With former US president Donald Trump promising a cryptocurrency revolution if elected back to power, attention has once again shifted to digital currencies and their future prospects. Trump has stated that if he returns to power, the US will become a Bitcoin superpower, with the Republican Party designing transparent regulatory guidance to benefit the entire industry. Among his other cryptocurrency friendly policy commitments is the creation of a strategic national Bitcoin stockpile.
While Trump’s announcement will likely lead to a surge in Bitcoin, many believe that Bitcoin and other cryptocurrencies are bubbles destined to burst. Before Trump’s promises, the US government had already taken steps to bolster the sector, with the Securities and Exchange Commission (SEC) approving Bitcoin exchange-traded funds (ETFs). This approval was a landmark event, even though scepticism about cryptocurrencies remains. With the SEC authorising 11 Bitcoin ETFs, many new investors who were previously reluctant to navigate the complexities of buying Bitcoin might gain confidence in the digital currency.
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Market analysts welcomed the SEC move, saying it serves as a significant validator for this burgeoning industry. However, while the US is making strides in the cryptocurrency direction, it is still not as widely accepted as traditional financial investments. Demand and acceptance will likely increase with regulatory clarity from other countries.
Rise of cryptocurrency
Cryptocurrencies emerged after the 2008 global financial crisis, which intensified following the bankruptcy of US investment bank Lehman Brothers. This crisis gave birth to a new class of digital assets, with Bitcoin, the first cryptocurrency, coming into existence just two months after Lehman Brothers’ collapse. The allure of these new currencies lies in their decentralisation, allowing peer-to-peer electronic transactions without the need for trust in traditional central banks. This decentralisation is also why some investors remain sceptical. Nonetheless, since 2009, the adoption of digital assets has soared.
The Indian conundrum
India has had a complex relationship with cryptocurrencies. While the bull run in foreign markets attracted Indian investors to digital assets, the government’s imposition of high taxes has been a deterrent. 2021 was the best year for cryptocurrencies in India, but a continued bear market in 2023 was due to market downturns and the introduction of a 30% tax rate along with a 1% TDS (tax deducted at source) in 2022.
The TDS on securities transactions led to a dramatic plunge in trading volumes on Indian exchanges, declining by over 95%. This sharp drop was due to Indian investors shifting their trading activities to offshore platforms to avoid higher taxes. According to a report by the Esya Centre, an estimated three to five million Indian traders migrated to foreign exchanges, resulting in a significant loss of $3.8 billion in trading volume for domestic platforms. Despite a recent resurgence in trading activity, with volumes quadrupling, Indian exchanges face the challenge of capitalising on renewed retail interest to regain lost ground and justify their previous hefty valuations.
India’s reluctance to mainstream cryptocurrencies was evident when it blocked access to foreign cryptocurrency exchanges like Binance, Kucoin, and OKX in January. This move had a significant impact on the crypto landscape, but it was welcomed by domestic players as it forced Indian crypto traders to shift to domestic platforms. The move was prompted by money laundering concerns raised by the Financial Intelligence Unit (FIU).
The opportunity called crypto
India desperately needs crypto regulation to sustain a surge in trading volumes. The crypto industry in India was highly hopeful that the recently announced budget would bring some much-needed amendments. Ultimately, the US has forged ahead in the cryptocurrency space, while India’s progress has been hindered by its stringent tax regime, the industry complains.
India stands at a critical juncture regarding crypto assets. Despite having a thriving startup ecosystem with nearly 900 crypto-focused ventures, regulatory uncertainty has cast a long shadow over its potential. This ambiguity has led to a significant brain drain, as talented individuals and companies seek more conducive environments abroad.
Despite the challenges, the allure of crypto remains strong. The rapid growth of Bitcoin ETFs, surpassing even gold ETFs, underscores the burgeoning global interest in digital assets. Experts believe that 2024 could be a watershed year for India’s crypto industry, with high expectations riding on the belief that the looming G20 deadline for crypto regulation will spur action. To unlock the potential of cryptocurrencies, issues such as unstable banking relationships and complex tax structures must be resolved. While scepticism still clouds the investor landscape, the potential rewards are undeniable.