What lies ahead for India’s Crypto Exchange market?

This white paper delves into the promising potential of India's crypto exchange market, by presenting a comprehensive analysis based on extensive primary and secondary research. By examining growth drivers, government actions, and future prospects, this whitepaper aims to provide valuable insights into the evolving landscape of cryptocurrency trading in India.
Our research is rooted in a rigorous methodology that combines in-depth interviews with key industry players, a thorough examination of market trends, and an analysis of government regulations. We present a holistic view of the Indian crypto exchange market, exploring its current state, growth trajectory, and the factors influencing its development.
By delving into the dynamics of this market, we aim to equip stakeholders, investors, and policymakers with the knowledge required to navigate the opportunities and challenges that lie ahead. Read on to learn more on the potential of India's crypto exchange market, as we uncover its untapped possibilities.

1. The last decade saw an increase in awareness of virtual currencies, and a fast-growing tech-savvy population seeking alternative modes of investments created a buzzing crypto universe

Awareness about Virtual Currencies

• As per a survey, more than 80% of urban Indians are aware of cryptocurrencies and ~15-20% have crypto ownership, which means almost 1 in every 5 urban Indians own a cryptocurrency.
• This surge in urban crypto investors and traders is due to the willingness and initiative taken up by the educated population to invest in Virtual currencies

Peer-to-peer model

• With constant hindrance from government, either as - publishing a circular for preventive measures against cryptocurrency trading or rolling out a circular regarding the ban of all private cryptocurrencies created a dilemma in the minds of traders for regular transaction methods - hence they shifted to a peer-to-peer model.
• While P2P gives more control over trading, it is an easy-to-use platform that allows traders/investors to buy and sell cryptocurrencies directly with other users.

Mode of Investment

• Indians began to seek alternative currency models by 2018 post demonetization in 2016. Many Indians with access to the Internet began to take up Bitcoin and other cryptocurrency investments
• Before Union Budget for Fiscal year 2022-23, a 30% tax was levied on cryptocurrencies, Virtual currencies were seen as the assets where more tax could be saved than the usual investments done where higher rate of tax is charged.

Fast Growing Tech Savvy Generation

• Around ~75% of the overall Indian crypto investors are aged between 20-40 years; attributed to tech-savvy generation who has started to take initiatives to understand and invest in crypto market
• Rapid urbanization in the region complements the demography change as consumers are shifting to urban cities for better job opportunities. Increasing financial stability of consumers leads them in availing better access to education which helps them to understand a better and clearer version of cryptocurrency market

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2. Young investors are driving the Crypto Exchange Industry Growth in India coupled with cross-border remittances & Decentralized Finance (DeFi) which are major traction for investors

Expansion in Young Investors

The young demographic primarily forms the largest chunk of the investor base engaging in cryptocurrency transactions, and as more and more people get to learn about the use cases of certain cryptocurrencies, there is a huge scope for onboarding many more potential investors for the exchanges. These youngsters seem to be less interested in stock and gold showing higher interest and involvement in cryptocurrencies investment.

Cross-border Remittances

Cryptocurrency as a cross-border payment medium will make a big difference in the Indian market. Due to great remittance demand, it will drive the prosperity of digital currency growth in India for a long time. Cross-border transactions traditionally carry high fee, but by using bitcoin or other cryptocurrencies as a cross-border payment medium, Indians can save a large number of remittance fees

Decentralized Finance

DeFi (Decentralized Finance) has seen an incredible rise over the last year, with there being a $48 Billion market cap and a roughly 88X growth in DeFi at a global level. DeFi also brings in multiple possibilities in the form of improving financial infrastructure, preventing financial fraud, attracting international capital etc. NFTs (Non-Fungible Tokens) have also risen in popularity like DeFi.

