Clampdown & unclear policy, crypto exchange founders leaving India

MULTIPLE INDIAN entrepreneurs and developers in the Web 3.0 space are moving out of the country in a bid to shift base to more crypto-friendly destinations.

The co-founders of India’s largest cryptocurrency exchange WazirX, Nischal Shetty and Siddharth Menon, have moved to Dubai with their families. Polygon co-founder Sandeep Nailwal is also among those who have relocated to Dubai over the last two years. This is in addition to an earlier round of departures. ZebPay and Vauld shifted to Singapore; CoinDCX now has a Singapore arm.

This comes amid a progressive clamping down on cryptocurrencies, including action by enforcement agencies against some platforms, new rules and regulatory tweaks being issued every few weeks even as there is lack of clarity on policy in the longer run.

Meanwhile, the UAE and Singapore are among those actively promoting the ecosystem, offering policy certainty to investors and incentives to attract and foster talent pools. According to industry insiders, & unclear policy, crypto exchange founders leaving India several developers and engineers working in this space have already moved or are considering relocating to Dubai and Singapore.

“We are in a bear market right now, and this is the time when products and solutions are built. Some of the biggest companies in the Web 2.0 space like Google and Facebook were also built during a slowdown phase. This is why many people who are building crypto and Web 3.0 products are moving to jurisdictions with more policy clarity,” said a top executive at one of India’s biggest crypto trading platforms who did not want to be named.

Another person building a blockchain platform said that in addition to seeking an amicable environment, there is also lack of clarity on the government’s future stance from a law enforcement perspective.

Speaking to The Indian Express, Ashish Singhal, co-founder and CEO of CoinSwitch, said: “India has battled brain drain for decades. This is a generational opportunity to reset the odds in our favour — crypto has moved away from Silk Road to Main Street. The examples from the US and other mature economies show institutional investors are ready to put capital in crypto markets if there is more regulatory clarity. Indian investors and innovators can benefit from crypto capital if there is more regulatory clarity.”

India’s official recognition of cryptocurrency began in 2018, when the Reserve Bank of India directed banks to cut money supply to crypto trading platforms — a move that was overturned by the Supreme Court in 2020. Last year, the government listed the introduction of a Bill in Parliament to prohibit all private cryptocurrencies, but the Bill did not get tabled.

Earlier this year, during the Union Budget for 2022-23, a 30% tax on virtual digital assets was introduced with provisions dissimilar to other asset classes. Later, the government also introduced a 1% tax deducted at source (TDS) – effective July 1 – on cryptocurrency transfers with an intention of maintaining a trail of money. The crypto industry has argued that the 1% TDS locks the investment capital for crypto traders, and suggested it should be kept at a low 0.1%.

Last week, in its latest move, the government issued guidelines detailing the responsibilities of various entities such as crypto exchanges, buyers, sellers and brokers on deducting the 1% TDS. It put the onus on the entity closest to the buyer for deducting the TDS. The direct tax department also said that even if there is an exchange of one cryptocurrency against another, tax will have to be deducted at a corresponding exchange rate.

Meanwhile, Dubai has emerged as a hotspot for crypto investments on the back of its favourable policies. In March this year, Dubai set up the Virtual Assets Regulatory Authority (VARA), which has been designated to promote Dubai as a hub for virtual assets, attracting investments and providing systems to protect investors. Additionally, in Dubai, there’s no income tax and other than a 5% VAT, gains from selling virtual assets are virtually tax-free.

Responding to a query from The Indian Express on Shetty and Menon relocating to Dubai, WazirX said: “We are a remote-first organisation with employees from over 70+ locations. This gives all the company employees the option to work from anywhere, subject to their comfort and convenience unless they are required to travel officially. WazirX is headquartered in Mumbai, and there is no change in any of our operating procedures. It is business as usual”.

WazirX, which is owned by the world’s biggest crypto exchange Binance, said in its statement that the current regulations on crypto could reduce participation and increase inefficiencies instead of encouraging more people to join the bandwagon. “The Indian exchanges are KYC compliant and ensure that the transactions are secure and traders are protected against any security threat. However, due to current taxation laws, there is a possibility for them to shift their capital to unregulated or decentralised P2P or foreign exchanges,” it said.

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“This could become a challenge, not only for the exchanges but also for the government to get revenue from taxes. But the more significant implication will be the disadvantage to the Web3 space, where it will intercept innovation and job creation as entrepreneurs will move to countries with more friendly policies and taxes towards crypto,” it said.

In June 2021, the Enforcement Directorate had said that it had issued a showcause notice to WazirX and its directors Shetty and Sameer Mhatre under the Foreign Exchange Management Act, 1999, for transactions involving cryptocurrencies worth Rs 2,790.74 crore. According to the ED statement, it had initiated FEMA investigation on the basis of an ongoing money-laundering investigation into Chinese-owned illegal online betting applications. At the time, WazirX had said it was in compliance with all the applicable laws.

Earlier this year, Shetty announced a new crypto project, Shardeum, with a US-based crypto investor Omar Sayed.

Multiple queries sent to Nailwal and Polygon remained unanswered.

An e-mail query sent to the Ministry of Finance did not elicit any response.

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