Indian crypto exchanges are facing a massive liquidity crunch, with trading volumes down nearly 80 per cent across exchanges since January. As per data shared with BusinessLine by the credit rating firm for digital assets Crebaco, top exchanges are reporting volumes in the red since the start of the year.

WazirX, Bitbns and ZebPay have lost 75 per cent, 52 per cent and 73 per cent in trading volumes respectively. A major reason behind this dip in volumes is the 30 per cent tax that the Centre has levied on income from trade in cryptocurrencies from April 1, 2022. Since then, exchanges like WazirX, CoinDCX, Bitbns and ZebPay have seen an 80 per cent, 40 per cent, 30 per cent and 65 per cent decrease, respectively, in trading volumes.

Sidharth Sogani, CEO, Crebaco Global, said factors such as the one per cent TDS and the likely introduction of GST on crypto are all dampening volumes. Global economic factors such as the the looming recession, the global crypto currency crash has also discouraged the entry of new money and new entrants into this space.

1 per cent TDS

The trading volumes have dipped further ever since the 1 per cent Tax Deducted at Source (TDS) kicked in from July 1. This means citizens selling their tokens — bitcoin, ethereum, dogecoin, solana and others — will receive 1 per cent less the value of the assets at the selling price. In effect, this is expected to have an impact on traders’ and short-term investors’ capital.

While some exchanges have welcomed the regulatory move and believe it will boost investor confidence, some others say investors will be discouraged as trading volumes will take a sharper hit. “The trading capital will be eroded over the course of the year with 1 per cent of the value being withheld on every trade, even if it can be recovered by filing returns,” said Smit Khakhkhar, tech diligence, Delta blockchain fund. As a result, the trade volumes will decline too.

Data from aggregator nomics.com show that trading volumes at WazirX plunged down to $3.02 million on July 2 from $14.53 million on June 30. Similarly, CoinDCX’s volume, too, went down from $2.62 million on June 30 to $835,135 on July 2. At their peak, the two saw combined daily volumes of over $200 million in 2021. Insights from Crebaco show that rupee deposits have also been delayed in the recent week due to the implementation of TDS, and deposits are getting processed slowly as compared to before.

Amanjot Malhotra, Country Head, Bitay, said, “The TDS levy is a modern instance of a tax provision that would be highly detrimental to the crypto industry. The tax provision will not only discourage innovators who have been doing a great job in promoting India as an innovative hub for the industry, but the government too will be at a loss as they will lose out on the possibility to earn massive tax revenue due to the overall decreased transaction volumes.” 

‘Boosting confidence’

However, Indian exchanges at large have complied with the government’s direction and formed the necessary procedures for execution. Some even believe the regulatory move will boost investor confidence. Rajagopal Menon, Vice President, WazirX, said, “The new update will ensure that tax deductions are transparent to keep users informed of taxation throughout the crypto-buying experience. Set processes are in place to collect TDS for relevant transactions.”

“Investors can trade now with confidence by paying applicable taxes and crypto entrepreneurs in India can conduct their business without any fear,” said Shivam Thakral, CEO, BuyUcoin, a crypto exchange. It will be interesting to see the crypto TDS saga unfold as this will be the first time crypto transactions will be formally monitored by the tax authorities, he added.

Liquidity crunch

Meanwhile, experts say if the market conditions do not become better in the next six months, smaller exchanges are likely to shut down. This is because without the requisite trade, these firms are likely to face massive liquidity crunch. 

Menon noted that high-frequency traders in crypto have, in fact, shifted shop from India to more markets such as Singapore and Dubai which have better tax policies for crypto. “These are the market makers,” Menon said. According to him, these traders have altogether stopped trading in Indian exchanges. He noted that older exchanges are cash rich, thus they will survive. However, 30-40 smaller exchanges are likely to be in deep trouble should these market conditions continue.

There are already reports of crypto exchanges freezing withdrawal to avoid bank run like situations, as investors lose confidence that these exchanges have the necessary liquidity. All experts believe that the crypto ecosystem is likely to see major consolidation this year. “This will not be good for the ecosystem,” Menon noted.

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