2.1 Moreover, factors such as strict foreign regulations made Rupee conversation complicated, therefore Indians are opting for digital currencies for conversion of INR to a more stable fiat currency

Strict Foreign Exchange Regulations

Due to strict foreign exchange regulations, it is complicated to convert rupee directly to US dollars. The value of Indian rupee is not stable, especially during the Covid-19 pandemic. The exchange rate between rupee and USD continued to rise, causing the former to enter constant depreciation. Therefore, most Indians will choose to convert rupee to bitcoin & then to US dollars (a more stable fiat currency) through C2C trading platforms such bitcoins & Paxful.

Covid-19 Pandemic

More Indians started investing in cryptocurrencies from 2020 as the Covid-19 pandemic led to a global economic crisis, resulting in higher volatility and depreciation in traditional assets like currencies, bonds and equities. This resulted in a sharp rise in crypto valuations throughout 2020, led by popular virtual coins like Bitcoin and Ether. In India, cryptocurrency investments grew from approximately $923 million in 2020 to a whopping $6.6 Billion in 2021.

Central Bank Digital Currency

There has been an increased adoption of CBDCs (Central Bank Digital Currency), with India also now moving on the path of having its own CBDC by the year 2023 (as per the address by Finance Minister of India in the Union Budget for FY 2022-23). India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced

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2.2. The introduction of Central Bank Digital Currency (CBDC) and the increasing popularity of NFTs among others has contributed to enhanced visibility of digital currencies in the market.

Union Budget FY 2022-23

• The Union Budget for FY 2022-23 gave clarity on the taxation of cryptocurrency/other digital assets by introducing a flat 30% tax on gains. Additionally, a 1% TDS would also be levied on transactions.

Legal Tender

• Finance Secretary Mr. TV Somanathan has recently mentioned in an interview that Crypto would not be considered legal tender in India, as legal tender by law is accepted for the 'settlement of debts'. Only the 'Digital Rupee' of the Reserve Bank will be a legal tender in India

Non-Fungible Token

• Non-Fungible Tokens (NFTs) are becoming an increasingly popular means of movie promotion, with several stars such as Amitabh Bachchan and Salman Khan launching their respective NFT collections. Salman Khan has also become the brand ambassador for Chingari's (A short-video app) NFT Marketplace. Actors Rajnikanth and Kamal Hassan also launched NFT series'.

Central Bank Digital Currency

• The Union Budget for FY 2022-23 also saw the official announcement of a Central Bank Digital Currency (CBDC) being introduced to the Indian public in 2023.
• The introduction of a CBDC shall lead to a more efficient and cheaper currency management system, along with the transparency it would bring on a real-time basis, as well as acting as a tool against tax evasion. Also, a CBDC would essentially be the same as paper currency but in a digital format, which means that it would also be sovereign-backed.

3. Though India is booming as a hub for Cryptos, there are several issues associated with it such as operational risks, cyber risks and governance risks.

Operational risks

• Operational risks can result in significant downtime when failures and disruptions prevent the use of services and even result in large losses of customer funds.
• Such risks have coincided with periods of high transaction activity and can result from poorly designed systems and controls.
• For example, on May 19, when liquidations of leveraged positions peaked, major exchanges reported outages, citing “network congestion.”

Cyber risks

• Cyber risks include high-profile cases of hacking-related thefts of customer funds. Such attacks take place on centralized elements of the ecosystem (for example, wallets and exchanges) but can also arise on the consensus algorithms that underpin the operation of blockchains
• For example, selling in-game virtual items and virtual currency is against World of Warcraft (WoW) game policies. Therefore, many users log into WoW gold selling websites to buy virtual gold in order to pay for virtual items that they need. Many of WoW gold selling websites are not reliable and they are vulnerable to hacking.

Governance risks

• Governance risks involve the lack of transparency around issuance and distribution of crypto assets and have resulted in investor losses.
• As of 2021 there was no proper regulatory framework for the cryptocurrencies in India and also the circular by RBI to ban all the digital currencies led to investors loss as they are afraid of trading their money.

