India’s plan to levy a tax on most cryptocurrency transactions could prove to be the straw that breaks the back of smaller firms in the industry, a senior executive at one of the country’s biggest crypto exchanges told Forkast in an exclusive interview.

“A lot of them might just wind up if this (situation) goes on for a longer period of time,” Zanmai Labs Pvt. Ltd. vice president Rajagopal Menon said. The firm operates, one of India’s largest cryptocurrency exchanges by volume. 

That would be a “shame” as “innovation happens at the fringes,” Menon said. 

“These guys are smaller, more nimble,” Menon said. “They go after audiences that might not be a priority for the larger exchanges,” he added. “So there could be some exchanges, the smaller ones, which could shut down.”

Menon was referring to the impact from the 1% levy that India plans to impose on crypto transactions that exceed INR 10,000 (about US$129) starting July 1.  This comes after India taxed cryptocurrency transactions at a flat 30% from April but without granting the asset class any legitimacy through legislation. 

The taxes have had a chilling effect on the industry.

Despite having some 15 million users, WazirX expects transaction volume to drop to US$20 billion or even lower for the financial year that ends in March, down from US$45 billion a year earlier.

While most of that can be attributed to the drop in prices of crypto, primarily Bitcoin, the taxes have also made investing in the asset class less attractive, Menon said.

“The sentiment is very, very bearish at this point of time,” as most traders pull out of India and move to countries with friendlier regulations, Menon said. “This year it’s going to be very bad for us,” he added. “It’s going to be crypto winter.” 

WazirX’s trading volume has dropped some 50% month-on-month since India’s tax kicked in, Menon said. The levy will further weigh on traders’ liquidity, he added.

See related article: India tax breaks crypto’s back

“By the 300th transaction, it starts eating into your capital, and you will not be able to trade more effectively,” Menon said. “If the intention is to track (transactions), I think you can do it with a nominal 0.1% TDS,” Menon added, referring to the levy, known in India as tax-deducted-at-source. 

While investors can claim back the tax from the government if their losses exceed a certain threshold, the fact that they have to wait till the end of the financial year to get funds back will weigh on their access to capital, Menon said. 

“It won’t kill (the industry), but it will definitely affect volumes of major exchanges in India,” Menon said. “And it’s got a lot of unintended consequences.”

See related article: India’s crypto tax will incur losses for government, says WazirX CEO

Image: Envato Elements

Menon said about 70% of Indian traders have either closed shop or moved to foreign exchanges since the tax in April kicked in. 

While those claims could not be independently verified, EY cited industry estimates to put India’s total crypto holdings at around INR 400 billion (US$5.37 billion) across some 20 million users. 

“The guys who are moving out are the established trading firms who set up offices in India,” Menon said. “Why should they pay extra taxes when countries like Dubai and Singapore are welcoming them with open arms?” he added. 

“I suspect a lot more people will move out. Things could get messy before it becomes better,” Menon said.

Meanwhile, retail investors who are unable to move out of India might find it increasingly difficult to trade in cryptocurrencies. 

See related article: India rules out offsetting losses against gains in new crypto tax law

Turning off the lights

For the last one year, Indian banks have been reluctant to work with crypto exchanges without providing reasons, Menon said.

“This is similar to the 2018 ban all over again,” Menon said, referring to a Reserve Bank of India (RBI) diktat yanking banking services from crypto companies that was later overturned by the country’s highest court in 2020. 

See related article: RBI is causing crypto hesitancy among Indian banks

For now though, the lack of support from traditional finance has had major consequences.

Coinbase Global Inc. had to shutter its services to Indian customers following “informal pressure” from the RBI, the chief executive officer of the global cryptocurrency giant said in an earnings call last month. 

See related article: Coinbase blames India’s central bank for exit

“What happened was that the Coinbase thing just highlighted the problems crypto exchanges are facing,” Menon said.  “We have been facing these problems for the last one year,” he added. “Banks have been very, very reluctant to work with us.”

Many exchanges, including WazirX, have therefore resorted to peer-to-peer transactions, which is a cumbersome process compared to simply buying crypto off an exchange. The whole process takes anything between five to 15 minutes, an eternity when it comes to trading as prices fluctuate in seconds. 

See related article: Coinbase snafu sets the cat among the crypto pigeons in India

Netting the small fish

Smaller exchanges that survive on thin margins are widely expected to suffer from the levy that will come in from July 1, Menon told Forkast.

Most depend heavily on trade volume as they make money only when there is a large volume of transactions, he said. 

Meanwhile, foreign-owned exchanges that offer services in India may just ride it out or may think of halting operations to come back when things are better, he said. Among Indian exchanges, only the largest exchanges with good capital backing “are likely to survive” the current storm, Menon said. 

See related article: India’s tax bogeyman is scaring off young crypto investors

A common ground for both the government and Indians who want to trade in crypto could lie in addressing the country’s most pressing problem, Menon said.

“What does the government want? It wants to move people out of abject poverty,” Menon told Forkast. “And crypto is just one of the little tools that you can use to help a lot of people,” he added.

See related article: India to make life hell for crypto investors: MP