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If financial memory is not as proverbially short as the public memory, we may still remember the crypto winter of 2018. The downward spiral started in December 2017. By July next year, bitcoin, the crypto poster boy, was down to $5.5K from $20K (a 72% dip) and eventually hit $3K.

Four years later, crypto is in free fall once more. The decline started in November 2021, and bitcoin has now seen a 3.5x slide, much like before. It is currently trading roughly at $20K, down from $70K in November 2021.

The difference: What the peak value was in 2017 would now be considered the worst-ever trough.

However, the crypto startups in India were always at the receiving end. In a circular dated April 6, 2018, the Reserve Bank of India banned all regulated banks from holding or facilitating crypto transactions, leaving the crypto startups out in the cold.

Incidentally, the RBI notification was struck down by the Supreme Court in March 2020. But the relief was short-lived. In March 2022, the Indian government once again mandated the following:

• Profits from crypto transactions would be subject to 30% taxation.
• Crypto investors could not offset the gains from one cryptocurrency against losses from another to claim tax benefits.
• 1% TDS would be deducted on all crypto transactions from July 2022.

And finally, there is the icing on the cake. During the ongoing Monsoon Session of Parliament, Union Finance Minister Nirmala Sitharaman stated in a written response to an MP that the central bank wanted cryptocurrencies to be banned in India.

In another recent development, the Internet and Mobile Association of India (IAMAI), the pan-India digital industry lobby, also dissolved the Blockchain and Crypto Assets Council (BACC). Although crypto players are planning to form a new industry body, the recent turn of events has put Indian crypto operators in a quandary.

Speaking about the overall impact, Vikram Subburaj, cofounder and CEO of the Giottus crypto exchange, said, “The most impactful thing in the recent past is the government’s decision to disallow offsetting the losses in one crypto against the gains from another. This has impacted trading more than anything else.”

The previous crypto winter during 2018-19 saw dozens of Indian crypto startups shutting down their operations. Among these were ZebPay India (restarted its business later), Koinex, Coinome, ThroughBit, Coinsecure, Coindelta, Cryptokart and more.

Will the ecosystem witness a similar spate of shutdowns in 2022 due to the regulatory quagmire?

Ajeet Khurana, former CEO of ZebPay and founder of the web3 advisory firm Reflexical, said that in 2018 too we had a market crash but the reasons were different. There wasn’t the kind of macroeconomic upheaval we are seeing right now. The RBI is not saying you cannot do business but is clearly opposed to crypto. Companies are facing financial difficulties, and the markets are also bad. So, the outcome may be similar, but the reasons are different.

Consider this. Since the Supreme Court ruled against the RBI circular in 2020, the Indian crypto industry saw annual growth of 600%, and the industry size surpassed INR 6 Lakh Cr by November 2021, according to data from the now defunct industry forum IAMAI-BACC. The number of investors is currently estimated to be 25 Mn.

Experts believe this growth narrative will now be deeply affected; the bigger the industry, the greater the ripple effect, they say.

Shutdowns, Suspension Of Key Crypto Services Hit Startups, Investors 

The crypto winter of 2022 (an outcome of macroeconomic turbulence and volatile market conditions), coupled with unfriendly tax policies, has made Indian crypto startups hit the panic button. Among them, crypto lending platform Vauld was the first casualty. In an announcement on July 4, the Singapore-headquartered company suspended all withdrawals, trading and deposits on its platform.

It also filed for a six-month moratorium to prepare for the intended restructuring of the company. A case filed in a Singapore court in this regard will be heard in August this year.

Leading crypto platforms CoinDCX and CoinSwitch Kuber have already suspended crypto deposits and withdrawals.

Cryptocurrency exchange Coinbase dialled down its India operations as well. The platform, which intended to hire more than 1,000 people in 2022, took a sudden U-turn and suspended its full-fledged launch in the country. It further slashed more than 10% headcount in India, while country head Pankaj Gupta was called back to the U.S. office.

Inc42 has further learnt that more than half a dozen Indian crypto startups have moved to Dubai, Delaware and the British Virgin Islands (BVI) in the wake of the crypto winter, and many are in the queue.

“In India, there is a lack of clarity when it comes to policy. And it changes every now and then,” said the founder of a crypto-based gaming startup. He is currently exploring three overseas options, including Delaware, BVI and St Vincent and the Grenadines, to shift his business out of India.

“Forget the ease of doing business in India. We could not even open a bank account here. How are we supposed to do business?” fumed a founder of a web3 company.

Meanwhile, the UAE government provides entrepreneurship visas for five years and other perks to shift the business there, the founder said. “We want to do business in India but hardly have any option, considering the low chances of survival here.”

Indian Crypto Startups Go Lean For A Longer Runway 

Commenting on the immediate impact of the crypto winter and the latest tax regulations, Subburaj of Giottus said, “There is definitely an impact. As per our estimates, there is a 70% drop in average daily trading and daily active users.”

