When Binance Holdings spun off its Indian subsidiary WazirX in 2022, the world's largest cryptocurrency exchange seemed invincible in the local market, while WazirX was faltering.
However, the government crackdown on foreign platforms has suddenly turned competition mechanisms upside down.
Restrictions on foreign exchanges
Since the Indian government in late December began restricting access to Binance and other foreign cryptocurrency exchanges operating in the country without being registered locally, traders have flocked to local competitors like WazirX. Many of them transfer deposits from Binance, according to local companies.
WazirX and competitors such as CoinDCX and CoinSwitch Kuber benefited after being hurt by a 2022 tax system that pushed traders to foreign exchanges.
It now appears to be headed for further gains after Apple's App Store last week removed apps from Binance and seven other foreign exchanges at the request of the Indian government.
Deposits entering WazirX jumped by about 250% in the four days after India notified nine offshore platforms of compliance with the new rules on December 28, compared to the four days before that, according to the company. CEO Sumit Gupta said that CoinDCX returned to receiving deposits immediately after the government action.
Huge gains for local stock exchanges
Numbers that we usually achieve in 3 months, we were able to reach just in the last two weeks,” Idul Patel, CEO of Y Combinator-backed Mudrex, said about deposit inflows and new users. He added that more than 30,000 customers have registered with Mudrex since December 28.
WazirX and MudRx estimated that roughly 70% of their new inflows came from Binance, while CoinDCX put the number at around 40%.
Binance said it is working hard to guide a constructive policy-making process that seeks to benefit users and market participants alike, repeating the statement it made after the Apple Store deleted its app in India, and did not respond to questions related to the exit of deposits.
Estimates of the market share of cryptocurrency exchanges in India are not available. But measured by app downloads, Binance has been dominant in the market since an execution tax imposed by the state in mid-2022 eliminated frequent trading on local platforms. Gupta of CoinDCX estimated that the new tax pushed about 95% of cryptocurrency trading in India to foreign platforms that do not collect it.
Unfair competition
The Indian government moved against foreign exchanges after months of pressure from local rivals, during which they argued that the new taxes created an unfair playing field.
The late December notice from India's Financial Intelligence Unit said the nine exchanges were operating illegally in India without complying with anti-money laundering provisions it issued last year, and called on them to explain how they would comply with those provisions.
The Financial Intelligence Unit also requested the Ministry of Information to block the websites of the nine platforms locally.
On Friday evening, specific URLs, known as their URLs, were not working in India. However, its applications are still available on Google Play in India.
The picture looks more nuanced when it comes to trading volumes, which were almost wiped out by the tax deduction at source that took effect in 2022.
WazirX said trading volumes haven't changed much, while CoinDCX said the slight uptick it observed in the past two weeks is probably more due to improved sentiment in the cryptocurrency sector overall.
However, CoinSwitch said trading volumes on its platform jumped 30-35% in the week following the FIU's notification of foreign competitors.
CoinSwitch, like CoinDCX, returned to taking deposits after the FIU action.
Tension with China
New Delhi-based think tank Esya Center wrote to India's Ministry of Home Affairs in late October demanding restrictions on foreign cryptocurrency exchanges that do not adhere to anti-money laundering regulations. He noted that seven of those platforms have Chinese origins or founders, according to a copy of the letter seen by Bloomberg. Asia Center declined to comment.
Chinese-born Canadian Changpeng Zhao founded Binance in China.
The reference to China, India's main geopolitical rival in Asia, may have touched a nerve.
In 2020, India banned 59 Chinese applications, including TikTok, amid border tension in the Himalayas.
It banned 232 other Chinese applications last year, an indication that relations are still fraught between the two countries.
Sana Hashmi, a visiting fellow at the Taiwan-Asia Exchange Foundation, which focuses on India, China, and the United States’ foreign relations, said of the crackdown on offshore cryptocurrency exchanges: The current developments also reflect ongoing Indian scrutiny of inbound Chinese investments and the work of... Chinese companies inside the country.
