Indian crypto exchanges lose to Binance and Coinbase

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Indian cryptocurrency exchanges have lost a significant portion of their trading volumes to foreign platforms since February 2022.

Between February and October 2022, Indian exchanges ceded $3.8 billion worth of trade to foreign exchanges, according to a report (pdf) by New Delhi-based think tank Esya. In October 2022, global players like Binance and Coinbase held 67.6% of volume in India, up from 50% in November 2021.

This change was caused by India’s strict policy, as well as global market conditions.

If investors channel their business overseas, India’s tax design of VDA (virtual digital asset) is counterproductive, according to Esya’s report.

India’s cryptocurrency market has been gaining momentum during the pandemic years, with its total holdings reaching over $5 billion in February 2022. But it started to shrink after the 2022 Union budget announced a 30% tax on trading gains, as well as a 1% tax deduction. at the source (TDS). The budget did not provide for the amortization of losses.

These policy measures have only aggravated Indian trading conditions created by global headwinds.

The collapse of international cryptocurrency platforms such as FTX and Vauld has hit global trading volumes, but Indian exchanges such as WazirX, CoinSwitch and CoinDCX have suffered the worst.

Indian VDA exchanges lost 97.1% of their volume in October 2022 compared to corresponding volumes in January 2022. During this period, foreign exchanges lost only 36.3%, according to the Esya report.

Why Cryptocurrency Trading is Easier on Foreign Platforms

It is easier to convert cryptocurrencies to fiat currency on international exchanges like Binance. This allows merchants to channel funds without intermediaries.

Some exchanges like KuCoin and Gate also allow limited trading without providing KYC details. Decentralized like DYDX are not looking for KYC at all.

These incentives, apart from easier overseas taxation, are what attract Indian traders to overseas platforms.

This implies that India not only loses its international competitiveness in the VDA ecosystem, which is closely linked to several emerging technologies, but also the scarcity of liquidity which is important for the simultaneous creation of economic value in the country, according to the report. Esya.

The Indian government therefore needs to reevaluate its tax policy to incentivize users, he said. Experts believe that a regulatory framework at par with global policies is what is needed to sustain the industry in India.

India’s cryptocurrency tax policy is stricter

India has adopted a strict policy on taxation of cryptocurrency holdings. In December 2022, the Governor of the Reserve Bank of India, Shaktikanta Das, even expressed his concerns about financial stability if the use of cryptocurrency is not banned.

In comparison, other global jurisdictions have been more lenient.

For example, the United States, the largest cryptocurrency market in the world, classifies these assets as property. It levies up to 20% long-term capital gains tax and also protects losses. It does not take TDS.

The UK has a somewhat similar policy.

In Singapore, profits generated by cryptocurrencies are simply tax exempt. The government there considers cryptocurrencies as intangible assets.

In this context, India’s fixed and high tax rate may not be optimal for maximizing industry tax revenue, as it indirectly incentivizes investors to evade tax through increased exchanges between peers (P2P) and the gray market, according to the Esya report. This, he said, could hamper financial stability.

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