WazirX’s Weekend Episode — How May this and Other Factors Shape Crypto Regulation In India?

Three things happened over the course of one Sunday, crypto-wise.

One, WazirX, one of India’s largest cryptocurrency exchanges, made history by crossing $270m in daily volume, the highest ever for any crypto exchange in the Indian market.

Two, WazirX crashed.

Three, WazirX launched an NFT marketplace to enable auction and sale of these digital assets.

All these developments have justified the ongoing market swell for crypto-assets and the fact that it is gaining ground in India too. This is particularly relevant when you put it in context of a fourth development that came in early today. The Government was reported to plan an “exit window” for holders of crypto-assets to allow their disposal in about six month’s time, if not suddenly.

This, perhaps, reinforces the threat of a complete crypto ban in India. However, in a contradictory move, the Government also made it mandatory for all companies to disclose their virtual currency exposure and dealings on their balance sheets. Ironically, this suggests the first step towards creating a regulatory framework for this asset class. Such regulatory pushes are typically designed to increase transparency in view of an expected uptick in institutional adoption. Government’s message appears to be somewhat mixed. And so, a pivot from ‘ban’ to ‘regulate’ is certainly not out of the question.

With that context, let’s look at cryptocurrency exchanges like WazirX, the institutions which lie at the centre of cryptocurrency trading, and what positions they stand in from a regulatory viewpoint.

A Fair Exchange

A cryptocurrency exchange basically allows customers to trade cryptocurrencies or digital currencies for other assets. Today, Coinbase, Binance, Huobi, Bitfinex etc. Are some of the biggest crypto-exchanges operating in the world. Coinbase was the first exchange to come up back in 2012 and is heading towards its much-anticipated IPO on April 14th.

The oldest crypto exchange in India is ZebPay. It came into existence in 2014 and boasts about 4 million customers today. WazirX, however, is touted as one of the more successful exchanges in India. Founded in 2017, it was acquired by the global crypto exchange, Binance in 2019. It’s reported to rank 27th globally on the basis of traffic, liquidity and trading volume. With 1.75 million users, it is one of the few exchanges to have its own native token called WRX.

All these exchanges around the world are fairly new and privately-held. Because of the turmoil surrounding blockchain protocols globally, the crypto-exchanges still operate in a somewhat regulatory grey area. Some of them don’t even disclose basic information such as the names of the owners, data, location or financial reports.

Which is why increased government scrutiny around their working is mounting and reaching a tipping point (especially in India) where talks about the ban on crypto-assets as well as exchanges have been around for quite some time.

Regulation of Cryptocurrency

The Indian Government has had a zig-zag approach when it comes to deciding what form the regulation of crypto-assets should take. While most of the industry is joining the same appeal of “tax us but don’t ban us”, the RBI, the Supreme Court and the Government have offered different takes on the issue.

But with the interests of over seven million investors on the line who have put more than $1bn into cryptocurrencies, the Government is testing the idea of a blanket ban with an ounce of salt (translation: “calibrated approach”), even though it was entertained initially.

The baby steps of actual cryptocurrency regulation were taken last week when the Companies Act, 2013 was amended to make disclosure of proceeds from cryptocurrency transactions compulsory for companies. Although the plans to introduce the cryptocurrency regulation bill in the monsoon session of Parliament were afoot in February, the fact that it was neither tabled nor discussed was a major relief to the crypto investors who had long feared an overnight demonetisation of the asset, in the nostalgic fashion of 2016.

Some would say that the Government’s (especially bureaucracy’s) hypocrisy is to blame for this erratic stand because they want development in blockchain but not cryptocurrencies. More precisely, they want blockchain technology to “create value” but not be used for “making or receiving payments”.

Surely, for a country like India which is the world’s largest recipient of overseas remittances, advancement in end-to-end technologies for virtual payment tokens makes for an additional and meaningful use case.

What Might the Future Regulation Look Like?

Taxation of crypto-assets is a good place to start. The Government says income tax is to be deemed from all manners of income, regardless of whether they are from illegal or unregulated sources (like cryptocurrencies). But there are no official records or data collection measures yet employed to track cryptocurrency-related earnings in the country.

Another problem is with the disclosure requirements of crypto-transactions. If one is not a corporation but merely a shareholder of a corporation like, say, a crypto exchange, will the disclosure norms extend to them? Also, will the exchanges be mandated to share customer data with the Government too, like deposits, advances, wallet balance etc? Because that is not a rosy picture from a privacy perspective.

There is also a rising global discourse on decentralised exchanges (or DEXs) which are different from traditional crypto exchanges in that people can trade there without an intermediary. The current exchanges are essentially the custodians of an individual’s crypto assets and exert considerable control over them. DEXs put this control back into the investors’ hands. They don’t control their coins and minimise security risks that centralised exchanges are vulnerable to.

If this is the direction crypto-trading is taking, then there is no reason for countries like India to not start soon with building a robust regulatory framework for these assets. It’s like what Rahul Pagidipati, the CEO of ZebPay, said,

"When an airplane is first invented, you wouldn’t want to fly it as it might not be safe. But with each year, it gets safer."

(Originally published April 7th 2021 in transfin.in)