makwana emphasised that the guidelines, in themselves, do not have the force of law—they simply clarify restrictions imposed by the Prize Chits and Money Circulation Schemes (Banning) Act, from 1978, which is administered by the ministry of finance. If his department became aware of any companies violating the restrictions, he said, it would not hesitate to report them to the necessary authorities.
Just a rejection of Gainbitcoin’s application might not be enough to stop Bhardwaj. When I spoke to him about Gainbitcoin last month, he told me, “We are working out of Singapore, so we are not forced by any rules in India.” In a YouTube video uploaded in late December, Bhardwaj says that while Gainbitcoin’s application is being processed, even its rejection would not mean the company is illegal. If Gainbitcoin does not receive approval, he says, “We are just not going to form a base in India, that is all. We will not have an office in India.”