India: Indian VDA investors face risks amidst shift to P2P Platforms


India’s Virtual Digital Assets (VDA) market requires strong regulatory frameworks to balance investor protection with innovation. Currently, many Indian compliant VDA exchanges lack UPI access, forcing investors to explore international and unreliable P2P trading platforms. Establishing a regulatory framework that fosters innovation can help maintain India’s reputation as a global leader in the Web3 revolution

India: Indian VDA investors face risks amidst shift to P2P Platforms  0ANIThe establishment of a comprehensive regulatory framework for VDAs is imperative. This framework should strike a balance between fostering innovation and ensuring investor protection. India has the potential to lead the way in the global Web3 revolution.

With a perfect blend of homegrown dynamic startups and investors who passionately embrace the potential of blockchain technology, India holds the key to unlocking immense possibilities. However, as with any emerging industry, it requires support from the government in the form of robust regulation.

Denying banking and UPI services to compliant Indian exchanges is not only unjustified but also counterproductive to the nation’s policy objectives of protecting Indian VDA users and maintaining oversight in the ecosystem. It is important to note that most of the Indian exchanges are compliant and employ robust measures, such as maintaining a KYC database and utilizing software that ensures secure and transparent trades.

As these start-ups are invested in long-term business engagement, the interests of the investors are central. Therefore, it is crucial to grant UPI access to VDA exchanges that are registered in India and comply with Indian laws, such as the Prevention of Money Laundering Act (PMLA) and the Income Tax Act.

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View Details » This will enable Indian investors to transact seamlessly, ensure investor protection, and prevent capital outflow to non-compliant platforms. Unfortunately, VDA Exchanges are currently deprived of accessing the UPI facility, a right that should rightfully be granted to them, despite there being no official notification on this disallowance.

The decisions made in the past, such as the denial of UPI services and the implementation of a 1% TDS in India’s Virtual Digital Assets (VDA) market, may have faded from public discourse, but their consequences continue to reverberate. Indian investors, seeking alternatives in the face of these challenges, have shifted to P2P platforms, unaware of the risks that lie ahead.

While media reports often highlight instances of scams and fraudsters, putting the entire industry in bad light, it is important to recognize that these issues arise from investors using P2P and foreign platforms, where the regulatory safeguards are not as stringent as in compliant Indian exchanges. It is important to understand the gaps and create a more secure environment for Indian investors in the VDA and Web3 industry.

India is home to millions of VDA investors who believe in the potential of blockchain technology. Imagine India ranking among the top five countries in terms of VDA adoption in 2022, with a staggering transaction volume of $172 billion between July 2021 and June 2022.

However, after this impressive success, a concerning shift in investor behavior has been observed since mid-2022 resulting in a noticeable decline in trading volumes in Indian exchanges. Surprisingly, this drop does not indicate a waning interest in VDAs among Indians, but rather suggests a migration towards peer-to-peer (P2P) platforms and foreign exchanges. A report by ESYA highlights that approximately USD 3,852 million (~INR 32 thousand crores) worth of trade volume shifted from domestic centralized VDA exchanges to foreign ones during February to October 2022.

What caused this shift in investor behavior? It is pertinent to note that in early April 2022, UPI services for crypto exchanges were disabled. UPI has been a widely adopted payment system in India and has facilitated easy payments and fund transfers since the pandemic. The denial of UPI services to Indian exchanges prompted investors to explore other channels, such P2P platforms, to engage with VDAs.

While these channels do not comply with the regulatory guardrails set for Indian exchanges, they enjoy full access to the Indian banking system for transactions. The shift towards P2P transactions caused due to the introduction of a 1% TDS on crypto sales by the Indian government, driving investors to seek alternatives that may potentially help them avoid taxation.

The investors engaged in these P2P exchanges are probably not fully aware of the risks they are exposed to. P2P trading platforms, lack comprehensive regulatory frameworks, leaving room for exploitation by scammers and fraudsters. While some of these P2P platforms conduct basic KYC verifications, the overall absence of stringent oversight poses risks.

Disputes and issues that arise during transactions are challenging to address due to the absence of a regulatory authority. Scammers exploit the escrow system on P2P exchanges by deceiving users and circumventing secure transfers, undermining the trust-based nature of these platforms.

It is essential to address these regulatory challenges. Additionally, strengthening investor education and awareness about the risks and rewards of crypto investments is vital. It can foster a responsible and informed investor community.

Consider the remarkable impact of the IT and ITes sector, as well as the recent surge in fintech. These industries have played a pivotal role in propelling India’s economy forward, generating employment opportunities for millions of Indians. Such achievements were made possible due to the unwavering support provided by the government.

Now, as we stand in the nascent stage of another groundbreaking chapter, the VDA and Web3 realm beckons us with equal promise and potential. It is an opportunity to not just revolutionize internet but to empower individuals, fuel dreams, and transform lives.

(The author, Krishna Sarma is Managing Partner, Corporate Law Group. Views are own)


Updated: 07/30/2023 — 06:00

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