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Crypto exchanges brace new rules, expect small investors to move to grey market

This move will be a major hurdle for the smaller investors and is anticipated to drive the retail investors to the grey market, that is the decentralised exchanges.

April 01, 2022 / 01:50 PM IST
Representative image

Representative image


Starting from April 1, retail investors and crypto exchanges will be paying a 30 percent tax gain from virtual digital assets, which is expected to drop the volumes of transactions in the coming months, said the experts in a Twitter space session organised by Moneycontrol yesterday.

The panelists included Sathivik Vishwanath, co-founder of cryptocurrency exchange firm Unocoin, Sidharth Sogani, founder & CEO of research firm CREBACO, Manhar Garegrat, executive director and chief of staff of crypto exchange firm CoinDCX and Rashmi Deshpande partner at law firm Khaitan and Co.

They further added that this move will be a major hurdle for the smaller investors and is anticipated to drive the retail investors to the grey market, that is the decentralised exchanges.

Decentralised crypto exchanges (DEXs) do not require any documentation and allow users to directly hold all their assets in their own wallets.

“A few may exit cryptos, but we are expecting to see more participation from institutional investors and high net individuals (HNIs) who are looking to diversify their portfolio. So while I do not expect a huge change in the number of users, we will see customers whose ticket sizes are bigger participating in this soon,” said Vishwanath.

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Adding to this, Sogani, said, “If an investor wants exposure in several cryptocurrencies, especially an experienced investor who wants to buy emerging tokens, that will become difficult now. What may happen is people will not invest in these emerging high risk assets in India.”

“The incoming will continue. But, for the small investor who is investing Rs 10,000 to 20,000, it becomes difficult because they don't get in with a long term horizon,” he added.

Shiba Inu (SHIB), Dogecoin (DOGE), Matic (MATIC) were among the most-traded cryptocurrencies in India in 2021.

Further, these investors will not be able to set off their losses, which is usually a provision in other types of assets, which will be adding to the woes of the investors.

Also Read | Ronin Network suffers $610-million hack, the largest ever cryptocurrency theft

Commenting on this, Sogani highlighted that this move is unconstitutional as investors in other asset classes are allowed to do so, but not here.

Shift towards the grey market

For months now, the experts have also been pointing out how the industry will shift towards the grey market.

“This move will be driving the liquidity and investors from centralised exchanges who have some form of structure, self regulation, KYC norms to unstructured ecosystems,” said Garegrat. “They not only pose risk for the Government and industry but even risks for the investors, who may not understand the risks entirely but are just looking to save the tax cost.”

Also Read | Crypto fund for Ukraine: How cryptocurrencies are funding Ukraine’s fight against Russia

Adding to this, Sogani said, “There are a thousand ways that these investors can find to avoid these taxes, so it is better to embrace the ecosystem and help it grow rather than moving away these people.”

Arguing this, Deshpande, said, “In the short run, there will be hiccups, but in the long run, if the businesses have strong fundamentals and the Government can see the intent, they will soften their stand and we will be able to ride the storm,” said Deshpande.

The experts also highlighted that the 1 percent TDS, which will be implemented from 1st July, will be a challenge.

“Market makers are the folks who bring liquidity to the markets for retail investors and make sure that the orders go through on the exchanges. They form a very intrinsic core for this business. Now, these people, if trades multiple times, now have to start deducting 1 percent on each trade, which is a challenge,” said Garegrat.

He added, “They are hugely disincentivized because a large portion of their capital starts getting blocked as TDS. This is going to make a key impact on the industry.”

Echoing similar sentiments, Vishwanath said, “The investors who were not even under the bracket to pay taxes, will now have to look for an auditor, do book keeping and all for the 1 percent TDS, which will be a heavy expense for the investors. This is apart from the 30 percent tax, so it obviously becomes an inconvenience.”

He added that 1 percent is quite high especially for those who do multiple trades. "If the transactions needed to be tracked, 0.5 or 0.1 percent would have been sufficient for the purpose. This will be a tough year or two, let's see what direction the industry will take.”

The experts highlighted that the growth in the crypto ecosystem is quite fast-paced and delay in regulatory clarifications will cost the country.

"The Government needs to take a quick decision if they are going to legalise it or not. While likely they are not banning it, but bring in robust regulations, have a body to keep a check and which will understand the complications of the industry," said Deshpande.



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Sanghamitra Kar
Priyanka Iyer
first published: Apr 1, 2022 01:50 pm
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