A new avatar: Making a case for crypto-currencies to fill SME financing gap

Studies point out that the 40 million-odd SMEs in India, with limited access to formal credit, face a financing gap of $250-500 billion

Despite regulatory risks, the case for crypto currencies might be growing stronger. For one, Tiger Global led a massive round in local exchange CoinSwitch, which many see as a backing of the long-term potential and viability of crypto-businesses in India. Secondly, new use-cases are coming to the fore, with the latest one being crypto-currency as a means and vehicle to finance small and medium enterprises (SME).

Many reports and studies pointed out that the 40 million-odd SMEs in India, with limited access to formal credit, face a financing gap of $250-500 billion. The government has tried to bring them into the formal finance structure through initiatives like Jan Dhan accounts, Goods and Services Tax and Aadhaar, but the success has been limited. Can crypto-currencies solve this?

The discussion is spurred by iSpirit, the developer of IndiaStack. In an April 10 paper, it said opening up the SME sector to financing and investment in crypto-currencies would not only unlock huge troves of capital but also enable low-cost and quick disbursals.

“Inflows of cryptocurrencies from KYC-ed investors through approved Indian and global exchanges can potentially be allowed into India for the purposes of enhancing SME access to low-cost global capital. GST-registered companies could, for instance, receive capital against their issued e-invoices and other information collateral in special accounts opened via a controlled conduit such as GIFT city, which is one of India’s favored bridges to international markets,” argued Sanjay Phadke in the iSpirit paper.

“Inflows of global crypto-capital into Indian SMEs could also enable the rest of the credit system to migrate to informational collateral-based lending. And the special account could eventually be ported to a wallet backed by a national digital currency, such as the proposed digital rupee.”

Huge capital is locked in bitcoin and other crypto currencies around the world; recent data from CoinGecko pegs the market cap of crypto-currencies at $2 trillion. This has led to countries and corporates not only accepting payments in crypto-currencies (for instance, Tesla) but also imagining financial instruments around them (big firms like JP Morgan and Stripe have treasury in the form of bitcoin).

iSpirit thinks that opening up investments in crypto-currencies would have two distinct advantages: It would allow Indian firms to tap global crypto-reserves and international capital, and secondly, it would be transparent and cost-effective.

Balaji S Srinivasan, the former CTO of Coinbase, agrees with the theory. In a recent paper, he argued that payments in crypto-currencies offer 10-times more efficiency. “For example, you can use a stablecoin to programmatically split $100,000 among 1000 different people in 50 different countries to pay each $10 for a microtask, give them a transaction confirmation almost immediately on the Ethereum blockchain, and fully settle the monies within a few minutes such that all 1000 recipients can spend their earnings. You can raise 30 million dollars in 30 seconds on-chain. You can even stream money in real time, rather than making people wait 2-4 weeks between paychecks. These kinds of feats represent over 10x improvements on basic financial primitives and are simply impossible with the old banking system. So crypto has boosted the performance of global finance on many dimensions,” he said.

The way to go about this is to incorporate crypto-currencies with IndiaStack, iSpirit has proposed, “which broadens IndiaStack from its current mostly domestic remit into an international platform for attracting capital from around the world.” Indian SMEs already have some amount of digital historic data through GST filings and banking, and opening this up to international investors through IndiaStack framework could help in credit analysis and disbursal. Indian exchanges, like CoinSwitch, could be one of the partners in the framework, he suggested.

“Global corporations are tilting in the favour of crypto-currencies,” said Archit Aggarwal, blockchain entrepreneur and consultant, pointing to the example of Visa and Paypal embracing crypto-currencies to settle transactions. “On an institutional level, one of the biggest use-cases is international remittances and theoretically crypto transections are far more efficient than Swfit (the de-facto software banks use for international remittance) but it only be possible is the government is in favour and sees its merits.”