Regulatory action ushers domestic crypto revival

Cryptocurrency exchanges in India are having a field day for the past few weeks with volumes surging multi-fold ever since the authorities started blocking offshore exchanges.

The Finance Ministry’s Financial Intelligence Unit initiated regulatory action against offshore exchanges on December 28. While CoinDCX has reported a 2,000% surge in transaction volume since then, CoinSwitch said trade volumes increased by 30–35 per cent in the week post-December 28.

WazirX said its deposits zoomed 250 per cent in the four days after the compliance action was initiated, while Mudrex noted an addition of 30,000 customer registrations.

Following show-cause notices sent to popular foreign exchanges like Binance, Kraken and several others for not registering with the FIU as required under the Prevention of Money Laundry Act (PMLA), the URLs of some of these platforms have been blocked, and their apps have been removed by both Google and Apple from their app stores.

These actions have turned the tide for domestic virtual asset exchanges, which had lost nearly 90 per cent of their users to foreign entities in the past couple of years ever since a 1 per cent tax deducted at source (TDS) on cryptocurrency transactions was introduced in 2022, on top of the 30% capital gains tax that can’t be offset against losses. Most Indian crypto investors had since been indulging in regulatory arbitrage by preferring to use these offshore exchanges that did not deduct taxes.

“We’ve seen the first step where India is asking offshore exchanges to comply with FIU. The next step could be to ask them to comply with TDS. What we will see is the gradual return of traders who migrated to offshore exchanges and new users will use domestic exchanges,” WazirX vice president Rajagopal Menon told DH.

The foreign bourses are now trying to retain Indian users, which make up for one of the biggest cohort of crypto traders worldwide, by creating alternative URLs and mobile apps. However, the shift in investor sentiment and trust is evident, as per Mirdul Gupta, CoinDCX’s chief operating officer.

“The positive trends in volumes, deposits and compliance efforts have broader implications for the cryptocurrency landscape in India. This could mark a turning point where volumes will potentially return to domestic entities,” said Sathvik Vishwanath, co-founder & chief executive officer of Unocoin.

Moreover, with many of these platforms now blocked, users are unable to access parked funds, further fueling the move towards complaint exchanges in India, Gupta said.

“Nobody wants to risk their capital on offshore exchanges that are non-compliant. There is no promise of the security of this capital, and it is tough to pursue legal proceedings against them, as compared to registered Indian companies,” he said.

To capitalise further on the changing dynamics, Indian exchanges are offering discounts and offers to users who are transferring their funds from offshore companies. CoinSwitch this week announced a 2% cashback for crypto deposits, while WazirX is offering a bonus of 1% to users who transfer their crypto assets to the platform.

“CoinDCX has allocated a $1 million fund to assist investors in transferring assets from non-compliant offshore exchanges to the platform, accompanied by a 1% bonus. This initiative was expected to bring about a 500% surge in fresh inflows, but in the first week alone, we have observed an 800% increase in deposit volume,” Gupta said.

However, regulatory actions are expected to lower overall crypto trading volumes from India, at least in the short term, as investors look for low tax-intensive and safer asset classes, industry insiders said.

This is mainly due to the high TDS on crypto transactions, which takes away liquidity from traders. The industry has been batting for it to be reduced from 1% to 0.01% which would finally create a level playing field for domestic companies and foster fair competition.