Of Zebpay, regulatory arbitrage and policy scapegoating


If one looks back at post-modern history, once every decade or so, there is a major disruption that upends the broad contours of our lives. At the turn of the millennium, the emergence of the internet as a mass medium led to the dotcom boom (and bust). In the last decade, applications built on the Internet and the mainstreaming of mobile phones have led to seismic changes in our lifestyles irrevocably changing the way we work, shop and play.

If you fast-forward to today and look at the shortlist of major candidates that will impact our future lives, there is one candidate that will appear on most lists—blockchain and cryptocurrency (crypto for short). If crypto actualizes the potential that it promises, it will change every market in the world, democratizing entire value and supply chains, altering incentive frameworks and re-imagining finance as we know it.

Struggle at its peak

Needless to say, there is now a veritable gold rush, both literal and figurative, into the blockchain, with a host of companies angling to become the Google, Apple or Amazon of this brave new world. But the problem with gold rushes since time immemorial is that each such race attracts visionaries and charlatans in equal numbers.

And one can tell whether a particular person or company was a visionary or a charlatan only in hindsight, years, if not decades, after the event. Until then, the segment is akin to the Wild West with companies jostling to take center-stage before the curtain raises. One such company is Zebpay. Or rather, one such company was Zebpay.

Until 27 September, Zebpay was India’s oldest cryptocurrency exchange. With a purported user base of 3 million, it was also arguably India’s largest cryptocurrency exchange. But on 28 September, Zebpay sent an email to its 3 million users stating that it will be stopping its exchange business on the very same day.

Why this sudden shutdown?

Zebpay laid the blame squarely at the doorsteps of the Reserve Bank of India (RBI). In its announcement, it said “The curb on bank accounts has crippled our, and our customer’s, ability to transact business meaningfully. At this point, we are unable to find a reasonable way to conduct the cryptocurrency exchange business.” The “curb” refers to a statement released by the Reserve Bank of India (RBI) on 5 April which banned the nation’s banks from dealing with cryptocurrency exchanges and other similar services.

On the surface, this seems like a perfectly plausible explanation. Here was a company that was an early entrant into the world of crypto—Zebpay started operations in 2015, nearly four years back—at a time when blockchain and crypto were largely esoteric concepts that were far from being regulated by the powers that be. Like many other crypto pioneers, the company leveraged this early lead and the surrounding regulatory arbitrage to build a business. But once this segment came under regulatory supervision, the company could no longer survive and had to shutter its operations. Live by the regulatory sword, die by it.

All kosher?

Not quite.

The Ken spoke to several crypto players and observers in India and the common response to Zebpay’s shutdown was not one of understanding the dynamics that led to this. Instead, we encountered the existential question “why?”.

“To be honest, we do not know why Zebpay did this,” says Aditya Naik, the chief business officer and co-founder of cryptocurrency exchange Koinex, a competitor to Zebpay. “The RBI’s directive cannot be the only reason for shutting down operations because that reason is common for all, and everybody has taken a hit but except for the really small exchanges, all other exchanges are still operational,” he adds.

“I didn’t expect them to close down this early. It was shocking to me because it was the biggest exchange in India,” says Shubham Yadav, co-founder of cryptocurrency exchange Coindelta.

While it was almost trivial to scapegoat RBI’s policy as the precipitating factor that crippled the company, a deeper dive indicates that the answer might lie elsewhere.

“The larger players in the industry could perhaps have accrued some amount of cash profits during the 2017 bull run that saw rising volumes coupled with healthy transaction margins. By cutting variable costs like marketing in the current lean period, they are hoping to tide over this phase of low growth and regulatory uncertainty”, says Nitin Sharma, founder of Encrypt, a blockchain investment network, who was also surprised to hear of Zebpay’s announcement.