When disruptive innovations solidify their dominance in the global economy, there is always an unembarrassed ode of admiration to mark their achievements. The value of cryptocurrencies has plummeted in the last year or so, similar to the stock market. But the industry’s fate was never in doubt for the long term. After all, in a decentralized world, nothing less than a technological marvel such as cryptocurrency can be considered the future of money and A Possible Comeback Of India’s Crypto Economy.
Despite the fact that incumbents who support fiat money continue to dismiss crypto’s intrinsic value and warn about its fiscal risks, many investors are drawn to the past’s quick and spectacular returns.
In fact, the Reserve Bank of India recently launched the first-ever digital rupee pilot to meet rising demand within a regulatory framework and A Possible Comeback Of India’s Crypto Economy
The Indian central bank is not alone in this regard.
Add to that the Ethereum Merge, a sustainable network update for a more inclusive Web3 (of which Defi and crypto are core components), and the rise of India’s Polygon that brings together Web3 technologies and use cases to build a global ecosystem of A Possible Comeback Of India’s Crypto Economy
Interestingly, after the new crypto tax regime went into effect in April of this year, Indian cryptocurrency exchanges experienced a significant slowdown in the bull run. The Enforcement Directorate launched several investigations after a wave of allegations involving alleged financial irregularities and legal violations (ED).
After the FTX collapse and the Terra-Luna crash, things became sufficiently ugly on a global scale. The need for operational transparency and consumer protection is becoming more pressing as cryptocurrency investors in India and around the world continue to be shaken by the industry giants’ humiliating collapse.
The crypto story and the businesses involved have entered a dark winter. Additionally, Indian cryptocurrency companies are experiencing greater turbulence than their Western counterparts due to the ambiguous legal status of cryptocurrencies in the country, where they are still not recognized as an asset class. Still, income from them is taxed at the highest rate.
Despite all the odds, cryptocurrency experts never shied away from endorsing bitcoin, which served as the industry’s face. However, bitcoin also lost some of its appeals in 2022 due to a 60% and 3% decline in price and market share, respectively.
The failure of TerraUSD (UST), an algorithmic stablecoin pegged to the U.S. dollar (but not fully backed by reserves), and its sister coin Luna further weakened the legitimacy of cryptocurrencies. Few people questioned the kind of returns (around 20%) offered to all UST buyers who lent their securities to the protocol by the linked borrowing and lending platform known as Anchor.
Following the stablecoin’s collapse in May 2022, which reduced the market cap of all cryptocurrencies by almost $1 Tn, there soon followed a bank run as most investors sought to withdraw their funds.
More bad news came in. According to the analytics platform DappRadar, the trading volume on OpenSea, the largest NFT marketplace in the world, decreased by 99% between May and August 2022.
On August 28, the market processed NFT transactions worth close to $5 million, compared to its record high of $405.75 million on May 1.
The industry experienced yet another setback when Meta shut down its digital wallet Novi and sold this year’s $200 million worth of assets from its stablecoin project Diem Payment Network.
Local rather than international events, however, had a greater impact on the Indian market.
Consider the GainBitcoin scam, one of the largest and most established cryptocurrency Ponzi schemes. According to a recent report by Inc42, the overall scope of the fraud may be around INR 90,000 Cr (based on the wallets operated by its key masterminds, the late Amit Bhardwaj and his associates). The Pune police initially estimated the size of the scam to be INR 2,000 crore, and the ED later estimated it to be INR 20,000 crore.
WazirX, a cryptocurrency trading platform, first knocked on the Delhi High Court’s door at the beginning of the year. The business filed a writ petition to have the ED proceedings annulled. Following a raid on parent company Zanmai Labs in August, ED temporarily froze WazirX bank accounts with assets worth Rs 65 Cr.
However, WazirX was not the only target of the probes. When the Foreign Exchange Management Act (FEMA) or Prevention of Money Laundering Act (PMLA) were violated, the agency immediately conducted search operations against 10 major exchanges, including WazirX, Binance, CoinSwitch Kuber, CoinDCX, Vauld, ZebPay, BuyUCoin, Bitbns, and Giottus.
The agency also called the founders of cryptocurrency exchanges to appear before it and provide specific information. Investors in India were understandably concerned about the widespread inquiries, but there were other factors as well.
They were also upset by Coinbase, a US-based cryptocurrency exchange, leaving abruptly just days after launching in India, as well as the Binance-WazirX merger and demerger.
Although many found it amusing when Binance and Wazirx started a fight on Twitter to disown each other after ED probed the latter for alleged money laundering, the high drama cost investors who owned WRX tokens. Each token now costs $0.17, again a more-than-substantial dip from its price of $4.
However, India’s harsh tax policies slapped on crypto-based incomes have done the maximum damage.
In February 2022, the Indian government announced stringent tax regulations, sending a wave of shock and disappointment, especially among retail investors.
The news severely hampered trading on Indian cryptocurrency exchanges. For instance, WazirX, the top cryptocurrency exchange in the nation at the time, saw its average daily transaction value fall to $1-5 Mn starting in July from $100 Mn recorded earlier. Due to a severe tax burden, daily transactions on other exchanges also drastically decreased.
More than 450 Web3 startups, of which crypto entities are a key component, are based in India, and despite a challenging funding winter, traditional VCs were quick to launch Web3-specific funds.
Sequoia Capital unveiled two new funds: an $850 million fund specifically for Southeast Asia and a $2 billion corpus for early-stage, venture-stage, and growth-stage startups in India. Additionally, Sequoia India made investments in cryptocurrency businesses like Polygon and CoinSwitch Kuber.
Once more, Lightspeed Venture Partners, a renowned VC firm, unveiled three funds totaling $6.6 billion in the United States and a $500 million early-stage fund for India. Additionally, it established the Lightspeed Faction, a separate group devoted to developing the blockchain’s foundation.