Unpacking India's blockchain market: investment activity is relatively subdued, tax reform is most critical: How three-way payments work in India

The Indian blockchain market is experiencing significant growth, a trend that is being fuelled by the country's young demographics, a strong pool of technical talent, and supportive government policies.Adoption of Web3 technology has become so widespread that India is ranked No. 1 in the Global Cryptocurrency Adoption Index for the year 2023.

The tax and regulatory environment for Web3 and blockchain in India underwent significant changes in the first quarter of 2024. These changes include excessive Tax Deducted at Source (TDS) and adjustments in capital gains tax rates, as well as increased regulation of cryptocurrency exchanges.

India's Web3 ecosystem is attracting investment and continues to grow despite regulatory uncertainty. Despite the apparent lack of new investments in the blockchain space in the first quarter, a number of projects are still in development.

### 1. Current Status of Blockchain Market in India

As highlighted in the previous report, India Web3 Market Overview, India is fast becoming a significant player in the global blockchain market. Key factors driving this growth include a young demographic, abundant technical talent, and government policies that support technological innovation. With a population of over 1.4 billion, India provides an ideal environment for the widespread adoption of Web3 services. According to Chainalysis, India's ranking in the Global Cryptocurrency Adoption Index has jumped from fourth place last year to first place by 2023, reflecting the growth of the Indian Web3 market.

The Indian Web3 ecosystem is booming with over 1,000 active startups, especially in Bangalore, a key Web3 hub. Despite a decline in the amount of investments in 2023, the frequency of investments has remained stable, indicating that the market is still growing. In addition, the Indian government is gradually adopting Web3 technology, experimenting with the Digital Rupee Central Bank Digital Currency (CBDC) project, and advancing the national blockchain framework. This shift from an initial ban to support underscores the recognition of blockchain's potential and commitment to fostering a healthy technology ecosystem.

### 2. Changes in the first quarter of 2024

#### 2.1 Changes in tax expectations

Players in the Indian blockchain market have urged the government to reduce the source tax on cryptocurrency transactions by Tk 11 TP3T and capital gains tax by Tk 301 TP3T in the upcoming budget for 2024-25.

Source tax is a heavy burden for investors as it levies 11 TP3T at the time of realisation of the currency.For example, if you sell Rs 1,000 worth of bitcoins, you will be taxed Rs 9.8, which is 11 TP3T on Rs 998, excluding the transaction fee (assuming Rs 2 at a rate of 0.21 TP3T).

Since the tax was announced in 2022, trading volumes in India have fallen by 901 TP3T. in response, industry organisations and participants including the Blockchain Association and the Bharat Web3 Association have called for a reduction in the tax at source to 0.011 TP3T and to allow cryptocurrency trading losses to be offset against profits, akin to the stock market.

The Indian blockchain industry was disappointed with the interim budget announced in February, which maintained the cryptocurrency profit tax of $30% and the source tax of $1%. These decisions were made before the elections and no significant changes to the tax structure are expected. Following the April/May elections, tax reforms are expected. The industry is still hoping for adjustments that could include clear regulation, repeal of the 1% source tax, and a reduction in the overall tax rate.

#### 2.2 Blocking global cryptocurrency exchanges

In December 2023, the Planning Commission of India issued notices to nine cryptocurrency exchanges for violating anti-money laundering laws.In January 2024, the Financial Intelligence Unit (FIU) asked major global cryptocurrency exchanges, including Binance, Kraken, and OKX, to remove their apps from the Indian app shop. The requests were swiftly complied with and apps were removed from the Apple App Store and Google Play Store.OKX also announced in March that it would cease operations in India by 30 April, highlighting the huge challenges cryptocurrency exchanges face under the current regulatory framework.

Last year, the regulatory environment for cryptocurrency exchanges in India began to change significantly when Coinbase stopped accepting new customers in the country.Coinbase CEO Brian Armstrong attributed the decision to indirect 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 to be approved by the Financial Intelligence Unit (FIU), marking a significant shift in regulation. This approval allowed KuCoin to start admitting users within the established regulatory framework. These changes in the first quarter reveal a shift in regulatory intensity in India.

#### 2.3 Investment ecosystem development

Despite regulatory uncertainty, the Web3 ecosystem in India is growing. Recently, Core Foundation launched a $5 million innovation fund to promote the development of the Web3 ecosystem in India. solana and CoinDCX have also launched a $3.2 million developer support programme. These massive support programmes show confidence in the Indian market.

#### 2.4 New investments

Indian blockchain eSports company Stan closed a Pre-A round of funding in January this year, raising $2.7 million from CoinDCX and other investors.Stan is building a blockchain gaming community, announcing the launch of a marketplace platform in addition to the release of its official NFT.

In the first quarter of 2024, there was a notable lack of new investment in the blockchain space. The downturn in investment activity is likely to be influenced by two main factors: the global surge in interest and capital flows for AI technology, and ongoing regulatory uncertainty in India.

#### 2.5 Other changes

Despite efforts to support the Web3 and blockchain ecosystem, the company is shifting its operations to regions like Dubai and Abu Dhabi. This shift is mainly to escape India's vague and strict regulatory and tax policies. Dubai, in particular, attracts cryptocurrency business by offering incentives such as tax-free income and corporate tax.

India's cryptocurrency exchange, Mudrex, also offers U.S. spot bitcoin ETFs for Indian investors and supports four spot ETFs from BlackRock, Fidelity, Franklin Templeton and Vanguard.

Finally, CoinDCX merged with the collapsed Koinex, solving the problem of withdrawing assets from Koinex users and gaining some of them. As India's first unicorn cryptocurrency exchange, CoinDCX is currently valued at $2.15 billion, and its reach is expected to expand further 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 seems to have only pushed up prices without contributing to significant market growth, investors have the potential to contribute to a healthier market environment and provide significant support for innovative projects.

Moreover, the policy direction of the new government after the elections will be crucial and will determine the future of the Indian blockchain market. The outcome of these elections and policy decisions could be a key turning point in determining whether the market is able to overcome its current challenges and realise its full potential.