India's position on Crypto currency vindicated by global trends

By Lee Kah Whye India's conservative position on not encouraging trading in Crypto currency is being rapidly vindicated by the negative experiences of various Crypto funds, with the latest being Singapore's Three Arrows crypto fund. In line with the dip in the overall crypto market valuation, the Singapore-based crypto hedge fund Three Arrows Capital (3AC), one of the high-profile crypto investment firms has run into difficulties and is reportedly in trouble.

Taking into account the latest crash in the crypto assets, many experts believe that India correctly predicted the adverse economic headwinds and perhaps saved a lot of investors from an economic ruin. To just put things into context, the value of Bitcoin as a crypto asset has tumbled 55 per cent so far in 2022. The crypto market, at large, has fallen by about a third since it hit its peak sometime in November last year.

In line with the downturn in the crypto market, Bloomberg and Reuters quoted sources saying that the Singapore-based crypto hedge fund has entered into the process of liquidation after failing to make payments on a loan of 15,250 bitcoin (approximately USD 324 million) and USD 350 million worth of USDC, a stable coin. News agency Reuters reported citing sources that a court in the British Virgin Islands, where the Singapore-based hedge fund firm is incorporated, issued the liquidation order on June 27. The Commercial Court there orders a company to be liquidated if it is regarded as insolvent because it cannot pay its debts.

The Singapore-based hedge fund firm 3AC was founded by former Credit Suisse traders Zhu Su, a Singaporean, and Kyle Davies at the kitchen table of their apartment in 2012. Zhu had famously predicted the bottom of the last crypto cycle in December 2018 when bitcoin was worth about USD 3,850. Further, according to blockchain analytics firm Nansen, its blockchain holdings were once worth close to USD 10 billion.

Adding to its woes, the Singapore central bank the Monetary Authority of Singapore (MAS) last week reprimanded 3AC for breaching financial regulations. On the other hand, the Indian regulator had attempted to ban cryptocurrencies only to be later overturned by the Supreme Court.

Supreme Court of India in early 2020 overturned a circular put out by the country's central bank the Reserve Bank of India prohibiting banks and entities regulated by it from providing services in relation to virtual currencies (VCs), terming the circular as "disproportionate". Taking one more step to dampen the crypto trading in the country, a one per cent tax deducted at source (TDS) on crypto transactions was introduced in the Budget for FY23, which kicked in on July 1. The one per cent TDS liability is the second major provision of India's after the recently introduced 30 per cent capital gains tax on all transactions on virtual assets took effect on April 1, 2022.

India's crypto community has been up in arms over the new provisions and warned that it will have a severely negative impact on crypto trading in the country, especially with the latest global market slump. Sumit Gupta, co-founder and CEO at CoinDCX in a tweet has said that this tax "would do more harm than good". He said developers and entrepreneurs might flee to friendlier jurisdictions, while adding that a 30 per cent taxation rate coupled with one per cent TDS was "unfair."

The Indian government has been very careful not to legitimise crypto trading. The rationale behind imposing taxes on the virtual assets spelt out by the government was that taxing on the crypto was imposed as because people were profiting from it. "We have been cautioning against crypto and look at what has happened to the crypto market now," said Reserve Bank of India (RBI) Governor Shaktikanta Das in a CNBC-TV18 interview earlier this year after the value of cryptocurrencies took a tumble. He had warned about the dangers of investing in something that has no underlying value.

"Our position remains very clear, it will seriously undermine the monetary, financial and macroeconomic stability of India," the Governor had said. Recently, Das has said that cryptocurrencies are a clear danger and anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name. He mentioned this in the foreword of the Financial Stability Report (FSR) released in late June by RBI.

"While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against. As the financial system gets increasingly digitalised, cyber risks are growing and need special attention," he further said. According to cryptocurrency data aggregator CoinGecko, the total market cap of cryptocurrencies has shrunk by more than a third, down to around USD 930 billion from a high of about USD 3 trillion reached in November of 2021.

Although the crypto market has been on a decline this year, there isn't a specific reason for the same. Analysts have, however, suggested that the wider global economic situation of higher interest rates, and a looming recession, coupled with investors' lower risk appetite have caused the slump. It has caused various calamities in the market. Some believe a crypto winter has arrived. Besides 3AC, among the recent disasters is the collapse of terra USD stablecoin and sister coin luna, and liquidity issues at lenders Celsius Network and Babel Finance.

Earlier, crypto lender BlockFi and prime brokerage Genesis has said that they had to liquidate one of their large counterparties recently. In June, Crypto giant Coinbase slashed 1,100 jobs. Crypto broker Voyager Digital reportedly the party behind the default notice served on 3AC, has also been impacted. "I think given this price drop, from the all-time high of USD 68,000 to USD 20,000 now, it will probably take a while to get back. It probably will take a few months or a couple of years," Changpeng Zhao, the founder of the world's largest crypto exchange, Binance, told The Guardian.

Zhao added that bitcoin may take years to recover from the recent crash. On the other hand, other market participants remain bullish over the crypto's future.

"What I expect from bitcoin is volatility short-term and growth long-term," said Kiana Danial, founder of Invest Diva and author of Cryptocurrency Investing For Dummies. PricewaterhouseCoopers' fourth annual global crypto hedge fund report published in June showed that although the crypto market is bearish now, 35 per cent of fund managers in its survey predicted that bitcoin will be trading over USD 50,000 by the end of 2022 and a further 42 per cent forecast that it will trade between USD 75,000 to USD 100,000 by the year's end.

JPMorgan Chase & Co. believes that the current phase of cryptocurrency deleveraging will not last much longer. In a note published on June 29, it supported this prognosis by saying that it has been observed that "crypto entities with the stronger balance sheets are currently stepping in to help contain the contagion." It has also been noticed that venture capital funding which is "an important source of capital for the crypto ecosystem, continued at a healthy pace in May and June."