Indian cryptocurrency ecosystem is still not out of the woods

After a lull, cryptocurrency market is expecting a turn around. On Monday, the price of bitcoin regained the $41,000 mark for the first time in over 18 months. This is a remarkable recovery from the lows of $17,000 a year back. Since early 2022, series of scandals, interest rate hikes by central banks in the US and Europe, and the illegal use of cryptocurrencies led to a meltdown in their values. The price of bitcoin, which is the most popular among cryptocurrencies, had fallen to below $17,000 from a peak of $66,000. However, this major cryptocurrency has since recovered. So far this year, bitcoin has risen by about 152 per cent, making it the second-best year in terms of gains after the 302 per cent rise registered in 2019. While nobody knows how the price of cryptocurrencies will pan out, experts are hopeful that as the US Federal Reserve ends its rate hike cycle, it may aid rise in prices of cryptos.

Despite the price recovery in the cryptocurrency space, investor confidence in the ecosystem seems to at an all-time low. The fraud perpetrated by FTX founder, Sam Bankman-Fried is seen as one of the biggest financial frauds in American history. Added to that Binance-operator of the world's largest cryptocurrency exchange- pleaded guilty to multiple financial crimes and agreed to pay about $4.3 billion to the US authorities. These instances have rocked the trust in the ecosystem. In India, the crypto exchanges situation is not as healthy with investors leaving it in droves this year. This was basically because the Centre’s regulations became stricter. The government announced levying a 30 per cent tax on crypto gains. This led to a significant shift in the trading volumes across the domestic crypto exchanges to foreign ones. Moreover, offshoring of domestic liquidity to foreign exchanges was observed.

In response to such developments and upheavals, the Union government has recently come up with new regulations. According to the new norms, all the offshore cryptocurrency exchange platforms serving Indian users will now be subject to existing Anti-Money Laundering (AML) and Countering of Financial Terrorism (CFT) guidelines. Against this backdrop, the growth in Indian cryptocurrency ecosystem remains stunted. And there seems to be no hope of its recovery in the near-term. Firstly, the government is pushing for regulations that can help it to oversee movement of funds across geographies. This can potentially help in mitigating risks arising from money laundering activities. Secondly, the government’s intention is to save small retail investors from this asset class, which remains unregulated across geographies. It is a known fact that many small investors have already burnt their fingers by investing in crypto assets. Unless some kind of global consensus is arrived at in terms of regulation of crypto assets, the government is in no mood to give a free hand. Thirdly, the threat of using these assets for funding terrorist activities looms large. Hence, the Indian cryptocurrency ecosystem may not recover in the near future.