Meanwhile, CoinSwitch Kuber, which is backed by Tiger Global, Andreessen Horowitz, and Coinbase Ventures, plans to launch an investment platform for mutual funds and US stocks in its diversification efforts. Sources say the company is looking to become a one-stop-shop for retail investors, though it plans to be crypto first.
Regulatory ambivalence and subdued demand sentiment prompted two of India’s biggest cryptocurrency players to branch out into these alternative revenue streams. Other lesser players are expected to follow in their footsteps.
While CoinDCX and CoinSwitch Kuber say crypto will continue to be the mainstay, analysts say players had no choice but to de-risk and diversify. The same scenario is expected to play out for many players in the industry. Globally, 2022 has been a turbulent year for the cryptocurrency industry, with stablecoins crashing earlier in the year, and FTX, one of the biggest cryptocurrency exchanges. currency in the world, now in a downward spiral.
Cryptocurrencies are stuck in bearish territory with tight liquidity in global financial markets following central banks raising interest rates to combat high levels of inflation.
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“We have a swap business, but the plan has been to not limit ourselves. We launched CoinDCX Ventures to grow the Web3 ecosystem,” CoinDCX co-founder and CEO Sumit Gupta told ET, adding that the venture capital arm has invested in 13 startups so far. nearly two-thirds of which are in the Web3 infrastructure space.
“The focus will continue to be on building a Web3 infrastructure. And we continue to remain excited about several themes and are in the process of identifying companies working on scale, identity, security and asset management solutions,” he added.
CoinSwitch Kuber, which also owns a venture capital fund for Web3 startups, is looking to become a broader retail investment platform, with other asset class options such as mutual funds and US actions on its application.
“If people are looking to diversify their investments from crypto to other asset classes, why shouldn’t we offer them the platform to do so – that’s the solution we’re looking to provide,” he said. told ET a crypto trading platform official. .
The company plans to launch trading in an additional asset class by January. CoinSwitch Kuber also launched a $10 million venture capital fund for Web3 startups in August.
In India, the journey of the crypto sector has been marked by ups and downs in terms of regulatory measures.
Cryptocurrencies were first officially recognized in India in 2018, when the Reserve Bank of India asked banks to cut off the money supply from crypto exchanges. This directive was overturned by the Supreme Court in 2020, leading to a wave of investment in the sector.
In 2021, the government was supposed to introduce a bill in parliament to ban private cryptocurrencies, but ultimately failed to do so.
Later, in the Union budget for 2022-23, a 30% tax on virtual digital assets was introduced, which resulted in higher taxation of cryptocurrencies than other asset classes such as such as stocks, mutual funds, gold, etc.
Following this, a 1% withholding tax was made effective from July 1 on cryptocurrency transfers.
Notably, even though the RBI has repeatedly flagged its concerns over cryptocurrencies, the government has indicated the need for global consensus to regulate the ecosystem.
In July, noting that the RBI had requested the government ban cryptocurrencies, Finance Minister Nirmala Sitharaman told parliament that “international collaboration” would be needed for any effective regulation or ban of cryptocurrencies, as digital currency is borderless in nature.
“Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any regulation or prohibition legislation can only be effective after significant international collaboration on the assessment of risks and benefits and the evolution of common taxonomy and standards,” she said in response. to issues raised in the Lok Sabha.
Analysts say a lack of regulatory clarity could force ecosystem players to look for alternatives.
“While the overall outlook for crypto was very positive, the lack of regulatory clarity has resulted in a lot of heartache for crypto operators,” said Ranadurjay Talukdar, Partner and Head of Payments at EY India. “The equivalence is with fintechs in the card space – even they are considering pivoting their business models around RBI’s digital lending guidelines. The lack of regulatory clarity will naturally force players to move to other professions. »
Talukdar added that stock trading is one of the most organic adjacencies to crypto trading. “If I look at the adjacencies, the most natural for a crypto reader will be stock trading. That’s clearly the idea. It’s a very underpenetrated market from a retail perspective. That said, it’s a very different ballgame because the rules of crypto trading are very different from those of stock trading.”
CoinDCX’s Gupta said the company is working on a number of alternative solutions, but exchange activity has become the mainstay due to the crypto bull run.
The cryptocurrency exchange has also recently branched out into decentralized finance to establish a broader footprint in the global Web3 space. In August, it announced the launch of Okto, a keyless self-custodial wallet that gives users access to over 100 decentralized applications. “Okto has witnessed a great response. We have a waiting list of 1 lakh users. The beta app will be released shortly, first for Indian users,” Gupta told ET.
“We had a lot of solutions two years ago, but trading or buying/selling crypto picked up organically because the market was going up. The product line is there and the plan is to allow the ecosystem to grow. This has been the approach all along, but trading activity picked up during the bull market,” he said.
At the retail level, crypto trading volumes declined over the year due to various factors, such as the introduction of tax rules and the impact on demand from factors such as the stablecoin crash. and the collapse of the FTX.
“Now that crypto trading and profitability have plummeted due to volatility, it makes sense to diversify. Options like the metaverse are also being discussed, but we’ll have to see if that works. This is a very tight scenario for these players,” said Mihir Gandhi, Head of Payments Transformation, PwC India.
With the end of the bull run in the crypto markets, investors in these startups have also tightened their purse strings, in line with broader trends.
Funding is dwindling
This year, funding for cryptocurrency and blockchain startups in India from venture capital and private equity investors has gradually dried up – from $464.4 million in January-March to $181.4 million. in April-June and $125.3 million in July-September.
In the October-December period so far, space startups have raised $68 million, according to data from Tracxn.
On a global basis, even though the total funding raised by crypto startups during the year hit an all-time high of $835.8 million, more than half of that money was raised in the first quarter of 2022.
Examining alternative business models and revenue streams could also be a way for crypto exchanges to generate liquidity in a crisis.
“Creating liquidity is very important for the business model. Since most Indian crypto players are well-funded startups, they shouldn’t have any short-term liquidity issues. But they will have to generate a profitable flow because constant cash flow is very vital for livelihood,” EY’s Talukdar said.
“One area, which is also a natural progression for crypto players, is CBDC (central bank digital currency). The RBI has done a pilot for wholesale CBDCs, and this is a space that crypto players can potentially explore. Basically, it might be a different philosophy, but in a heavily regulated jurisdiction like India, CBDCs will have a strong business case,” he added.
The RBI recently announced pilot projects in the wholesale and retail segments of the CBDC, which is its answer to private cryptocurrencies.