THE FRENZY AROUND cryptocurrencies may not be apparent as it was a couple of years ago, but in certain circles, it's as palpable as before. Take the owner of a listed FMCG firm who asked his treasury department to take some exposure to cryptocurrencies. "The department has put some funds in cryptocurrencies via our exchange. It could be just 1% of the portfolio but amounts to crores. As they become comfortable with the volatility, they may take it to 5%," says the founder of the crypto exchange.

The crypto wave in India waned in FY23 after government imposed a flat 30% tax on income from transfer of virtual digital assets. This, along with 1% TDS (if transaction value exceeds ₹10,000), put off investors. Those with a little exposure to digital assets remained invested and paid tax on booked profits. The more savvy investors/traders found a different way out— they moved to offshore decentralised exchanges (DEX).

"If I do a ₹1 lakh transaction via a centralised exchange, I pay 0.5-1% platform fee, while another 1% is deducted as TDS. If I carry out the same transaction via a DEX, the charges are minimal," says chartered accountant Aishwary Gupta. DEXs are customer-to-customer arrangements without an intermediary. "Poor implementation of taxation is making people migrate to DEXs. Had it been done better, people would have stayed on centralised exchanges and government collected taxes," says Gupta.

However, it is not clear if crypto investors have to disclose digital assets held abroad in ITRs. That is why Nirav Karkera, head of research at Fisdom, a wealth-tech platform, is advising clients to stay away. "The money has an end use. Whenever these transactions are converted into Indian rupees, investors will have to pay taxes. Equity investment is much more tax-efficient. We advise clients to stay away from digital assets," says Karkera.

Changing Macro Situation

Can the crypto frenzy return in the coming months? The craze for digital assets had faded in 2022 after imposition of taxes in India and collapse of three major banks in U.S. Now, the sentiment is improving. Data shows Bitcoin rose 58% year-to-date as on August 21 at $26,090. It hit the 2023 high of $31,471.80 on July 13. The number of clients on one of the California-based cryptocurrency platforms, Mudrex, has increased from one lakh in FY21 to 10 lakh. The platform runs a separate division, Mudrex OTC, for HNIs, who need to invest at least $50,000. "Mudrex OTC has around 75 clients. Average monthly investment by HNIs is $70,000," says Edul Patel, CEO and co-founder of Mudrex.

Globally, too, interest rates have stabilised, making investors look at riskier assets again. "Cryptocurrencies performed well when interest rates were lower. Now that the rates have stabilised, capital is moving back to riskier assets. Indices such as S&P 500 and Nifty50 have been going up. We are witnessing the same trend in the crypto market," says Patel.

Bitcoin halving is another event that is closely linked with performance of digital assets. It occurs when reward for mining Bitcoin transactions is reduced to half. This mitigates inflation in cryptocurrencies and occurs every four years. The last bitcoin took place in April 2020 and the next one is scheduled for April 2024. The next leg of the rally is expected to start thereon. There is enough anecdotal evidence that digital assets are here to stay. "Big fund houses in U.S. are launching bitcoin or ethereum ETFs. Demand is coming from institutional investors. Confidence is building up as regulations or tax rules are introduced," says Patel.

Regulatory Shift

The industry is also organising itself and finding ways to operate within legal boundaries. Earlier this year, Financial Intelligence Unit (FIU) in India told crypto exchanges to start reporting data of high-value or suspicious financial transactions. "FIU started registration for virtual asset providers so that we report suspicious transactions. More and more exchanges are complying. Now that taxation and registration are done, we expect regulations soon. This gives confidence to crypto investors," says Patel.

Finance minister Nirmala Sitharaman had announced in Parliament that India was discussing with G-20 member countries the need to develop a protocol for regulating crypto assets. This shows government understands that technologies such as blockchain and distributed ledger are important. The industry will take two shapes. One, cryptocurrencies with no real use-case and second, real-world digital assets, that is, tokens backed by a real financial asset. For example, RealX, a digital assets platform, has introduced blockchain-based property tokens that will provide holders direct and proportional ownership of property. "This co-ownership is different from other fractional ownership platforms and creates a model compliant with existing property laws," says Manish Kumar, co-founder and CEO, RealX. The entry point to avail a digital certificate establishing ownership rights over a property is just ₹5,000.

More such innovations are expected. "Once genuine real-world assets are accepted and reach a critical mass, you will see a follow-up on decentralised finance products that mimic traditional financial products, albeit in digital realm. This will open a whole new economy with innovative products because of new abilities that digital assets and blockchain carry,” says Kumar. It seems cryptos are here to stay for good.

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