Crackdown and Unclear Policy Cause Crypto Exchange Founders to Leave India
SEVERAL INDIAN entrepreneurs and developers in the web 3.0 space are leaving the country in a bid to shift the 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 moved to Dubai in the past two years. This adds to an earlier streak of departures. ZebPay and Vauld moved to Singapore; CoinDCX now has a branch in Singapore.
It comes amid a gradual crackdown on cryptocurrencies, including action by enforcement agencies against some platforms, new rules and regulatory changes released every few weeks, even as long-term policy lack of clarity.
Meanwhile, the United Arab Emirates and Singapore are among those actively promoting the ecosystem, providing political certainty for investors and incentives to attract and foster talent pools. According to industry insiders and unclear policy, with the founders of the crypto exchange leaving India, several developers and engineers working in this space have already moved or are planning to move to Dubai and Singapore.
“We’re in a bear market right now, and that’s when products and solutions are being built. Some of the biggest companies in the Web 2.0 space like Google and Facebook were also created during a downturn. This is why many people who create crypto and web 3.0 products are moving to jurisdictions with a clearer policy,” said a senior executive at one of the biggest crypto trading platforms in India who did not want to be appointed.
Another person who has built a blockchain platform said that in addition to seeking a friendly environment, there was also a lack of clarity on the government’s future position from a law enforcement perspective.
Speaking to The Indian Express, Ashish Singhal, Co-Founder and CEO of CoinSwitch said, “India has been battling brain drain for decades. This is a generational opportunity to reset the odds in our favor – crypto has moved away from Silk Road to Main Street. Examples from the United States and other mature economies show that institutional investors are willing to pour capital into 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 ordered banks to reduce the supply of currency on crypto trading platforms – a decision that was reversed by the Supreme Court in 2020. Last year, the government announced the introduction of a bill in Parliament to ban all private cryptocurrencies, but the bill has not been tabled.
Earlier this year, during the Union budget for 2022-23, a 30% tax on virtual digital assets was introduced with different provisions than other asset classes. Later, the government also introduced a 1% withholding tax (TDS) – effective July 1 – on cryptocurrency transfers with the intention of maintaining money trails. The crypto industry has argued that the 1% TDS locks in investment capital for crypto traders and suggested that it should be kept at a low 0.1%.
Last week, in its latest ruling, the government issued guidelines detailing the responsibilities of various entities such as crypto exchanges, buyers, sellers, and brokers on the 1% TDS deduction. It is the responsibility of the entity closest to the buyer to deduct the TDS. The direct tax department also said that even if there is an exchange of one cryptocurrency for another, tax will have to be deducted at a corresponding exchange rate.
Meanwhile, Dubai has become a hotspot for crypto investments thanks to its favorable policies. In March this year, Dubai established the Virtual Assets Regulatory Authority (VARA), which was appointed to promote Dubai as a hub for virtual assets, attracting investment and providing systems to protect investors. Additionally, in Dubai, there is no income tax and apart from a 5% VAT, earnings from the sale of virtual assets are virtually tax-free.
Responding to a question from The Indian Express about Shetty and Menon’s relocation to Dubai, WazirX said: “We are a remote organization with employees from over 70 locations. This gives all company employees the flexibility to work from anywhere subject to their comfort and convenience, unless they are required to travel officially. WazirX is headquartered in Mumbai, and there are no changes to our operating procedures. It’s business as usual.”
WazirX, which is owned by the world’s largest crypto exchange, Binance, said in its statement that current crypto regulations may reduce participation and increase inefficiencies instead of encouraging more people to join the bandwagon. “Indian exchanges are KYC compliant and ensure transactions are secure and traders are protected from any security threats. However, due to current tax laws, it is possible for them to transfer their capital to unregulated or decentralized P2P or foreign exchanges,” he said.
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“It could become a challenge, not only for the stock exchanges but also for the government to obtain tax revenue. But the most important implication will be the disadvantage for the Web3 space, where it will intercept innovation and job creation as entrepreneurs move to countries with more crypto-friendly policies and taxes,” said he declared.
In June 2021, the Enforcement Branch said it had issued a demonstration notice to WazirX and its directors Shetty and Sameer Mhatre under the Exchange Management Act 1999 for transactions involving cryptocurrencies worth Rs 2,790.74 crore. According to the ED statement, he had opened a FEMA investigation based on an ongoing money laundering investigation into illegal Chinese-owned online betting apps. At the time, WazirX declared to be in compliance with all applicable laws.
Earlier this year, Shetty announced a new crypto project, Shardeum, with US-based crypto investor Omar Sayed.
Several queries sent to Nailwal and Polygon went unanswered.
An email query sent to the Ministry of Finance did not elicit a response.