How global headwinds, regulatory woes are clouding Indian crypto landscape

On August 10 last year, cryptocurrency exchange CoinDCX raised $90 million (Rs 670 crore then) in a Series C funding round. The amount itself may not be very large for a fast-growing tech startup, but the funding round was significant for another reason. It valued the company at $1.1 billion, making it the first crypto unicorn startup in India.

Less than two months later, in early October, CoinDCX was overtaken by CoinSwitch Kuber when it raised $260 million in a Series C round. At the time, CoinSwitch Kuber said the round pushed its valuation to $1.91 billion, making it the second Indian cryptocurrency exchange to become a tech unicorn.

CoinDCX struck back in April this year when it secured another $135 million in an oversubscribed Series D round. This round almost doubled its valuation to around $2 billion, making it once again India’s most valued crypto startup.

Apart from the money, both startups boast of a long list of marquee investors in their cap table.

Sample this: CoinDCX’s investors include B Capital Group, founded by former Facebook co-founder Eduardo Saverin; Coinbase, Polychain, Block.one, Jump Capital, Bain Capital Ventures, Pantera Capital, Steadview Capital Kingsway, DraperDragon, Republic Capital, and Kindred.

On the other hand, CoinSwitch Kuber counts Coinbase Ventures, Andreessen Horowitz (a16z), Sequoia Capital India, Paradigm, Ribbit Capital and Tiger Global among its investors.

Cut to June 2022, and the crypto world has turned upside down.

Global crypto turmoil

Earlier this month, a Dogecoin investor accused billionaire Elon Musk, his electric car company Tesla and space company SpaceX of running a “pyramid scheme” to support the cryptocurrency that has lost almost 90% of its value.

Musk—the world’s wealthiest man—has been a vocal supporter of cryptocurrencies, but now faces a $258 billion lawsuit. While nothing eventually may come out of the lawsuit, the case highlights the problems in the cryptocurrency ecosystem the world over and highlights the pain it has caused scores of investors.

The global crypto market cap has plunged almost 70% to around $930 billion from $3 trillion since November last year, according to CoinMarketCap, a website that tracks crypto prices.

Bitcoin has slumped almost as much. The world’s most dominant cryptocurrency fell below $18,000 this month from almost $69,000, before climbing above $20,500. Ethereum, the No.2 digital currency, has lost almost 75%. Last month, the so-called ‘stablecoin’ Terra and its sister cryptocurrency Luna became absolutely worthless after losing their peg to the US dollar.

And it’s not just cryptocurrencies that have crashed. Many crypto exchanges are also struggling as trading volumes dive. Coinbase, one of the world’s biggest crypto exchanges, has laid off 18% of its employees, including 8% of its India staff, and warned of a “crypto winter”.

Other crypto exchanges such as Crypto.com, Gemini, Buenbit and Bitso have also laid off between 10% and 50% of their staff to cut costs. Crypto lenders such as BlockFi and derivatives platform BitMEX have sacked employees, too.

And then there is Singapore-based Three Arrows Capital, a prominent crypto hedge fund which managed $10 billion but is now facing insolvency, and crypto lender Celsius Network, which also faces bankruptcy and a regulatory probe after suspending fund withdrawals.

These global developments, along with a stock market correction and a steeper drop in technology stocks, have had a ripple effect in India, too.

India’s crypto challenges

When CoinDCX entered the unicorn club last year, the company said it was “a giant leap forward” in its efforts to create advanced crypto-based products, simplify investing in cryptos, globalize its services, and expand its team. The company appears to have covered quite a distance since that giant leap last year. This week,

CoinDCX restricted crypto deposits and withdrawals for multiple users due to compliance, risk and monitoring requirements, it said in a blog post. This means users won’t be able to deposit or withdraw their digital assets. The company, however, said users can still deposit and withdraw Indian rupees through net banking services.

Coinswitch Kuber has also suspended crypto deposits withdrawals, citing know-your-customer requirements, although it allows rupee deposits and withdrawals.

Another large Indian cryptocurrency exchange WazirX, which is backed by the world’s largest crypto exchange Binance, has paused all withdrawals and deposits via net banking and now allows users to do so only via peer-to-peer service. No wonder, then, that WazirX’s daily trading volume has dropped almost 95% since October, according to data from CoinGecko. This has prompted the company to cut costs and hire people only for the most critical roles.

“We have cut down all our non-critical costs,” Rajagopalan Menon, WazirX’s vice president, said in a Bloomberg report. “We are hiring only critical hires, we aren’t spending money at all. It’s literally crypto winter here.”

The pain that Indian crypto companies are suffering is not only because of global headwinds. Regulatory headaches at home are another major cause.

Regulatory conundrum

In 2018, the year CoinDCX started its operations and a year after CoinSwitch Kuber launched, the Reserve Bank of India banned cryptocurrency trading in the country. This ban came at a time when the global crypto market was booming. In 2020, the Supreme Court of India quashed the RBI’s ban. This revived the fortunes of crypto platforms.

CoinDCX and CoinSwitch say crypto investments by Indian users soared after the Supreme Court lifted the ban. For instance, the number of CoinSwitch users increased to 10 million in September last year from 5 million in May and 1 million in November 2020, the company said at the time of raising Series C capital. It now boasts 15 million users.

Similarly, CoinDCX says it has 13 million users. Both unicorns have previously said they aimed to reach a user base of 50 million, hire more people and launch more products in an effort to rope in more users.

But Indian authorities have been less than supportive. While the Supreme Court lifted the RBI bank, the Indian government has taken a number of steps to make life difficult for crypto companies and investors.

In its annual budget presented earlier this year, the government imposed a 30% tax on income earned from all digital assets including cryptocurrencies. Moreover, the government doesn’t allow investors to offset their trading losses on cryptocurrencies—a facility that is available to investors trading in stocks and bonds. This makes crypto investing far less favourable than shares, mutual funds and bonds from a tax perspective.

In April, Indian authorities abruptly cut off crypto exchanges from the regular banking system by making the popular United Payments Interface, or UPI, unavailable to them. No reason for this move was given, but it prompted some banks and payment gateways to also disable the UPI service for crypto exchanges. This meant that crypto traders and investors couldn’t top up their accounts with cash, leading to a fall in trading volume on exchanges.

And there is more pain to come from next month. The government has mandated that exchanges will have to deduct 1% tax at source from July 1 on all digital-asset transfers above a certain size. The move, industry observers, say will drain liquidity and lead to a drop in trading volume.

Regulatory hassles are also forcing many crypto companies and their founders to shift their base outside India. These include Polygon, a blockchain and Ethereum scaling startup that raised $450 million this year.

Polygon co-founder Sandeep Nailwal has previously said the regulatory uncertainty in India is prompting developers, investors and entrepreneurs to leave for countries with more friendly regulatory environments. WazirX co-founders Nischal Shetty and Siddharth Menon have also moved to Dubai.

So, where does all this leave Indian crypto startups and retail investors? In the short term, as central banks continue to tighten monetary policies and end the era of cheap money, Bitcoin and other digital currencies will remain under pressure—just like other assets such as stocks and mutual funds. The long-term trajectory will depend upon not only on the return of risk sentiment but also on how the regulatory landscape shapes up. Until then, keep your seat belts on.