India’s crypto players are going through a rough patch.
Falling transaction volumes, regulatory vacuum, opposition from India’s central bank, money-laundering charges and a global crypto winter are threatening their very existence.
While crypto exchanges remain optimistic about the future with some believing that India is at the cusp of framing required policy, fund managers and industry experts are sceptical about the sector’s growth in the near term.
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“The Reserve Bank of India has concerns over cryptocurrencies as the regulator fears that money laundering will happen. Even their experience in the short term is not good. Unless the regulator takes a favourable view, funding to these entities will dry up,” Exfinity Ventures Chairman & former Infosys Chief Financial Officer V Balakrishnan said.
He said that many cryptocurrency-related businesses might have to migrate to foreign shores where regulations are conducive to their survival and growth.
A global crypto winter has hurt transaction volumes significantly.
The average daily trading volume of global crypto funds fell 34per cent to $61.3 million in October, touching the lowest level since June 2020, according to digital asset data provider CryptoCompare. Products based on major digital currencies including Bitcoin and Ethereum have witnessed a steep downtrend during this period.
Indian crypto exchanges have not escaped this trend, with their trade volumes dropping drastically in the last six months, according to data aggregator nomics.com. Some reports suggested an up to 90per cent fall as investors left in droves.
Steep correction in crypto coin prices is one of the major reasons for such an outcome. For instance, the price of Bitcoin – the most popular cryptocurrency – has fallen by almost 60per cent to $19,210.80 apiece from $47,733.40 a year ago. The fall in other major currencies is way deeper.
“Volumes are a direct result of sentiment; not just crypto but all major global indices are down. Volumes will recover when sentiment improves. We are investing in investor education as we believe that this is the best time to learn about crypto which will pay dividends when the bull market comes,” Rajagopal Menon, the vice president of crypto exchange WazirX told DH.
Indian taxation rules have made things worse.
Though the world’s second-most populous country is yet to formulate a policy framework to regulate digital assets, this year’s budget introduced a levy of a 30per cent tax on income from crypto transactions. It also implemented a TDS (tax deducted at source) of 1per cent on the sale of cryptocurrency assets from July 1, wiping off most inflows into these digital assets.
Fears of money laundering
The Enforcement Directorate’s probe into alleged money laundering involving gaming apps and Chinese loan operators through crypto exchanges has dented the credibility of the ecosystem. In recent months, all major crypto exchanges have come under the radar with a search by the ED on their premises. WazirX, CoinDCX, CoinSwitch Kuber and others have been brought under the purview of the ongoing investigation.
Around nine exchanges, several fintech firms and a few payment platforms are currently under ED’s radar for alleged violation of the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA), sources told DH on condition of anonymity.
“ED investigation is about Chinese loan apps and the nine crypto exchanges were called on as witnesses to provide information about transactions. The ED is not investigating crypto exchanges. The investigation is ongoing, the industry will cooperate completely and the law will take its course,” said WazirX’s Menon.
Ray of hope
While the crypto industry is plagued with problems, some see a glimmer of hope that things will improve as India takes up the G20 Presidency in December.
Finance Minister Nirmala Sitharaman has said that crypto will be part of India’s agenda in the upcoming G20 meet. It is in pursuit of creating standard operating procedures (SOPs) for cryptocurrencies through global consensus in its bid to address the concerns over the end use.
“We are seeing the first signs of this happening with the OECD (Organisation for Economic Co-operation and Development) developing the Crypto Asset Reporting Framework,” Menon said. “The Common Reporting Standard required jurisdictions to obtain information from financial institutions and exchange such information with other jurisdictions.”
“Critically, India is to take up G20 Presidency from December 1, 2022, to November 30, 2023, and the FM plans to discuss cryptos during its presidency and intends to establish a technology-driven regulatory framework,” he told DH.
While the crypto ecosystem remains optimistic about future growth, its denizens have already started facing the heat. Layoffs have become widespread in recent months and HR experts highlighted how good talent was shying away from joining the industry.
As the RBI is all set to launch a pilot for Digital Rupee in the coming months, the ecosystem will evolve further.
“It’s just a matter of time before the ecosystem stabilises with a favourable regulatory environment. Till that time, it’s a matter of survival,” said an entrepreneur who is eyeing the launch of a Web 3-related startup in the coming days.