The move may lead to a resurgence in Indian exchanges, they said, as many investors who had shifted to trading on global exchanges to save on tax are expected to return to local ones now.
“The major impact will be on the trading activities on the foreign crypto bourses, and we may see a significant shift of trading volume to Indian exchanges, which are FIU-compliant,” said Shivam Thakral, CEO of BuyUcoin, India’s second-longest-running digital asset exchange.
WazirX native token WRX was up 23% at the time of going to press.
Following the announcement in the Union Budget 2022 of a 30% tax on gains, 1% tax deducted at source (TDS), and no provision to offset losses, domestic centralised crypto exchanges had seen an over 95% drop in trading volumes in February and March 2022, per a study by Esya Centre, a New Delhi-based technology policy think tank. The study said cumulative trade volumes worth $3.852 billion shifted from domestic exchanges to foreign ones during February to October 2022.
Crypto Investors a Worried Lot
Over the last year and a half, Indian crypto investors have continued to transition to global exchanges in droves, crypto executives said.
These investors are a worried lot now, after the news of possible blocking of URLs of nine foreign crypto exchanges – which were not adhering to anti-money laundering (AML) guidelines and the requirement of a 1% TDS on crypto trading – broke on Thursday.
“A lot of investor funds are parked at the global exchanges,” said Vishal Gupta, a Noida-based trader and popular influencer. “Investors are now trying to get more information about withdrawals and some are also shifting their assets to either hardware wallets or third-party wallets.”
Gupta said he is “flooded with queries from anxious investors”.
Industry watchers said three foreign exchanges very popular with Indian crypto investors — OKX, Bybit and BitGet — have not been included in the FIU list while a couple of exchanges that have either changed names or are not popular are in the list.
“It’s an old list that the government has used in this case. Some popular non-KYC exchanges are also not on the list,” said the CEO of an Indian exchange on condition of anonymity.
But the Indian crypto industry is of the view that the FIU move will help strengthen investor protection.
“Robust regulatory frameworks ensure transparency, protect consumers, and combat financial crime,” said Sumit Gupta, cofounder of CoinDCX. “This step will mitigate risks, protect users and investors from potential scams, and foster the development of a secure VDA (virtual digital assets) ecosystem.”
Most Indian VDA exchanges adhere to the Prevention of Money Laundering Act (PMLA) as FIU-registered entities, he said.
In March 2023, VDAs were included within the scope of the PMLA. Any exchange offering VDA services in India must report to and comply with this Act, regardless of whether they are an Indian entity or not.
A total of 28 VDA exchanges, including CoinDCX, CoinSwitch, WazirX, and Goittus, have already completed the registration process with the Financial Intelligence Unit-India (FIU-Ind) under the finance ministry.
Clearly, the nine foreign exchanges have yet to register with FIU-Ind.
“In all probability, these foreign exchanges were not complying with requests for data from Indian law enforcement agencies. This notice makes it very clear that they have to register with the FIU and share records when required,” said Rajagopal Menon, vice president at WazirX. “The next step could be to get these offshore exchanges to comply with Indian TDS laws for services provided to Indians residing in India,” he added.
However, industry watchers said, most global exchanges are going to have a big challenge in complying with the stringent PMLA guidelines, complicating the situation for Indian investors who migrated to these exchanges.
Experts said India crypto investors should keep their digital assets on a regulated and FIU-compliant platform for better asset protection.
They also said the government should give time for users to move their assets from the foreign exchanges before blocking their URLs.
“I think the government should take a calculated approach to blocking URLs of foreign crypto exchanges, as a lot of Indian traders might have stored their digital assets on such bourses,” BuyUcoin’s Thakral said.
Crypto Revival
Despite the strict positions taken by the Reserve Bank of India (RBI) and the finance ministry regarding cryptocurrencies, India has emerged as the leader on Chainalysis’ 2023 Crypto Adoption Index. This index measures grassroots cryptocurrency adoption levels across countries.
Indian exchanges had started recording higher volumes in the past few months with Bitcoin crossing $40,000 in early December after nearly a year and a half of crypto winter.
“Finally, there is some good news on the regulatory front, Bitcoin price is rising and possible seeding of Blackrock ETF could bring back momentum in the crypto sector,” said the CEO of a crypto exchange who requested not to be named.
Manhar Garegrat, country head, India and global partnerships, at Liminal, a digital asset custody platform, said India, as a capital-controlled country, must have an oversight on any monetary inflows and outflows. “So, this (notices to non-complying entities) was a natural outcome of growing regulatory clarity in the country. Since it is a show-cause notice, it will be interesting to see the responses from the said exchanges,” he said. “This definitely helps Indian exchanges that were at the receiving end of the regulatory arbitrage that allowed foreign exchanges to continue providing services without any compliance burden.”