Crackdowns on offshore cryptocurrency exchanges operating in India under money laundering laws may deprive local exchanges of much-needed liquidity and complicate their plans to move abroad, three industry executives said.
On December 28, the Financial Intelligence Unit (FIU) of the Ministry of Finance wrote to Binance, KuCoin and seven others that any exchange offering services to Indian users must register as a "reporting entity" and file declarations with the department of income taxes. The FIU also recommended blocking the web addresses of these exchanges in India.
โExchanges like Binance remain the key source of liquidity for most Indian exchanges, which also use almost 10% arbitrage margin on any crypto token trade through them as they actually have no reserves.โ of cryptocurrencies. This makes them dependent on major global exchanges, which are also in a beneficial position when it comes to the overall tax regime. โIndia also has no specific crypto law, all of which points to an unfavorable and unsustainable situation that Indian crypto exchanges must resolve first,โ he said.
Sidharth Sogani, founder and CEO of Crebaco, a cryptocurrency research company.
Attracting liquidity has historically been one of the biggest challenges for crypto exchanges around the world, including the defunct FTX. Exchanges, including many in India, accept orders in Indian rupees to hold orders for crypto tokens, using larger exchanges like Binance for access to be able to buy or sell any crypto tokens.
Cryptocurrency transactions and earnings in India are subject to 30% income tax, while an additional 1% tax deduction at source (TDS) is required on every transaction made through cryptocurrency exchanges with based in India. Since the introduction of these taxes in 2022, cryptocurrency trading volumes in India have plummeted.
Data obtained by Mint from Crebaco showed a 93% and 60% drop in average daily trading volumes on WazirX and CoinDCX, two of India's leading crypto companies, between March 2022 and now. Volumes could fall further with action against currencies.
One of the executives cited above also agreed that taxes and liquidity pose significant challenges in an already deteriorating crypto market in India.
โThe 1% TDS on all cryptocurrency trades is a big win for exchanges in India as it largely eliminates the prospect of arbitrage trading. "This leaves exchanges like CoinSwitch and CoinDCX in a precarious situation in terms of liquidity, which mainly arises only when there is healthy trading in the industry," the executive said.
CoinDCX and CoinSwitch did not respond to queries as of this writing.
The FIU's action has complicated the exchanges' plans to move abroad, a second person added.
โFor most of these crypto exchanges, the offshore moves were largely designed to alleviate compliance and taxation issues, which have been significantly complicated in India. The latest notice wouldn't make much of a difference for companies like Binance or KuCoin; In any case, they are not interested in setting up elaborate operations in India or doing everything possible to comply with regulations in India. "What this will affect are Indian stock markets and startups, which will likely cancel their overseas moves as it will make no difference to a large extent, either strategically or financially," the executive said.
Both executives agreed that a move abroad would only make sense if Indian exchanges were able to proliferate global cryptocurrency markets and generate their own liquidity and reserves.
Most stock markets project a bullish future amid a strong and sustained rally in Bitcoin, the reference symbol of the global crypto industry. The price of a Bitcoin token has risen from around $27,000 in October last year to $47,000 last week, an increase of 74%.
The rally has been largely fueled by talks about the introduction of an exchange-traded fund (ETF) for Bitcoin in the United States. While Indian exchanges hope this will bring some dormant users back into the fold, a smorgasbord of challenges including regulations, taxes and liquidity may not help them rise with the rising tide.
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Posted: Jan 9, 2024, 10:46 pm IST
