Inside India's booming crypto industry

Nischal Shetty, founder of cryptocurrency exchange WazirX. Last month, WazirX said that it recorded a trading volume of over $38 billion in 2021.  (Mint)
Nischal Shetty, founder of cryptocurrency exchange WazirX. Last month, WazirX said that it recorded a trading volume of over $38 billion in 2021.  (Mint)


  • Despite regulatory uncertainty, why are so many cryptocurrency startups cropping up?

It’s the best of times and the worst of times to be a startup with a foothold in India’s crypto marketplace. While regulatory uncertainty continues to linger, many—from Bollywood icons to tech entrepreneurs—like crypto; everyone wants to learn about crypto. Some even believe cryptocurrencies, and the underlying blockchain architecture, will set off a new wave of financial innovation once the level of adoption rises.

The latest to dive headfirst into the space is Jignesh Shah, founder of 63 Moons Technologies. The firm, via its wholly-owned subsidiary Tickerplant Limited, announced the launch of CryptoTV, CryptoWire (blockchain news and analysis providers) and a Crypto University last week. Shah is battling civil and criminal cases related to the National Spot Exchange Limited (NSEL) financial scam. Thus, his entry into the crypto realm, which often draws the ire of regulators and governments, is a bit surprising. But it explains the momentum that is driving the Indian crypto market at the moment. Everything from new coin launches to so-called crypto-based fixed deposit accounts and ‘loan against crypto’ products have mushroomed and proliferated over the past year.

Currently, India ranks second in cryptocurrency adoption, behind only Vietnam, according to the 2021 Global Crypto Adoption Index. According to a recent study by Nasscom and the crypto exchange WazirX, the Indian cryptocurrency market has been growing exponentially over the past few years and is expected to touch $241 million by 2030.

Meanwhile, leaks from official sources indicate that the Union government is unwilling to accord legal status to cryptocurrencies. Even if it is acknowledged as an ‘asset’ instead of a ‘currency’, there is a strong possibility that only Securities and Exchange Board of India (Sebi) registered platforms would be allowed to trade in crypto. All transactions may also need to happen via onshore wallets. Despite these looming conditions, why is the number of business ventures in the segment exploding?

The simple reason: Crypto is raking in the moolah at the moment. “Everyone in the fintech ecosystem has been looking to get into cryptocurrency trading… the kind of money in crypto is crazy," says the founder of a Sebi-regulated investment advisory firm, requesting anonymity.

So, what exactly is the crypto business? How do exchanges and traders make money legally as well as through means that could be deemed unethical? And will India’s legislative approach help in regulating the ever-evolving crypto universe?

The kosher business

The major source of revenue for a cryptocurrency exchange is commission on each trade (buy and sell). It usually ranges between 0.1%-0.5%, or sometimes, even 1%. The largest global exchange Binance’s trade volume on an average day is roughly $100 billion (0.1% of it, or $100 million, is the net revenue every day from just spot trading).

Since all the Indian crypto exchanges have moved their offices out of the country following the Reserve Bank of India’s (RBI) ban on crypto transactions by banks in 2018, it is difficult to assess their revenues. Last month, WazirX said that it has recorded a trading volume of over $38 billion in 2021. Roughly 0.1% of that figure is 280 crore.

The oldest exchange Zebpay, which moved its base to Singapore in 2018, last reported its revenues from India in the financial year 2018. It was 202 crore. The profit stood at 77 crore. In September, CoinSwitch Kuber, another exchange, reported a monthly transaction volume of 15,138 crore on its platform (translates to roughly 15 crore in monthly revenue).

The founder of the Sebi-regulated advisory quoted above said that these turnover estimates are conservative because crypto exchanges regularly charge 0.5%-1% as commission.

Another realm in the emerging crypto business ecosystem is occupied by banks that power the regular and trading accounts of the exchanges. “Cashaa charges (the exchanges) a fee of 1.5%. Our deposits are at $2 billion," said Kumar Gaurav, founder of so-called crypto bank Cashaa. “We are not powering the trading account of Indian exchanges because we are not present locally. But since these Indian exchanges are headquartered outside India, we power their regular accounts where their funding money is kept," he added.

