The year was 2021. Terms such as crypto, blockchain and NFT had captured the popular imagination. The value of Bitcoin, the most popular crypto asset, rocketed to a peak of almost $69,000 in November. Indians, too, couldn’t resist the charms of this digital currency, with an estimated 100 million-plus trading in cryptos—the highest in the world, per broker discovery and comparison platform BrokerChooser. In fact, a 2022 report by trade and the United Nations Conference on Trade and Development (UNCTAD) said that more than 7 per cent of the Indian population owned cryptocurrencies in 2021. The year also saw crypto exchanges flourish in the country with their trading volumes growing and their founders being the toast of the town.

Cut to 2023, and Bitcoin has plunged to about half its value from the peak in 2021 and trading volumes for crypto exchanges in India have plunged more than 90 per cent since February 1, 2022. What happened? First, Finance Minister Nirmala Sitharaman imposed a 30 per cent tax on crypto gains and a 1 per cent tax deducted at source (TDS) on all ‘sell’ transactions on February 1, 2022. And second, Bitcoin plunged after the failure of some prominent crypto exchanges like FTX and the end of an era of ultra-low interest rates. Is crypto a dead asset class then?

While crypto has lost its sheen as a popular investment option, there are some financial bodies that still believe in them. For instance, Standard Chartered Bank has predicted that Bitcoin could touch $120,000 by the end of 2024. But there are many who are sceptical about this asset class, like the legendary Warren Buffett. The Oracle of Omaha famously said at Berkshire Hathaway’s annual meeting in 2022 that if someone offered him all the Bitcoin in the world for $25, “I wouldn’t take it, because what would I do with it?”

Former State Bank of India chairman Arundhati Bhattacharya, who is now Chairperson and CEO of Salesforce India, also doesn’t believe in the asset class. “There are a few things [about cryptocurrencies] that I don’t believe in. One is the fact that their value is not determined by any particular authority. It just goes up and down. You cannot say whether it’s going to be Rs 10,000 today or Rs 100 or Rs 10 tomorrow. So, to that extent, it is just like any other commodity,” she told BT in an earlier interaction. The second thing, she said, is that the security regarding crypto is another concern. “You don’t know whether somebody can hack in. You don’t know whether the people who are supplying it [will] simply go away in a puff of smoke.”

While opinion about crypto has always been divided, crypto trading declined in India only after heavy taxes were imposed. With transaction volumes dwindling at crypto exchanges, what are the founders doing to deal with the crisis?

The Crypto challenge

For the founders of crypto exchanges in India, it is a battle for survival. And for that, they are embracing diverse strategies. These include exploring alternative revenue sources, implementing workforce reductions, and cutting down marketing expenditure. Some are seeking to diversify their business, while others have moved to more crypto-friendly locations. While the tax prompted some to move out of the country, there are others who had moved to crypto-friendly locations earlier.

Take, for example, Nischal Shetty, Founder and CEO of WazirX, one of the largest crypto exchanges in the country. “I moved to Dubai (in 2021) to start Shardeum (a blockchain platform), which is a Switzerland-based company. The crypto regulations are friendly in Dubai and Switzerland and it was easier to work from Dubai for us,” he says.

Shetty, whose company laid off 40 per cent of its employees in 2022 after the slowdown and shut down its NFT business recently, hasn’t given up on crypto. “Currently we have thousands of sign-ups daily. During the peak, it was tens of thousands. Our trading volume has also dipped to 10-15 per cent of the peak,” he says, explaining that many exchanges have had to tighten their belts because of a dip in trading volumes. “We laid off people because of a decline in business but we have enough [financial] runway to continue with our business. WazirX has always been a profitable company. It is only during the last few months that we are into losses. But they are not huge and we’re focussed on turning profitable again,” says a confident Shetty. He adds that there has been no change in the operational structure of WazirX as a result of his move to Dubai.

The volatility of the crypto market in India has prompted the founders of many exchanges to move out of the country, say experts. “No other country is doubling down on crypto at the pace at which India is. Major crypto exchanges continue to have their base in countries like Singapore and Dubai,” says Ravi Sawana, Associate Partner at law firm Lakshmikumaran & Sridharan.

