Mumbai, April 24 

Top cryptocurrency exchanges in the country may face a liquidity crunch as they have seen a nearly 75 per cent drop in trading volumes between April 1 and 17 amidst the implementation of the new tax rule.

Further, the upcoming 1 per cent TDS to be implemented on buying and selling of virtual digital assets starting from July 1 may even discourage ‘liquidity providers’ of top crypto exchanges to participate in future activities.

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“Liquidity providers are crucial for all kinds of exchanges because they match the orders on both buy-side and the sell-side so that when a user logs into the platform he gets his order filled immediately on a market price,” explained Sidharth Sogani, Founder and CEO of cryptocurrency research and analysis firm CREBACO Global.  

If TDS comes in picture, each transaction will have a 1 per cent TDS which will increase the order book spread. Also, the current tax practices increase compliances for liquidity providers and hence are backing out as they are not equipped to deal with compliances. The generic trading volume has reduced substantially in the Indian crypto markets. If this is not addressed to in the coming few days, we may see the death of exchanges in India,” Sogani said. 

P2P transactions 

The situation has been double whammy for crypto investors who not only have been hit by taxes but also through withdrawal of key UPI-based payment services which have been used for trading so far. Now, the alternative left for them is peer-to-peer (P2P) transactions, wherein the exchanges can connect the buyer and seller, letting them make direct transactions among themselves over bank accounts.   

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Interestingly, this would also mean that these transactions would go untracked and will not be taxed for 30 per cent, as per industry sources. But experts said this still wouldn’t be a strong enough reason for most investors to shift to P2P transactions given the various glitches on such networks. 

“Crypto transactions turn on P2P networks cannot be tracked because two parties are interacting with each other and the exchange just acts as an escrow account. Hence the exact volumes cannot be measured. We doubt that investors will move to P2P since it has several accounting issues as the sender and receivers are individuals and can be accounted based on several aspects,” said an industry expert.