Interpreting the Indian blockchain market: Investment activities are relatively sluggish, and tax reform is the most crucial.

Author: Ryan Yoon & Yoon Lee, Tiger Research

Translation: Felix, PANews

Key Points:

● Continuous Development of the Blockchain Market in India: India has a young population, a strong pool of tech talent, and supportive government policies. Web3 technology is widely adopted, ranking first in the global cryptocurrency adoption index in 2023.

● Tax Reform and Regulatory Changes: In the first quarter of 2024, significant changes occurred in India's tax and regulatory environment for the Web3 and blockchain industry, including excessive TDS (Tax Deducted at Source) and adjustments to capital gains tax rates, as well as strengthened regulation of cryptocurrency exchanges.

● Investment and Ecosystem Development: Despite regulatory uncertainties, India's Web3 ecosystem continues to attract investment and grow. While there was a noticeable lack of new investment in the blockchain industry in the first quarter, some projects are still being developed.

1. Current Status of the Blockchain Market in India

As emphasized in the previous report "Overview of the Web3 Market in India," India is rapidly becoming a significant player in the global blockchain market. Several key factors driving this growth are: 1) the young population structure, 2) abundant tech talent, and 3) government policies favorable to technological innovation. Additionally, with a population exceeding 1.4 billion, India provides an ideal environment for the widespread adoption of Web3 services. According to Chainalysis' "2023 Global Cryptocurrency Adoption Index," India ranked first globally, rising three places from fourth place the previous year, reflecting the growth of the Indian Web3 market.

India's Web3 ecosystem is thriving, with support from over 1,000 active startups, particularly in the key Web3 hub of Bangalore. Despite a decrease in investment amounts in 2023, the frequency of investments remains stable, indicating sustained market growth. Furthermore, the Indian government is gradually adopting Web3 technology, experimenting with the digital rupee through the CBDC project, and advancing the construction of a national blockchain framework. This shift from initial prohibition to support highlights the recognition of blockchain potential and the commitment to nurturing a healthy tech ecosystem.

2. Changes in the First Quarter of 2024

2.1 Expected Changes in the Tax System

Participants in the Indian blockchain market are urging the government to reduce the TDS (Tax Deducted at Source) on cryptocurrency transactions to 1% and the capital gains tax to 30% in the upcoming 2024-25 budget.

Source: CoinDCX

TDS is a particularly heavy burden for investors, as it levies a 1% tax on currency realization. For example, if you sell bitcoin worth 1,000 rupees, you will be taxed 9.8 rupees, which is 1% of 998 rupees, excluding transaction fees (2 rupees, assuming 0.2%).

According to a report from the Esya Center, since the announcement of taxation in 2022, trading volume in India has plummeted by 90%. In response, industry organizations and participants, including the Blockchain Industry Association and the Bharat Web3 Association, are calling on the government to reduce TDS to 0.01% and allow offsetting of cryptocurrency trading losses with profits, similar to the stock market.

The Indian blockchain industry expressed disappointment with the interim budget announced in February, which maintained a 30% tax on cryptocurrency profits and a 1% TDS. Considering these decisions were made before the general elections, it was not expected that there would be significant changes to the tax structure. Following the elections in April/May, tax reform is expected to be implemented. The industry still holds hope for adjustments, which may include clear regulation, abolishing the 1% TDS, and reducing the overall tax rate.

2.2 Global Cryptocurrency Exchange Lockdown

Source: Cointelegraph

In December 2023, the Indian Planning Commission issued notices to 9 cryptocurrency exchanges violating anti-money laundering laws. Further regulatory actions were taken in January 2024, when the Financial Intelligence Unit (FIU) requested mainstream global cryptocurrency exchanges, including Binance, Kraken, and OKX, to remove their applications from the Indian app stores. These requests were quickly met, with Apple App Store and Google Play Store delisting the relevant applications. OKX also announced in March that it would cease operations in India by April 30, highlighting the significant challenges faced by cryptocurrency exchanges under the current regulatory framework.

Last year, when Coinbase stopped accepting new customers from India, the regulatory landscape for Indian cryptocurrency exchanges began to undergo significant changes. Coinbase CEO Brian Armstrong attributed this decision to informal pressure from the Reserve Bank of India.

Fortunately, in March of the same year, the exchange KuCoin announced that it had become the first global exchange approved by the Financial Intelligence Unit (FIU), marking a significant shift in regulation. This approval allows KuCoin to start acquiring users within established regulatory frameworks. The changes in the first quarter reveal a shift in the intensity of Indian regulation.

2.3 Ecosystem Development through Investment

Despite regulatory uncertainties, India's Web3 ecosystem continues to develop. The Core Foundation recently launched a $5 million innovation fund to drive the development of the Indian Web3 ecosystem. Solana and CoinDCX also initiated a $3.2 million developer support program. These large-scale support programs demonstrate confidence in these projects' potential in the Indian market.

2.4 New Funding

Source: AFK Gaming

Stan, an Indian blockchain esports company, completed a Pre-Series A funding round in January this year, raising $2.7 million from CoinDCX and other investors. Stan is building a blockchain gaming community and announced the launch of a marketplace in addition to releasing its official NFTs.

In the first quarter of 2024, there was a noticeable lack of new investment in the blockchain industry. The subdued investment activity may be influenced by two main factors: the global surge in interest and capital flow into AI technology, and the ongoing regulatory uncertainty in India.

2.5 Other Changes

Despite efforts to support the Web3 and blockchain ecosystems, companies are shifting their operations to regions such as Dubai and Abu Dhabi. This shift is largely due to evading the unclear Indian regulatory environment and strict tax policies. Dubai, in particular, attracts crypto businesses with incentives such as exemptions from income tax and corporate tax.

The Indian cryptocurrency exchange Mudrex also offers U.S. spot Bitcoin ETFs to Indian investors, supporting four spot ETFs from BlackRock, Fidelity, Franklin Templeton, and Vanguard.

Finally, CoinDCX merged with the defunct Koinex, resolving asset withdrawal issues for Koinex users and gaining a portion of its user base. CoinDCX is India's first cryptocurrency exchange to become a unicorn, currently valued at $2.15 billion, and its influence is expected to further expand after the merger.

3. Conclusion

The most critical issue currently facing the Indian blockchain market is the need for comprehensive tax reform. While the influx of investors may seem to only drive up prices without promoting significant market development, investors have the potential to contribute to a healthier market environment and provide substantial support for pioneering projects.

Additionally, the policy direction set by the new government after the elections will be crucial in reshaping the future of the Indian blockchain market. The results of these elections and subsequent policy decisions may be a key turning point in determining whether the market can overcome current challenges and unleash its full potential.

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