Crypto exchanges probe exposes risks of rehypothecation and comminglin

Client Assets Used Without Profit Sharing

A recent report by the The Times of India highlights that the Income Tax Department has raised red flags against several Indian Crypto exchanges probe for allegedly using client assets deposited with them without sharing any profits with investors.

Investigators found that platforms often deploy tokens kept by the users for their own purposes including lending, staking or trading while customers are left unaware of how their funds are being utilized.

How Exchanges Justify the Practice

Officials pointed out that most platforms mention in their terms and conditions that tokens parked by users may be deployed at the exchange’s discretion.

While the original owners retain the right to sell their tokens, platforms commonly lend them to other users or pool them to boost liquidity. The problem is that investors are not kept informed about when and how their assets are being used.

Risks of Rehypothecation and Commingling

Experts warn that such practices known as rehypothecation and commingling pose serious risks. They compared it to the global example of FTX’s collapse where misuse of client funds led to widespread investor losses.

In India, similar patterns are being observed but the lack of a clear regulatory framework makes it difficult for enforcement agencies to act. Authorities admit that while such practices are happening, there are currently no explicit laws stopping platforms  from handling assets in this manner.

Tax Evasion Concerns Add to Scrutiny

The Crypto exchanges probe also uncovered widespread tax evasion by crypto traders. Many individuals who made profits through platforms reportedly failed to pay taxes under section 115BBH of the Income Tax Act.

The investigation revealed that automated bots were being used for arbitrage trading in Tether which is raising further concerns about unregulated trading practices.

Why Investors Should Be Concerned

A source close to the investigation stressed that while individuals are evading taxes, the larger issue is the unchecked use of parked Crypto exchanges probe.

Since profits are not shared and no safety guarantees exist, investors remain exposed to high risks without proper protection.

Conclusion

The findings of the I-T department shed light on the growing risks within India’s Crypto exchanges probe ecosystem. With platform's  free to use client deposits and no profits being shared the investor’s confidence is at stake.

Experts believe that without stronger regulations, India could face problems similar to past global crypto collapses.

The probe has underlined the urgent need for transparent rules to safeguard investors in the digital asset space.