Unocoin cofounder and CEO Sathvik Vishwanath said, “We are at 70% volume in July compared to June.”

In fact, volume is considered a solid business parameter in the crypto space. For instance, a look at the daily transaction volumes of WazirX in July 2021 and July 2022 reveals a 10x dip or so. Similar is the case with ZebPay.

Explaining how this could impact exchanges, Khurana said, “An exchange charges a commission on trading. If the volume goes down by 10x, so will the commission. If the exchange was earning $100K daily, its income would be reduced to $10K. This will directly impact the exchange’s ability to operate.”

“We will effectively see a scaling down of operations. I think shutdowns will also happen, but the exchanges will mostly try to survive on the bare minimum at first,” he added.

Crypto Players Reversing Hiring Plans

Given the current scenario, crypto exchanges have been forced to reconsider their hiring plans. According to industry sources, CoinSwitch Kuber, which had earlier planned to double its headcount to 1,000, all but stopped its recruitment. Only a few critical positions are still open.

ZebPay, too, laid off its employees in double digits, sources told Inc42.

Vauld has already laid off more than 30% of its workforce, and Coinbase India has let go of around 8% of its employees in India.

In contrast, Subburaj of Giottus claimed a three-year runway and denied any layoff. “We have been a nimble, lean, employee-friendly organisation from the start, and our attrition is very low. In fact, our core team is still with us. We have no plans for job cutbacks, and we are on track with our recruitment plans for this year. Besides, we have seen bear markets like this before. It happens in cycles,” he said.

London-based Cashaa, a bank offering crypto-based financial services, has most of its customers located in the US, the UK, the EU and the Middle East. The company recently exited its India joint venture Unicas and claimed to be less affected by the market turmoil in India.

“We are not backed by VC or hedge funds or have any dependency on outsiders to tell us how to navigate through the bear market or go into liquidation to protect shareholders’ interest,” said Kumar Gaurav, the company’s founder and CEO.

Crypto Investment Equation Is Set To Change

Earlier, people used to invest in bitcoin or ethereum and held them for the long term. Only a small percentage of their crypto investments in other digital currencies were traded for short-term profits.

In 2016 and earlier, people used to invest in Bitcoin or Ethereum and hold them for the long term. A much smaller percentage of their crypto investments in other digital currencies were traded for short-term profits.

But this equation changed, said Khurana.

There was always a thin volume of transactions in cryptos other than the top ones like bitcoin, ethereum, solana, cardano and polygon. “Now that the 1% TDS is set to impact traders, their order books will become thinner. It means price slippage will increase.”

A WazirX trader, who did not want to be named, agreed with Khurana. Now that the losses incurred by one crypto cannot be set off against the profits from another, no one can risk it as the crypto market is highly volatile. “I used to invest in lots of new cryptocurrencies earlier. But now, I will not invest anywhere except in bitcoin,” he said.

However, the new tax rules will not impact investment patterns alone. Even Indian crypto startups will likely overhaul their product playbooks just like they did in 2018.

As crypto exchanges try to find alternative income channels, a few players like Unocoin are trying to diversify it further. “We prefer to build more products and services around crypto for the Indian market,” said the CEO, Sathvik Vishwanath.

For the time being, crypto exchanges are extremely cautious about investing in new projects and only tread the safe ground. For example, Unocoin has collaborated with customer behavioural analytics firm CleverTap to optimise and accelerate user engagement by providing a seamless omnichannel experience.

CoinSwitch Kuber, in association with Startup Karnataka, has announced a blockchain hackathon to recognise and stimulate blockchain-based solutions. Backed by Sequoia India, the hackathon will focus on critical themes like smart city, digital governance and tamper-proof supply chains offering product provenance.

If this crypto winter continues to linger for another year, there will be an increased focus on the permissible uses of blockchain across industry sectors like banking and CBDC, supply chain, egovernance services and more, according to experts.

While some of the established crypto players recently failed to close funding despite several rounds of talks, 5ire, a 5th gen sustainable public blockchain, recently raised $100 Mn and turned into a unicorn. Interestingly, 5irechain does not use PoS (Proof of Stake) or PoW (Proof of Work) but proof of benefit, a different architecture for consensus and rewarding purposes.

Founder and CEO Pratik Gauri said, “Though, we have customised applications-based use cases. Now it depends on who adopts us. So if an FMCG adopting us then we obviously have supply chain use cases, but we then optimize or we customize according to the requirements of the companies. If we are getting adopted by, say the police department, then applications will include firearms licensing, smart policing, predictive policing, FIRs registration etc.”

Does it mean traditional cryptocurrencies will be fated to die a regulatory death in India just as they did in China and many other countries? Or will there be a meaningful pivot, a broader industrial adoption, or the emergence of a digital-era asset class that can validate its raison d’être over time?