Crackdown on foreign crypto exchanges operating in India under money laundering laws could deprive local exchanges of much-needed liquidity and complicate their plans to move abroad, three industry executives said.
The Finance Ministry’s Financial Intelligence Unit (FIU) wrote to Binance, KuCoin and seven others on December 28 that any exchange offering services to Indian users must register as a ‘reporting entity’ and submit statements to the income tax department . The FIU has also recommended blocking the web addresses of these exchanges in India.
“Exchanges like Binance remain the key source of liquidity for most Indian exchanges, which also use an arbitrage margin of almost 10% in any crypto token trade through them, as they don’t really hold crypto reserves,” said Sidharth Sogani, founder and chief. CEO of Crebaco, a cryptocurrency research firm.
Attracting liquidity has historically been one of the biggest challenges for crypto exchanges worldwide, including the defunct FTX.
Exchanges, including many in India, accept orders in Indian Rupees to hold crypto token orders, using larger exchanges like Binance to gain access to be able to buy or sell any crypto token.
Crypto transactions and profits in India are subject to 30% income tax, while a further 1% tax deduction at source (TDS) is required on every transaction carried out by India-based crypto exchanges. Since the introduction of this tax, in 2022, crypto trading volumes in India have declined.
Data obtained by Mint from Crebaco showed a 93% and 60% drop in daily average trading volumes in WazirX and CoinDCX – two of India’s leading crypto firms – between March 2022 and now. Volumes may fall further with the action against the foreign exchange.
One of the executives quoted above also agreed that taxation and liquidity pose significant challenges in an already fractured crypto market in India.
“The 1% TDS on all crypto transactions is a big hit for exchanges in India as it removes a lot of the prospect of arbitrage trading. It leaves exchanges like CoinSwitch and CoinDCX in a precarious place in terms of liquidity – which mainly can only be obtained when there is healthy trade in the industry,” the CEO said.
CoinDCX did not respond to inquiries by press time.
CoinSwitch CEO Ashish Singhal, responding to a Mint query, said the FIU’s crackdown “will help create a level playing field between Indian and foreign exchanges, strengthen compliance rails and also enhance consumer protection”.
He also promised “seamless” crypto transactions for CoinSwitch’s users, but did not comment on the liquidity of trading on the exchange.
The FIU action complicated exchanges’ plans to move overseas (mainly for easier compliance and taxes), a second executive said above.
“The latest notice won’t make a huge difference to the likes of Binance or KuCoin – they’re not keen on setting up extensive India operations or going out of their way to comply with regulations in India anyway,” said this CEO.
“What this will affect are Indian exchanges and startups, who are likely to cancel their moves abroad as it won’t make a big difference – strategically or financially.”
Both executives agreed that a move abroad would only make sense if India’s exchanges were able to spread the crypto-forward global markets and build their own liquidity and reserves.
Most exchanges are predicting a bullish future amid a strong, sustained rally for Bitcoin — the bellwether for the global crypto industry. The price of one Bitcoin token rose from around $27,000 in October last year to $47,000 last week – a 74% increase.
The rally was largely fueled by talk of launching an exchange-traded fund (ETF) for Bitcoin in the US. Even as Indian exchanges hope to bring some dormant users back to scale, a smorgasbord of challenges, including regulations, taxes and liquidity, may not help them rise to the occasion with the rising tide.
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