Vauld, Zebpay and CoinDCX are some of the platforms that also Indian borrowers to avail credit against their crypto holdings. Cashaa is rolling out its own lending against crypto in collaboration with United Multistate Credit Cooperative Society, in which Gaurav owns a 51% stake.

“Unicash is the brand through which we will be offering wallet and lending offerings," Gaurav said. “If you have bitcoin sitting idle, you can get (a) loan against it at 14-18% (interest). As a cooperative that has a lending licence, we are asking bitcoin to be treated as an asset class like gold, etc. We also have (a) wallet, where you can convert money into bitcoin and hold (it) with us… because you will (then) also get interest on your bitcoin, just like you (would) get bank interest on your INR savings," Gaurav said.

These new offerings show that crypto is no longer just one thing. lists more than 60 cryptocurrency-related investment categories. Out of these, non-fungible tokens (NFTs), decentralized finance (DeFi) and decentralized exchange tokens (DEX) are some of the new use cases that are slowly and steadily marking their presence felt in India. While NFTs are tradeable assets like coins, DeFi enables blockchain-based smart contracts and DEX allows direct peer-to-peer transactions bypassing exchanges.

Nischal Shetty, founder, WazirX explains, “NFT is a decentralized marketplace (where digital art is bought and sold). We don’t even take custody of (the) NFTs or (the) assets with which you buy NFTs. It’s just a smart contract on a blockchain and people place buy and sell auctions on our platform."

Globally, NFT platforms operate just like a marketplace and can charge up to 10-15% commission on every NFT transaction. The rest of the money goes to the creator—similar to the relationship that Amazon or Flipkart have with their sellers.

In addition, Shetty notes that there ought to be a sizeable number of people in India who understand products such as DeFi or DEX. “With 15-20 million crypto users in India (a conservative number), at least 1-2 million people (would be) into decentralized exchanges or decentralized products. It’s time for Indian exchanges and Indian startups to start experimenting in this zone."

Coinswitch Kuber claims to have 15 million users on its platform, WazirX has 10 million, while CoinDCX and Zebpay have six million and five million users, respectively.

Not-so-kosher business

But the nature of the ongoing crypto frenzy is such that not everyone who enters the space truly understands what they are getting into. “A majority… maybe even close to 80% of the money that India is investing (in crypto) is going into multi-level-marketing (MLM) scams and get-rich-quick schemes," Cashaa’s Gaurav said.

Currently, if a new coin is being launched, it is fairly difficult to gauge whether it has broken any securities law or money laundering norms. As per Indian law, no financial instrument can guarantee an assured return, but many crypto coins are being launched with a guarantee of 50-100% return. There are also issues related to the lack of proper disclosures and audits.

In 2018, when the crypto craze peaked on an earlier occasion, many startups began to launch their own private coins or tokens. This practice, according to Gaurav, has only evolved and happens “in a much more sophisticated manner. It is even more difficult to understand".

“Every time I visit India, there will be 2-3 new coins, which want to be next bitcoin. This is happening in tier-2 and tier-3 cities. Coins are being sold in the name of crypto and without (any) regulation… all via MLM person-to-person schemes," said Gaurav. “There are (also) instances where exchanges list scam tokens and (then) apologize later," added Gaurav.

‘Pump and dump’ is another major problem. Explaining the modus operandi, Gaurav says, “Basically, you have a coin which is introduced and suddenly its prices skyrocket 20x and people rush to buy. But people who want to sell are facing problem in selling it. Because (some) are not able to sell but others are still buying it, the price keeps going up. One should think that if you and me are not able to ‘sell’, then who is selling the coins? Is it exchanges or any internal people involved in it? If someone is buying, then where is the supply coming from?"

“This is a huge source of revenue for the exchanges, which is unaccounted. If they account this in their books, it’s actually a crime," Gaurav added.

