GOVERNMENT INDECISION ON CRYPTOCURRENCY REGULATION AFFECTS TRADE
By Arun Kumar Shrivastav
India is making all the bad noise on the cryptocurrency front! In the 10 days starting April 1, trading volume on major Indian crypto exchanges such as WazirX, CoinSwitchKuber, CoinDCX, and ZebPay decreased by more than 90%, normalized from last year. For context, WazirX, India’s largest crypto exchange by volume, had $44 billion in trading volume in 2021. Today, their business is down by up to 98%, which is pretty much a complete washout. of their trading volume.
This happened after the newly introduced crypto taxes came into effect on April 1, at the start of the new 2022-23 fiscal year. Introduced in the 2022-23 budget, the new crypto taxes are exorbitant as they include a 30% tax on profits with no provision to offset losses. So while profits on individual trades are taxed, losses cannot be adjusted for tax calculations. Additionally, all crypto transactions will attract 1% TDS. The net result of this extreme taxation is that traders have left the exchanges almost entirely.
High taxes aren’t the only thing driving traders away. Several exchanges, including WazirX and CoinSwitchKuber, stopped receiving deposits from Indian investors on Tuesday following a statement from the National Payments Corporation of India (NPCI), which governs UPI, on April 7 saying it does not recognizes no crypto exchange using UPI. The NPCI statement came in response to US-headquartered Coinbase launching its services in India on April 7.
At an event in Bangalore, Coinbase launched its trading services for Indian investors, promising support for UPI for Indian Rupee deposits. However, within hours, NPCI, which is an umbrella organization for interbank retail payments and settlement systems, said in its statement that it was not aware of any crypto exchanges using UPI services. Three days later, Coinbase officially halted UPI-based deposits on April 10. On April 12, CoinSwitchKuber, which is India’s first crypto unicorn, and WazirX which is the largest crypto exchange by volume, also halted Indian rupee deposits citing regulatory concerns.
Attributing unnamed official sources, the media said that cryptocurrencies or crypto exchanges are not legal entities in India, so NPCI is not obligated to provide payment settlement services to them. However, NPCI has long maintained this position, but some payment aggregators that used UPI provided services to crypto exchanges.
Investors used these aggregators to make deposits into their crypto wallets for trading purposes. Reports suggest that at least four of these aggregators, MobiKwik being the most notable of them, have stopped providing payment services to crypto exchanges from April 1. This caused trading to come to a screeching halt. Coinbase and CoinSwitchKuber said they will work with regulators and try to meet their expectations so they can work smoothly.
Believing that cryptocurrencies are highly volatile and risky investments which also pose significant threats to the formal financial system, the Reserve Bank of India (RBI) in April 2018 requested banks to stop banking services to crypto activities, which mostly take place through crypto exchanges.
The Supreme Court of India in March 2020 had struck down the RBI directive and said that since cryptocurrencies are not illegal in India, banks cannot stop their regular services. However, the banks failed to comply with the SC order for one or another technical reason.
Some industry bodies that also represent Indian crypto exchanges are pushing for regulation to allow Indian crypto exchanges to operate normally. When introducing the crypto tax provisions, the government had stated that it was the sovereign right of the government to tax any activity it deemed appropriate. For a law on the cryptocurrency sector that would define which activities and entities are legal or illegal, the government is of the view that India should wait for a global consensus and framework to emerge in this regard.
Coinbase, which is the second largest crypto exchange with a presence in over 100 countries, has set up a technical center in India where it employs 300 people. Prior to its launch in India, Coinbase CEO Brian Armstrong said the company intended to hire 1,000 additional employees in India this year. Its investment arm Coinbase Ventures has invested $150 million in Indian startups, including CoinSwitchKunber, which was valued at $1.9 billion in October 2021 in a funding round.
One of the fallouts of government indecision on cryptocurrency regulation is that cryptocurrency experts and professionals are leaving the country. Several countries around the world, the UK being the last and most important among them, have declared that they want to become a cryptocurrency hub.
The Indian crypto sector received $630 million in funding in 2021. The amount is almost equal to what Miami Florida sees in venture capital funding in the crypto sector. New York and Silicon Valley are at number 1 and 2 respectively. The government needs to look at global trends rather than just global consensus in the crypto industry. India should not miss this opportunity in a region where it has certain natural advantages. (API Service)