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4. To curb the issues, the Government of India played a major role to form a committee to draft regulatory frameworks on Cryptos, working with the Financial Action Task Force to update Crypto policies, and…

Role of Indian Government in the Crypto Exchange Industry

Committee to Draft Law

• An inter-ministerial committee under the chairmanship of Subhash Chandra Garg, Secretary of the Department of Economic Affairs, was constituted to draft the regulatory framework for cryptocurrencies.
• Included on the committee are representatives from the Ministry of Electronics and Information Technology, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Central Board of Direct Taxes.

Working With FATF and G20

• India’s “Department of Revenue has been actively involved in the working papers being developed by the FATF on various issues (such as virtual currency, proliferation financing among) which will act as guidance for the member countries.
• The Financial Action Task Force (FATF), a global standard-setting body created to combat money laundering and terrorist financing, told the G20 recently that it is updating policies on crypto regulation which will be presented at the G20 summit.

RBI Banking Restriction

• In addition to several warnings about the risk of investing in cryptocurrencies, the RBI issued a circular on April 6 2018 prohibiting regulated entities from dealing in cryptocurrencies or providing “services for facilitating any person or entity in dealing with or settling” cryptocurrencies. 
• RBI gave financial institutions three months to exit crypto-related relationships such services include accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale”

4.1. ... Pushed for the upliftment of the blanket ban on virtual currencies and set up Cybercrime unit for detection of the crypto-related frauds held online

Role of Indian Government in the Crypto Exchange Industry

Supreme Court Hearing

• Multiple writ petitions have been filed with the Indian justice system to lift the RBI ban. The supreme court also asked the government to submit a report of the regulatory framework for cryptocurrencies.
• In Mar 2020, the Supreme court quashed the 2018 RBI circular which stated a blanket ban on all the cryptocurrencies in India, allowing to trade in cryptocurrencies.

Discussions at Blockchain Summit

• In February 2019, the Department of Science and Technology, the State Government of Uttar Pradesh, the Ministry of Commerce and Industry, the Ministry of Law and Justice, the Ministry of Human Resources Development, and the Department of Information Technology gathered at Blockchain Summit India to discuss various crypto-related topics including regulation.
• The event’s fintech partner, Cashaa, announced afterward that the policymakers discussed how to speed up crypto regulation.

Cybercrime Unit for Crypto

• India’s former Union Home Minister Rajnath Singh inaugurated a national cyber forensic lab and the Delhi Police’s cybercrime unit called Cypad to help detect fraud online, including those involving cryptocurrency.
• The national cyber forensic lab includes a crypto forensic unit. It is equipped with technology to recover data from damaged hard disks, perform cryptocurrency analysis, and ensure malware forensic data can be retrieved from 33,000 kinds of mobile phone models available on the market.

5. Indian Crypto market shows good potential due to a surge in Crypto investments, Non-Fungible Tokens and entry of International Cryptocurrency Exchanges in India indicates a strong step forward

Market Potential of Indian Crypto Exchange Market

Surge in Crypto Investments

• The market potential for cryptocurrency exchanges is huge in India, with WazirX clocking close to $43 Billion in trading volume during the year 2021.
• A report by Bloomberg has also stated that crypto investments in India increased from around $923 Million in April, 2020 to nearly $6.6 Billion in May, 2021.

NFTs to gain more Traction

• The NFT (Non-Fungible Token) space is also expected to gain more traction going forward.
• With artists potentially being able to get 100% of the revenue through cryptocurrency transactions.
• Rather than the other platforms like Youtube where a big chunk of the revenue accrued against an artist gets retained by the platform itself.

Entry/Acquisition of International Cryptocurrency Exchanges

• Binance's acqusition of WazirX has also laid a pathway for international cryptocurrency exchanges to explore an entry into India, in the form of either a merger/acquisition.
• KuCoin is one of the exchanges which has started laying out a team for India operations.
• Exchanges such as Singapore-based Coinstore and the US-headquartered exchange CrossTower have already set up local units for India operations.

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