Investors in India’s booming Bitcoin industry say that it’s time for more sympathetic tax regime
▶ Exchanges report soaring trade volumes and want a framework to give direction, writes Rebecca Bundhun
The recent surge in Bitcoin prices has prompted a question among investors: Will this trend change the fortunes of Indian cryptocurrency companies?
The nation’s exchanges are experiencing a burst in demand driven by Bitcoin prices reaching record highs.
The Indian cryptocurrency platform CoinDCX, for instance, has reported a five-fold increase in trading volumes over the past month.
“Specifically, our spot trading volume, which began around $5 million at the beginning of February, rose to approximately $25 million by February 28,” says Sumit Gupta, co-founder of CoinDCX.
“The recent surge in Bitcoin’s value has undeniably ignited a wave of enthusiasm and confidence.”
Meanwhile, WazirX, India’s largest cryptocurrency exchange, which is based in Mumbai, is also reporting significant growth in transactions.
“My servers are humming at overcapacity,” says Rajagopal Menon, vice president of WazirX, where trading volumes have increased 20-fold since the new year.
“My new users are up, my daily traffic is up. So, the long and short of it is that it is a function of sentiment – the moment the price goes up, it’s herd mentality and everyone wants to buy.
“So, we are definitely seeing a rise in people wanting to buy their favourite crypto.”
Despite the rise in investor interest, volumes are down from their peaks as crypto exchanges are heavily taxed.
In 2022, India imposed a 30 per cent tax on profits from cryptocurrencies, and a 1 per cent tax on all transactions of the assets.
While “there is no dearth of people” wanting to invest in cryptocurrencies, Mr Menon says that “retail investments have not reached the peak that we saw in 2021”.
This development coincides with the growing apprehensions expressed by Indian authorities regarding cryptocurrency trading.
The risks associated with it, coupled with fears of potential misuse for illicit activities like money laundering, have raised concerns.
There is also a worry that it could pose a threat to the stability of the financial system.
These concerns resonate worldwide. Indian authorities are wrestling with the challenge of how to regulate these assets, especially considering their popularity.
Bitcoin, the largest cryptocurrency, has risen by almost 54 per cent year-to-date to more than $68,000 as of Friday evening. This was lower than the peak it reached on Thursday of $73,803, and it fell to about $65,000 on Sunday.
The rise of Bitcoin has been driven by various factors, such as inflows into US spot exchange-traded products and the expectation of global interest rates falling. This often leads traders to redirect capital into risky assets.
Investor interest in cryptocurrencies has grown following the approval of 11 spot Bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission in January.
The Bitcoin “halving” event is anticipated to occur in April, resulting in a reduction in the rate at which new coins are generated.
Historically, these events have led to an increase in the value of the cryptocurrency.
Indian exchanges are pleased to witness a resurgence in investor demand after a challenging period for the sector.
“We’ve witnessed a remarkable 150 per cent increase in spot market trading volume,” says Mr Gupta. “This surge in demand for Bitcoin is fuelled by the launch of Bitcoin ETFs, signalling a maturing market.”
The growth trend is not limited to Bitcoin.
CoinDCX reported “significant growth across largecap cryptocurrencies like Ethereum, Solana, Shiba Inu, and Binance Coin”, says Mr Gupta.
The rise in demand “isn’t just confined to retail investors – we’ve also seen a notable increase in engagement from high-net-worth individuals and institutional investors”.
However, despite the renewed interest in virtual assets, exchanges are reporting that the tax regime continues to dampen investor sentiment.
“Changes in India’s regulatory landscape, including a new tax regime, have influenced appetite,” says Pranav Srivan Elankovan, the founder of the Crypfi exchange.
“The introduction of taxes and regulatory uncertainties have prompted investors to adopt a more cautious approach, potentially dampening demand.”
The taxes in 2022 have had an enormous impact on the industry, Mr Menon says.
“The moment this happened, [crypto investors] stopped trading in India. They fled abroad, because crypto knows no boundaries. So, you had a lot of foreign exchanges or offshore exchanges benefiting from Indian customers shifting capital abroad.
“Our volumes were down by 90 per cent in the bear markets”, by the end of 2022 and last year, he says.
However, he said that the “Indian government has taken a very serious view of offshore exchanges not complying with Indian laws” and is taking steps to prevent citizens from trading cryptocurrencies on them, thereby benefiting Indian exchanges. In January, India blocked access to the websites of global exchanges after issuing notices to them for not complying with its money laundering laws.
Despite the 30 per cent tax rate, it is widely accepted within the industry that this serves as a clear indication that the government acknowledges cryptocurrencies as a legitimate form of investment.
Speculation had persisted that India would impose a ban on cryptocurrencies.
Sidharth Sogani, the founder and chief executive of the cryptocurrency research firm Crebaco, made the decision to move from India to Dubai three years ago.
He said the UAE’s more “robust and open-minded” approach to the market was a big factor in his decision.
He said that despite the Bitcoin rally, Indian exchanges are still at a disadvantage.
“Volumes have not reached the previous bull cycles we observed in 2021, when the market had a way higher volume, and exchanges were more aggressive and they were advertising a lot.”
He said that regulation is of paramount importance.
“India is not a regulated market for crypto. It is legal, but it’s not regulated – they are two different things,” he said.
“When you say regulation, that means the regulatory body is responsible for all the market exchanges to report in a certain manner and that regulatory body does not exist yet.
“Once it does exist, there will be a different market.”
The exchanges have expressed their openness and readiness to embrace a regulatory framework.
“We want clear guidelines,” says Mr Menon. “For example, it’s very difficult, even now, for Indian crypto companies to get reliable banking connections.”
But he believes “a change is on the horizon”. This belief stems from India’s recent actions under its G20 presidency, which together with other member nations, embraced a plan to guarantee a synchronised execution of a policy framework for crypto assets.
“We are hopeful that regulation will make the industry a better place to be in and things would be much better in the coming years for India,” says Mr Menon.
We are hopeful that regulation will make the industry a better place to be in and things would be much better for India RAJAGOPAL MENON
Vice presldent, WazirX