Other than trading per se, the 2020 crypto boom has given birth to a set of new bank-like products, such as loans against cryptocurrency and fixed deposit (FD) schemes.

“Due to the regulatory vacuum, many entities are promising future returns. Crypto FDs (seemingly) can do literally anything under the sun," said the Sebi-regulated advisory’s founder quoted earlier.

Who regulates and how?

In all likelihood, the markets regulator Sebi could be given the additional responsibility of regulating cryptocurrencies, Mint had reported on 3 December.

While this does provide some clarity on the fate of cryptos in India, it also throws up several questions. For instance, what ‘products’ will come under the ambit of regulation and what will be deemed illegal? Will companies be allowed to offer services via a channel outside the crypto exchanges?

“If one goes by media reports and leaks, then one can’t do anything outside the exchange. Everybody will have to declare and bring everything under the exchange," said a senior lawyer, who requested anonymity. “But if somebody can’t have their own (private) wallet, then how will they be able to pay their GAS fee (gas is a fee paid to complete a transaction on the Ethereum network and it is priced in ether), or maintain NFTs, etc?" the lawyer added.

The thing with NFTs, in particular, is that transactions will inevitably cross national jurisdictions and enabling provisions may need to be added under the Foreign Exchange Management Act (FEMA), the lawyer said. “We will have to see how they put in place those restrictions regarding what can be done outside the exchange."

For now, the crypto industry is cognizant of the fact that any regulation which is introduced in the near term won’t be comprehensive as the domain is constantly evolving. NFT happens to be one such use-case, which the 2019 draft bill couldn’t even mention since it’s a fairly new phenomenon and it was not on anyone’s mind back then.

“From the point of (view of) regulation, the first step will be onboarding new rails, such as exchanges, wallets, or whoever is providing a service to buy and sell crypto… because that’s an entry point," Shetty of WazirX said. “If you regulate that part, then a path towards complete regulation will eventually come. I think this is fine because, for other use cases of crypto, it is status quo. Nothing changes," he added.

According to Unocoin’s CEO Sathvik Vishwanath, things were confusing till even a week ago. “Now that the finance minister has clearly clarified in Parliament that the (2019) bill is being re-written, I strongly believe (that) they are rewriting it because they want to include some of the other new technologies (and products which have emerged). I am hopeful that there will soon be some kind of guidelines, if not complete regulation."

Another possibility could be that the crypto exchanges might set up a separate entity altogether to offer NFT services and may follow the existing marketplace guidelines if Caasha’s Gaurav is to be believed. But whether Sebi as a regulator will allow such practices is the bigger question.

Several stakeholders Mint spoke to believe that it would be difficult for any single regulator to regulate the crypto realm as they already have too much on their plate. “Sebi might have to set up a separate unit to regulate this (space). Otherwise, what will happen is (that) it will be monitored at a very vague level with only the trading part of it getting covered… and not the creation and transfer part of it," said the founder of a cryptocurrency platform who didn’t wish to be identified.

Some industry players are even pitching for a brand new regulator—something along the lines of the International Financial Services Centre Authority (IFSCA). “We are saying create an empowered body which consults all the (relevant) regulators and bring laws step by step," said an industry official, who requested anonymity. “Crypto should be given to an independent agency which understands it and takes an impartial view. Because crypto will change. Today, it is security, tomorrow you will call it tokens, then you may see it as an IPR. Who will regulate it then? This will keep changing colour. You can’t keep changing (the) regulator or keep adding (new) regulators to (oversee)," the official added.

Coming up with a new regulator in any domain is typically a decade-long exercise. In a recently held fintech event ‘InFinity Forum’, responding to a question on crypto regulation, finance minister Nirmala Sitharaman admitted that regulation, both executive and legislative, is constantly playing catch up with technology. “They can never be on top of it because the technology is constantly evolving and changing. Hence, regulating it is going to be a collective effort," she said. Who will step up to the plate and what they will do to both the kosher and no-so-kosher world of crypto remains to be seen.

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