The Bitcoin price on Indian cryptocurrency exchanges fell sharply today after the government proposed law in Parliament that could effectively ban private cryptocurrencies.

In morning trade, the price of Bitcoin on cryptocurrency exchange WazirX fell to a low of Rs 33.5 lakh (or about $45,000). It was down over 25 percent from the previous day’s close of nearly Rs 46 lakh. In comparison, the price of bitcoin fell about 2.6 percent to $56,000 on Binance, the world’s largest exchange by volume.

The morning slump took place after a bulletin introduced in Lok Sabha Tuesday announced the intent of cryptocurrency regulation bill as follows: “To create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”

Also Read | New cryptocurrency bill: What we know so far

Why the price differential?

The prices of cryptocurrencies on Indian exchanges generally trade at a premium compared to global prices due to various factors such as volumes, market efficiency, currency risk and transaction costs.

But this morning, the price of Bitcoin and other coins were trading at a sharp discount. Within a few hours, however, prices recovered a fair bit. Bitcoin was trading at around Rs 42 lakh (still down about 8 percent compared to yesterday’s close).

The price differential was because prices on various exchanges are driven by their own demand and supply. This difference opens an “arbitrage” opportunity. It allows traders to buy Bitcoin cheaply on Indian exchanges and sell at a costlier price on the global ones, making a riskless profit.

Mechanisms such as arbitrage are a function that ensures the prices of the same product do not differ too much in different markets. Since traders can capitalise on the large difference, arbitrage ensures prices converge quickly – buying at the cheaper exchange lifts prices whereas selling in the costlier one creates selling pressure there.

However, for traders to benefit from riskless arbitrage opportunities, the difference between prices of the same asset has to be large to ensure that any profit covers the cost incurred to carry out the operation.

Also Read | Explained: What are private cryptocurrencies? How they are different from public ones

The cryptocurrency bill affect

Cryptocurrency prices on Indian exchanges were reacting to the bulletin introduced by the government in Lok Sabha. It seeks to ban private coins while providing a framework to issue the digital rupee.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, has long been awaited by the cryptocurrency industry. The industry had hoped the law would identify, accept, and regulate cryptocurrencies instead of banning them.

But industry watchers said they will await more details when the bill is tabled. They pointed that the definition of a “private cryptocurrency” will be key to the interpretation of the proposed law.

Crypto experts consider most cryptocurrencies such as Bitcoin as “public, decentralised” virtual currencies as transactions are settled and verified on a public register called Blockchain. (Such experts consider only select cryptocurrencies as “private” -- the ones that allow users to anonymise data.)

“All of us want regulation. We have been pushing for it for the last 1000+ days. Finally when the regulation process has begun, why panic? We need to have faith in our lawmakers. There’ll be discussions and deliberations. Ultimately, innovation will win,” WazirX founder Nischal Shetty wrote on Twitter.

“No one has seen the Bill or its contents yet eulogies have already been written,” CoinDCX, another crypto exchange, wrote to its users. “If we go by recent statements and our belief in the system, things are going to turn positive,” it added. He referred to the recent statements by lawmakers who said the government is keen to regulate cryptocurrencies and the underlying technology to benefit from them.

Also Read | Most cryptocurrencies will not survive; pose same problem as unregulated chit funds: Raghuram Rajan

(Edited by : Yashi Gupta)