Almost exactly two years ago, the Indian cryptocurrency market braced for a freezing winter, after the government announced a one% TDS and 30% capital gains tax on exchange of virtual digital assets.

Over the following months, everybody from investors to influencers, YouTubers, exchange platforms and even education startups pivoted to suggesting tips and tricks to circumvent these taxes, or folded up their businesses altogether.

Between April 2022 and July 2023, it’s estimated that cryptocurrency trading volumes on Indian exchanges fell from a high of $6 billion per month to just a few millions, as a major chunk of it
shifted to offshore platforms.

Now cut to December 2023, and the Finance Ministry issued showcause notices to nine offshore platform for non-compliance with Prevention of Money Laundering Act (PMLA), while the IT Ministry blocked access to URLs and mobile apps of these nine entities: Binance, Kucoin, Huobi, OKX, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex. This meant Indian crypto exchange platforms could finally breathe a sigh of relief.

In the past month, these platforms— including CoinDCX, CoinSwitch, Unocoin and BuyUcoin — witnessed a massive surge, ranging between 100% and 2,000% increase in registrations and deposits, as investors feared losing out on their foreign assets. To further cash in on the opportunity, Indian platforms announced deposit offers and up to two% cashbacks.

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CoinDCX alone announced a $1-million sum to be disbursed as incentives to depositors.
All of which may seem to suggest the winter is finally receding. But can the market expect to shoot up once again as before? And what about foreign firms like Binance? Can they make a comeback? Or would they choose to operate from tax havens such as the British Virgin Islands, Seychelles and the Cayman Islands?
Early shoots

We’ve seen early signs of recovery so far, with Indian exchanges reporting a surge in volumes for the month of January. However, nearly $4 billion in crypto assets of Indian investors are believed to be parked in foreign wallets, of which only a few millions have come back.

“It has been a really encouraging surge in deposits, which gives us the confidence that investors want to trade with safe and compliant exchanges,” said Minal Thukral, EVP and head, Growth and Strategy, CoinDCX. “We are optimistic that nearly 50% of foreign assets will flow back to India along with new investments in Bitcoin ETFs, which bring trust and confidence in crypto as an asset class.”

But while it’s true that the crypto freeze has been thawing in recent weeks, experts say there is still much that needs to happen. Despite banning non-compliant foreign cryptocurrency exchanges, for instance, trading on these platforms is active thanks to previously installed apps and VPNs. This also makes the ban ineffective and keeps a majority of these assets still outside the legal purview.

“Some internet service providers are yet to block access to these websites, which means users can still access them through their own WiFi providers,” said Aditya, a crypto watcher and influencer.

“Trading is also being done through apps which were installed before the ban and also through VPNs. But such access is prone to malicious attacks and may lead to users’ assets being stolen.”

A VPN is a connection setup with a remote network by changing one’s IP address to access information which is unavailable in the home network. While VPN activity cannot be tracked to estimate the volume of these trades, so far, it appears that Indians are reluctant to pull back their foreign holdings due to high taxation in India.

“For crypto investors, multiple avenues exist to circumvent URL blocks. Apart from VPNs, they can also transact with others on a peer-to-peer (p2p) basis — without the participation of intermediaries like crypto exchanges and depository institutions,” said Vivan Sharan, partner at policy advisory firm Koan Advisory.

“A recent study highlights that 90% of the total volume of crypto trading by Indians was conducted on p2p basis between July 2022 and July 2023. Thus, blocking URLs of a few exchanges will not automatically enlarge India’s regulatory net,” he added. But for how long can investors stick to these alternate practices is a question we don’t know the answer to yet.

Expectations of a comeback

Experts have also pointed to Binance’s silence on the ban, and believe that these platforms do not have a business case by registering themselves as Financial Intelligence Unit (FIU) -compliant entities in India.

Registration with the FIU acts as a licence to operate as a virtual digital assets (VDA) exchange in India.

“These platforms have been non-compliant for more than a year now despite several notices being served to them by the Indian government. It’s only after the ban that they took India seriously,” said Sathvik Vishwanath, CEO and cofounder of Indian exchange Unocoin.

“Institutional investors always have the option to trade through their foreign entities to avoid this tax,” he added. “As for retail investors, they only comprise three to five% of Binance’s overall user base. In fact, once it comes to India and starts paying taxes, this figure may further drop to one%. So, does it even make sense for them to take this operational and compliance burden?”

Moreover, not only is the crypto investor community small in India, offshore platforms must also worry about retrospective taxes of nearly Rs 3,500 crore for trades which have occurred in the past one-anda-half years.

According to a study by research firm Esya Centre, over Rs 3,50,000 crore was traded by Indians on offshore platforms, which is over 90% of total VDAs traded by Indians.

This has deprived the exchequer of revenues worth Rs 3,493 crore, as against the collected revenue of Rs 258 crore, because of offshore trades which are not TDS compliant. Additionally, this would also mean that billions of dollars of capital gains tax would not be collected on these trades conducted offshore. And this does not even factor in private transactions or larger over-the-counter trades.

“Banning is done under the PMLA law, but if these exchanges decide to register as an FIU entity, the Income Tax department may scrutinise them for the past trades on which taxes have not been paid,” said Stella Joseph, partner, Economic Law Partners.

More than the taxes, these entities should also be worried about PMLA compliance, given that cryptocurrency has been reportedly found to be a vehicle of money laundering by the Enforcement Directorate in several cases, including the Mahadev app betting scam.

“It really is a question of intent,” said Balaji Srihari, business head of the Indian exchange CoinSwitch. “India is a large market for crypto investments, but if foreign platforms want to tap into this opportunity, they should comply with law of the land — be it data protection, taxation or anti-money laundering.”