That said, some founders and exchanges have persisted with India, but they have been forced to look at alternatives to sustain their business. “Like many other players in the industry, we have used this period of slowdown as an opportunity to focus on building and simplifying Web 3.0 for the masses. Since our establishment in 2018, our mission at CoinDCX has remained unchanged: to simplify the investment process and accelerate the adoption of crypto and Web 3.0,” says Bengaluru-based Sumit Gupta, CEO and Co-founder of CoinDCX, adding that through its venture capital arm CoinDCX Ventures, the company has invested in more than 15 Web 3.0 start-ups. The other thing CoinDCX is focussing on, says the IIT Bombay alumnus, is the decentralised finance (DeFi) ecosystem. The company has launched the DeFi wallet called Okto, providing users with the ability to swap tokens and generate earnings through decentralised finance services. DeFi utilises distributed ledger technologies of blockchain to provide services such as lending without the need for traditional centralised intermediaries. “As we look ahead, we are confident that we are just scratching the surface of what is possible in this incredibly exciting time for CoinDCX and the Web 3.0 industry as a whole,” says Gupta.

Then there’s Ashish Singhal, Co-founder and CEO of Bengaluru-based CoinSwitch. The company, which boasts of a user base of 18 million, plans to launch another vertical where it can cash in on its crypto base to sell mutual funds and fixed deposits. “A lot of Indians started their investing journey with crypto. We want to grow with them, provide them with the right assortment of asset classes—simplified and tailored for their needs. This includes products like fixed deposits, mutual funds and more. We are aiming to announce these products by the end of this financial year,” says Singhal.

Does that mean a shift from its core crypto business? “At heart, we will always be a crypto-first investing platform. But the problem that we are trying to solve is bigger. Just about 3 per cent of Indians actively invest in stocks; the participation rate in mutual funds is similar. For India to have true economic participation, the retail participation in markets should be much higher… more Indians should be investing,” says Singhal. But it may not be easy for the exchanges to diversify, given the perception about crypto. Singhal, however, is confident. “All our investment products, be it crypto or beyond, will be fully compliant with the existing rules and standards. We will share the details as and when we announce our new products,” he says.

However, Chennai-based Vikram Subburaj, CEO and Co-Founder of Giottus Cryptocurrency Exchange, says his focus remains on making crypto investing easy and seamless. “We have launched features like easy buy/sell, SIPs, curated thematic baskets, and a conversational tool to facilitate smoother transactions and cater to new investors,” he says, adding that Giottus has a runway for two more years. “It is good enough to clear through the bear markets. We are seeing traditional players getting into building ETFs for cryptos. So signs of new customers coming to the ecosystem have begun already,” says Subburaj, an alumnus of IIM Calcutta.

As exchanges navigate through the bear market, a common underlying goal is shared among both Indian exchanges and major global players: to ready themselves for the upcoming bull run. “Fluctuation is quite normal in the finance industry… We remain optimistic about the long-term potential of the crypto market. Our strategy is to continue improving our platform, expanding our offerings, and educating our users,” says Johnny Lyu, CEO of KuCoin, which was founded in 2017 and is based in Mahe, Seychelles.

The Need for Regulation

While taxing cryptos can be seen as the first step towards recognising the asset class, the regulatory space in India is still a work in progress. And regulations are necessary simply because of the anonymity that crypto provides to its users, say experts. While blockchain—on which cryptourrencies are built—has found many uses, its inherent characteristic is of being untraceable. This opens up cryptos to the perils of money laundering. Cryptocurrencies operate in a decentralised manner, distinct from traditional currencies, as they are not issued or regulated by any central authority. Add to that the fact that the advent of cryptocurrency exchanges has enhanced the accessibility of cryptos, concerns about the potential misuse of these digital assets for unreported and untaxed transactions go up multifold.

In fact, in June 2021, the Enforcement Directorate issued a show-cause notice to WazirX for allegedly violating provisions of the Foreign Exchange Management Act (FEMA), for crypto deals worth Rs 2,790.74 crore. This was in connection with a money-laundering investigation against Chinese-owned illegal online betting applications. That probe found that Chinese individuals had allegedly laundered about Rs 57 crore by converting rupee deposits into crypto asset Tether, which was transferred to wallets on the Cayman Islands-registered Binance exchange, via the WazirX platform. The instructions for these transactions were received from overseas.

