<< Read More: The Empire Strikes Back, Part 1: Bitcoin

As bitcoin and its thousand or so cousins evolve from novelty to threat, the existing monetary system is reacting pretty much as evil empires tend to, with coercion and co-optation. This week it’s India:

India cracks down on bitcoin and hints it may launch its own digital currency

The Reserve Bank of India (RBI) has initiated a crackdown on cryptocurrencies such as bitcoin, even as it considers a proposal for issuing its own digital currency.

“It has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately,” the RBI said in a statement.

This may mean the end of the road for those who own bitcoin or its peers, as well as the many virtual currency exchanges. The existing business ties must be wound down in the next three months.

“Internationally, while the regulatory response to these tokens are not uniform, it is universally felt that they can seriously undermine the AML (anti-money laundering) and FATF (Financial Action Task Force) framework, adversely impact market integrity and capital control,” RBI deputy governor BP Kanungo explained at a press conference on April 05. “And if they grow beyond a critical size, they can endanger financial stability as well.” AML and FATF are international policy frameworks aimed at combating money laundering and terrorist financing.

Virtual currency players in India are naturally disappointed with the RBI’s decision.

“I don’t believe this is the right direction that the central bank has taken. This will cause panic among a few million people in India who are already using cryptocurrrencies,” said Sathvik Vishwanath, co-founder of Unocoin, a virtual currency exchange in the country. “If they want to launch their own digital currencies, they don’t need to ban existing ones.”

“This means that banks will not probably give loans to cryptocurrency exchanges. And the transactions will also get affected,” said Shubham Yadav, co-founder of of Coindelta, another cryptocurrency exchange. “However, the silver lining here is that they still haven’t banned it fully.”

The central bank, meanwhile, has constituted an inter-departmental group to study the feasibility of a digital currency backed by the RBI. “This will be in addition to the paper currency that we have. It also holds the promise of reducing the cost of printing of notes,” Kanungo said. The committee will submit its report by June 2018.

Some cryptocurrency players see this as good sign. “RBI issuing their own virtual currency just shows that soon there will be an ecosystem where cryptocurrencies will be central to the ecosystem and the government will not be able to ignore it,” said Coindelta’s Yadav.

One of the unsurprising but still kind of alarming beliefs of early cryptocurrency adopters was that governments were powerless to stop them. They expected an unimpeded rise to dominance while existing fiat currencies withered away like vacuum tubes in the age of microprocessors.

And now that governments are fighting back, shocked crypto proponents are grasping at straws:

“However, the silver lining here is that they still haven’t banned it fully” … “RBI issuing their own virtual currency just shows that soon there will be an ecosystem where cryptocurrencies will be central to the ecosystem and the government will not be able to ignore it.”

Sorry, no. If a government-run cryptocurrency is a country’s “legal tender,” then private-sector cryptos might be defined as counterfeit and their owners treated as criminals. In effect, that’s a ban within an ecosystem where only the official cryptocurrency is allowed to circulate.

This kind of government response is to be expected because no one gives up power voluntarily, and today’s central banks have the ultimate power, which is the ability to make money appear out of thin air. That’s how governments can maintain vast militaries and cradle-to-grave entitlement systems without taxing their productive classes into oblivion and/or rebellion.

They won’t give up without a fight, and as the battlefield takes shape it’s not looking good for cryptos. Which at least partially explains bitcoin’s ugly recent chart:

But the war isn’t over. Fiat currencies are clearly failing and cryptos are clearly part of what comes after. True-believers’ initial expectations were just unrealistic, and the real action might have to wait until some major fiat currencies implode. So keep an eye on the euro.