Crypto Start-Ups Look Beyond Exchanges Amid Regulatory Turbulence

Even as Bitcoin touched its all-time high of Rs 61.11 lakh (about $73,800) apiece less than a month ago and the cryptocurrency sector started 2024 with a much-needed spike in trade volume, more start-ups within the unregulated space are looking beyond the crypto exchange business to stay relevant.

Industry watchers Outlook Start-Up spoke with say that while crypto exchanges are here to stay, regulatory uncertainty and high taxation have made it inevitable for start-ups in the sector to venture into allied services.

“Indian crypto startups are definitely feeling the heat if they are running just exchange-driven businesses,” said Mridul Gupta, Chief Operating Officer at CoinDCX, a Mumbai-based crypto startup. 

The once buzzing cryptocurrency space witnessed a record-level slump in trading activity after the 1 per cent tax deducted at source and 30 per cent taxation on gains became applicable on July 1, 2022, for all the crypto transactions in the country. 

However, multiple factors have renewed investor interest in the unregulated asset class in the past few months. For starters, the prolonged bear run paved the way for a phase characterised by bullish investor sentiment on the back of the launch of Bitcoin Exchange-Traded Funds (ETFs). Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency.  

Additionally, earlier this year, in January, India’s Financial Intelligence Unit banned nine foreign cryptocurrency exchanges, including Binance and Kucoin, since they were suspected of violating Indian anti-money laundering regulations. “The crackdown on foreign crypto exchanges and increasing interest in ETFs have led to demand for Bitcoin,” said Shravan Shetty, Managing Director, Sector Potential Realization, Primus Partners. 

Crypto unicorn WazirX saw a 77 per cent jump in user deposits and a 134 per cent spike in transaction volume between December 28 and March 20. 

But the peaking demand has still not driven the trading volume back to the pre-tax period, said others. 

Although new user sign-ups are happening, overall investments are not going up to the earlier level, said Sathvik Vishwanath, CEO and Founder of Unocoin, another cryptocurrency exchange. 

Others agreed. "While the market shows strong signals of recovery, about 90 per cent of the volumes crashed after the TDS was announced, and the volume remains low,” said CoinDCX’s Gupta. 

Experts expect cryptocurrency exchanges to make up some of the lost ground as the investor community approaches the halving of Bitcoin, a process that happens roughly once every four years, limiting the supply of the cryptocurrency and driving up demand and price. 

However, this will not be enough for exchanges to build a sustainable business relying on cryptocurrency exchange transactions alone. Some of the crypto exchanges have ventured into other financial services. 

For instance, crypto unicorn CoinSwitch’s parent firm, PeepalCo, last week forayed into stockbroking services through a new entity named ‘Lemonn’. The entry will place Lemonn alongside other fintech giants, including Zerodha, Groww, and Upstox. 

However, the company has maintained that it always aimed to expand to other investment offerings, with crypto as a starting point. Others, too, pointed out similar strategies as the way forward for startups in the sector. 

“Crypto exchange businesses are an entry point for many to build native Web 3.0 and blockchain-driven businesses,” said Gupta. CoinDCX launched Okto in August 2022, a mobile app that seeks to transition crypto consumers to Decentralised finance (DeFi). 

Mudrex, which is a platform to invest, sell, and hold cryptocurrencies, has also expanded its suite of services through its product Coin Sets, which allows its users to invest in a theme-based manner in individual coins (just like buying shares at the stock market) to get diversified exposure to crypto. 

“We are exploring options within crypto and dabbling into derivatives. Soon, we will enter Futures, too,” said Edul Patel, co-founder and CEO of Mudrex. He wants to scale up further within the crypto sector and expand the distribution geographically.  

Just when crypto trading volumes were slumping in 2022, WazirX’s co-founder Nischal Shetty announced his new start-up, Shardeum, a blockchain that will be scalable, secure, and compete against the likes of Ethereum. 

Sector specialists pointed out that regulatory uncertainty continues to trouble investor choice. “While there was some legitimacy for crypto due to TDS, a lot of ambiguity remains around crypto assets,” said Manvinder Singh, Partner, JSA Law. 

This has also driven many crypto and Web 3.0 developers from India to settle in Dubai for proximity and better regulation clarity, said Gupta. Crypto has enough global use cases to build a strong business proposition for those who wish to offer blockchain-driven services from anywhere in the world, he added. 

However, crypto start-ups that venture into regulated financial services such as stockbroking and mutual funds will have to walk a tightrope to ensure they don’t ignore compliance requirements and get pulled up by industry watchdogs.