While Shetty refuses to comment on this case as the matter is sub-judice, what it does highlight are the potential risks. To keep such risks in check, cryptocurrencies were brought under the purview of the Prevention of Money Laundering Act (PMLA) in March 2023. Sawana of Lakshmikumaran & Sridharan explains that in India, FEMA—which governs cross-border payments using convertible foreign currency—does not identify crypto assets as currency and therefore using them as payment for cross-border transactions is prohibited. “However, cryptocurrency being borderless and not having any apex authority has been used to undertake various activities in the past… [such as] to transfer funds from one country to another without being on the radar of the Reserve Bank of India. Further, with a lack of regulation, there was no KYC being undertaken for dealers in transactions using cryptocurrency,” he adds.

The Indian government is working on crypto rules. The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 is still in process. There are also global rules being developed by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. FSB says crypto businesses need proper rules and that the big exchanges must share info with other countries.

FSB and the International Monetary Fund recently published a paper on crypto assets that says cross-border payments via crypto have created a challenge for regulators. But, it also stresses that blanket bans on trading and mining of crypto assets would not work and would, in turn, create “incentives for circumvention due to the inherent borderless nature of crypto assets”. To curb their misuse, the paper, also submitted to the G20 members, calls for nations to implement the Financial Action Task Force anti-money laundering and counter-terrorist financing standards that apply to virtual assets and virtual asset service providers.

There has been some headway. “The global push for clear policies on crypto assets has gained momentum under India’s [G20] presidency, and a global consensus is emerging,” Sitharaman said on September 9, adding that the G20 presidency will lend its support to the IMF and FSB.

“The recent acknowledgement of much needed regulatory framework for AI and crypto will instil confidence among the masses that have already adopted some forms of AI or Web 3.0 in their lives,” says Shivam Thakral, CEO of BuyUcoin, a digital asset exchange.

What the future holds

While the volume of crypto trading may have plunged in India, the founders of crypto exchanges haven’t lost hope. “Bitcoin is far from dead and continues to be at the heart of the crypto ecosystem. Its prices have demonstrated resilience. Looking ahead, we believe Bitcoin’s prospects remain positive,” says Subburaj of Giottus.

However, the prospects for the exchanges might not improve even if there is a rally, say experts. This is because crypto traders already prefer to trade on global exchanges mainly because of the tax advantage they receive. “Global exchanges operate outside India. No business operation is undertaken in the country. Thus, the income of global exchanges may not be taxable in India. In such a case, they need not follow TDS guidelines. However, global exchanges are liable to pay Equalisation Levy in India. Having paid that, their income is exempt from tax in India,” says Sawana.

Subburaj concedes that this is a concern. “However, we believe that the Government of India is aware of this issue and is taking measures to address it. With the imposition of TDS compliance on consumers of international exchanges, there is an increased expectation for compliance realisation among these consumers,” says Subburaj.

Separately, RBI launched the Central Bank Digital Currency (CBDC), a digital version of the sovereign currency. Based on blockchain, CBDC is expected to make cross-border transactions easier in the long run. Currently, it is used for domestic transactions and is a digital version of physical money. Will CBDC compete with crypto?

No, says Gupta of CoinCX. “It is important to recognise that CBDCs and crypto offer different value propositions for users. CBDCs are a digital representation of traditional fiat currency issued and regulated by the central bank. Crypto, however, is an asset class and not legal tender. Both CBDCs and crypto will function in parallel and neither one can replace the other,” he says.

Meanwhile, the blockchain space remains vibrant. Sandeep Nailwal, Co-founder of blockchain platform Polygon, who has relocated to Dubai, has been actively utilising blockchain technology for real-world applications. Furthermore, the government has recommended blockchain technology for Covid-19 certificates, degree certificates, supply chain management, and other applications, showcasing the continued potential and value of blockchain in various domains.

While the government is not against blockchain, it intends to be strict with crypto assets given their volatile nature, say experts. This is because crypto exchanges operate on a high-risk business model, heavily influenced by the liquidity of crypto assets and other market factors. “The earlier enthusiasm amongst countries about crypto—they believed that it is a great innovation—is now completely muted… Everybody realised that there are huge risks. So, there is a great amount of caution and concern around cryptocurrencies,” RBI Governor Shaktikanta Das said after the Third G20 Finance Ministers and Central Bank Governors meeting in Gandhinagar recently. Das’s statement sums up the mood. The founders of crypto exchanges are looking at a challenging future. 

@Teena_Kaushal