Will the Indian crypto market pass its biggest test yet? – Advisor Forbes INDIA
Cryptocurrency markets around the world have been battered with billions of dollars wiped out, pushing the total market value of cryptocurrencies to less than $1 trillion in just one year, from $3 trillion in 2021. particularly in India, where the government has been more than critical of the asset class and fired the fiscal bullet to wean demand. The three-edged sword of high inflation, strict taxation and a regulatory scanner is tearing apart the crypto rally in India where cryptocurrency companies face their biggest test yet.
The numbers speak of a horrific fall in the world’s largest cryptocurrency, Bitcoin, plunging over 45% in less than three months and trading around $20,000 (INR 16 lakh) as of July 5, 2022. Ethereum has experienced a downward spiral of almost 60% lower in value from its value of $2,700 (INR 2 lakh) in April 2022. Other popular cryptocurrencies in India such as Binance Coin, XRP, Solana experienced a drop of up to 80% to 100% from their values in April 2022.
Global Factors Main Catalysts of the Crypto Crash
A rise in interest rates with the start of the US Federal Reserve’s quantitative cut left international equity markets puzzled. The US stock market hit its lowest since the 1970s while the Fed has already hiked interest rates twice in 2022. Inflation in the UK also hit 9.1% during the year to May 2022 – its highest level since 1982.
A look at inflation figures around the world shows a sharp increase:
Geopolitical tensions due to the war between Russia and Ukraine and China’s Covid-19 containment policy have exerted immense pressure on supply which, in turn, has disrupted the overall production of goods in the world and led to an increase in food prices and production costs resulting in high inflation in some countries.
The Reserve Bank of India (RBI) said it perceived uncertainty due to the suffocating inflationary impact the Russian-Ukrainian conflict had on global commodity prices and international crude prices which remained high and volatile, including the prices of inflation-sensitive items that are affected by the global crisis. shortages thus increasing the cost of everyday consumer items.
Although India’s inflation rate eased slightly to 7.04% in May 2022 from an eight-year high of 7.79% the previous month, it remained above the RBI’s target range of 2% to 6% for the fifth consecutive month. Prices for foodstuffs, oils, fats and spices have also increased significantly.
The overall risk scenario is forcing investors to pull their money out of stock markets and in the case of emerging markets such as India, foreign institutional investors (FIIs) have sold shares worth nearly $22 billion. dollars from January 2022 to May 2022, marking an all-time record output.
Retail investors are prolonging this selling spree and looking for a way out of riskier assets such as cryptocurrencies, the chaos in the crypto world bears witness to this.
Tax crackdown in India adds further pressure
The RBI has maintained its stance on digital assets and has repeatedly issued warnings against cryptocurrency trading. According to the RBI, cryptocurrencies were specifically developed to circumvent the regulated financial system and that should be reason enough to treat them with caution.
In a circular dated February 2022, the RBI noted that it had seen that “cryptocurrencies do not lend themselves to the definition of currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they resemble Ponzi schemes, and may even be worse. That should be reason enough to keep them away from the formal financial system.
The RBI went on to state that “cryptocurrencies undermine financial integrity, particularly the KYC regime and AML/CFT regulations and at least potentially facilitate anti-social activities.”
In the same month, the Indian government announced a tax on income derived from the sale and transfer of transactions of virtual digital assets (VDAs) of more than INR 10,000, including cryptocurrencies. This means that if an Indian sells digital currencies such as Bitcoin or Ethereum, he will receive 1% less than the selling price. On top of that, a flat tax rate of 30% on income from all VDAs, including cryptocurrencies, added fuel to the fire.
As part of the new tax regime, the government levied a 1% withholding tax (TDS) on cryptocurrencies which came into effect on July 1, 2022, shortly after which cryptocurrency exchanges from India, including WazirX, CoinDCX, and ZebPay, saw a significant decline in their rankings. trading and intraday volumes. Crypto research firm Crebaco Global reported a massive 60%-80% drop in daily trading volumes in just four to five days after the new tax regime was introduced.
This has united the industry in its views on the VDA tax and it believes the tax will act as a deterrent to future investment. Other measures such as restricting the use of the popular Unified Payments Interface (UPI) to facilitate fast digital transactions for crypto trading have ticked off global players including Coinbase, which announced an exit from the India shortly after launching its operations in the country.
Cryptocurrency companies in India would also be subject to the regulatory scanner to check for financial irregularities. In an article published in the Indian daily The Economic Times, sources said that executives of companies such as WazirX, CoinSwitch Kuber and CoinDCX were summoned for allegedly violating the Foreign Exchange Management Act (FEMA) for transactions of cryptocurrency worth millions of rupees.
Crypto Companies Hold Strong
Despite Herculean challenges, India-focused cryptocurrency companies are yet to sound the alarm and are confident of creating a growth-oriented environment.
India’s largest crypto exchanges, WazirX and ZebPay, released a Trader Sentiment Survey this week to highlight how further reforms could boost the industry and its participants.
Their Trader Sentiment Survey found that 27% of the 9,500 survey participants had already sold 50% of their portfolio before April 1, 2022 and 57% of them sold below 10% as early as April 1, 2022. tax announcement. 83% of traders felt that the recent tax measure had deterred their trading frequency.
Discussing the survey results, WazirX Vice President Rajagopal Menon said, “The tax regime needs to be balanced to encourage participation and boost trading volumes.” Avinash Shekhar, CEO of ZebPay, called on the Indian government to “reconsider its stance for a more conducive regulatory environment that will ultimately contribute to overall economic progress”.
Some experts, however, believe that the virtual digital asset tax may, in fact, cause investors to move their crypto investments to foreign exchanges or trade offline instead of stopping trading altogether.
Ayesha Bharucha, managing partner at Bharucha & Partners, expects sophisticated investors to take advantage of the crash with the intention of earning profits in the future. “Crashes and booms are common in the context of volatile assets, and cryptocurrency is no exception…However, unlike in the case of a stock market crash, investor sentiment is likely to be tempered by the regulatory uncertainty surrounding cryptocurrency,” says Bharucha.
CoinDCX COO Mridul Gupta also says that the crypto market is unpredictable like any other market. He finds no surprise in the fall of cryptos as all asset classes are down.
“Right now, the crypto market is going through a bearish phase. Bitcoin may be down 75% from its 2021 peak, but it’s still 10x higher than it was there. five years ago,” said Gupta.
Others, like Ashish Singhal, the co-founder and CEO of CoinSwitch, suspect that trade has shifted to the crypto gray market and compliances established by crypto companies to signal that TDS may not work. apply on the gray market or on transactions carried out on exchanges outside the jurisdiction of Indian regulations.
“The fear is high that TDS could discourage users from trading on KYC-compliant platforms,” Singhal says while fighting for a lower TDS rate, which he says could incentivize users to stay on the platforms. -forms compliant with KYC and maintain capital under Indian regulations. .
Whichever direction India’s crypto markets go next, if one follows the mantra – markets are unpredictable – it would be safe to say that while weather is a factor, these are tough days and the worst may not yet be over. for the Indian crypto market.