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None of our investors and creditors have any right on user funds: CoinDCX COO Mridul Gupta

Terming the RBI Governor’s latest comments “unbalanced”, he rejected claims of a ‘crypto winter’ and called for being “clear on policy first”

Source: Mridul Gupta, Chief Operating Officer, CoinDCX

2022 was a forgettable year for the crypto industry at large as the ‘crypto winter’ resulted in subdued trading volumes and valuations plummeting to their all-time lows. The industry was rocked by two major events— the collapse of Terra LUNA and FTX in November 2022. For Indian exchanges, it did not help that the collapse came at a time when the Indian government announced a prohibitive tax regime on crypto assets in its annual budget for 2022-23.

The tax regime proved to be a deathly blow as trade volumes moved to foreign exchanges which remain out of the purview of the Indian government. To add insult to injury, there is an informal ban on banks to provide UPI services to crypto exchanges which  has managed to turn away prospective investors as other deposit methods are afflicted with friction.

Medianama spoke to CoinDCX’s Chief Operating Officer Mridul Gupta on a wide range of topics such as the impact of FTX, loss of trust among investors, the path ahead for the industry, among other things, in this freewheeling interview.

Here are excerpts from the conversation. The transcript was edited for purposes of clarity and brevity.

What has been the impact of FTX’s collapse on Indian crypto exchanges?

I would like to break the myth about the (crypto) industry being in the doldrums. It’s not the case. There have been some bad actors in the form of FTX but the industry has recovered strongly, volumes have come up on centralised exchanges globally. Now with respect to FTX, it was a bad actor; it was an offshore exchange. What the FTX debacle has taught the industry, the policymakers, the governments is that you need to create a level-playing field so that there cannot be an onshore-offshore arbitrage. We are seeing that customers’ trading activity is moving to exchanges which are trustworthy or decentralised exchanges (DEX). The interest taken by people has not been impacted at all.


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One looks at FTX not in terms of an offshore exchange but as one of the biggest exchanges where you could invest or do your trades because it was trustworthy. The loss of trust has been quite palpable in the aftermath of FTX. How do you address it?

It’s not about onshore and offshore but offshore is a red flag because it’s an easy way for the operator to get out. It doesn’t mean that onshore hain toh achcha hai or offshore hain toh ganda hain. There needs to be audited transparent policies. We put a clause in our terms and conditions way back in 2020 stating that the funds which we hold on behalf of a customer are actually theirs. None of our investors, creditors, etc. have any right on those funds. Most of the audits of the processes are to make sure that these funds are not used by the company.

Are we to take the word of an exchange when it comes to transparency and trust because what stops an exchange from dipping into customer funds in the absence of a regulatory framework?

Consumers should not take anybody’s word for it. They should do their own due diligence. They should check if the proof of reserves and proof of liability are stable or if they are changing fast. They should check whether an exchange’s terms and conditions are transparent or if they give the ownership of funds to customers. Are the terms and conditions changing (constantly)? They should also check if an exchange is pushing out audit reports. A customer should also pay heed to the exchange’s history, the number of customers, office location, India legislation. Many customers don’t know that they have to take these measures; it is important to invest in crypto education.

Are capital adequacy requirements something that the crypto industry should explore?

Capital adequacy measures are in the lending business because it’s a leverage business. I am taking money from you and I am giving money to someone else. We are not in that business. It doesn’t apply to us. We are in the business where we allow you and others to match and exchange assets on the platform. We will have a 100 percent capital adequacy ratio because all funds are user funds. They can withdraw them at any time. We are not using these funds. The ratio, while it is a good metric, does not apply to us. The (measure) will not give the right results because it is for lending and borrowing businesses as they borrow something and lend a part of it. They need to be sure that they don’t lend 100% of their capital.

Are measures like proof of reserves enough to instill trust in the system? How are they relevant to a lay investor?

One rotten apple can lead to the erosion of trust in the industry. But the industry is set on the premise of transparency and trust. Everything is recorded on the blockchain so one can download the ledger and see the balances moving. A measure like proof of reserves will not help you get the financial health of the company, you need to marry it to your proof of liabilities. Such measures help you understand if balances are being used for trades. We are talking about 1.3 billion people so not all education can be given on day one. We are also dealing with sophisticated and complex institutions like ministries, RBI, and tax departments, law enforcement agencies, etc. One cannot solve everything in a day but you have to start from somewhere so you start with assets and liabilities, policy, security standards, investment protection fund, insurance, SOPs, and audits. It’s a 100-year journey.

What are some of the trends emerging following this collapse?

We are seeing a trend for some form of compliance, policy, and regulation for centralised players. Measures like proof of liabilities are the first step in making the entire assets and liabilities transparent for consumers to prevent such events. There has to be a policy around what coins to list and not list, KYC, risk, etc. We are seeing a rise of self-custodial wallets because clients want to hold their own funds. More and more people are interfacing with DEXes (decentralised exchanges) and decentralised protocol via these wallets. (CoinDCX is planning to launch its own wallet soon)

Do you think there is enough audit expertise available in the sector?

There are a lot of audit activities happening in the blockchain ecosystem. For example, proof of reserves and proof of liabilities are audited by a firm. The capacity needs to be enhanced as the industry evolves. Smart contract audits were never a thing till a few years ago. Now, smart contracts need to be audited. I don’t think there is enough talent. We need more talent in the industry including auditors and security experts.

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The general sentiment around crypto has dampened a bit. How do you sum up your 2022? Where do you see the industry going in the next few years?

The ecosystem continues to grow strongly as we see a number of people participating as users and as developers. A number of projects, and a number of companies are getting funded. I’m not looking at the micro (perspective). I’m looking at quarters and years. We are seeing good development across the board and I don’t see any challenges there. I do think we have a chance of leading the (Web3) ecosystem but we are not there today. A global entrepreneur running a crypto company or a Web3 company will be based either in the US or Dubai and not India. It is a concern at a national scale. The (subdued trend) around volumes in India is a function of two things— bear market and TDS— because of which volumes have not subsided, volumes have actually moved out. The regressive tax and no clarity on policy and regulation are to be blamed for it. The trading volumes have not subsided because of TDS but they have moved out so if you see P2P (peer to peer) volumes on Chinese exchanges, they are thriving. People want to trade even in the bear market. It’s just that we are not presenting them with avenues.

How would you respond to the RBI governor’s recent comments on crypto triggering the next financial crisis?

I do think that (RBI Governor) views are not completely balanced because there have been multiple references to private cryptocurrencies but private is something which is owned by an institution or an individual fundamentally. Bitcoin and Ethereum are decentralised and this has been the view across all circles such as fintech, intellectual, policy, and even regulatory. They are recognised as commodities and not securities in the US. There is a disconnect in what is a blockchain, crypto, and what is private and public.

What kind of shape would you like the government to give to crypto regulation?

I do not see any regulation coming immediately because regulation is a complex subject. It means putting boundaries and constraints around an ecosystem. How do you put a boundary of a framework if an ecosystem is evolving? There needs to be a policy before regulation and the guardrails need to be well thought out. We need to be clear on policy first. How do we support Web3 and the blockchain? What kind of taxation do we put in place? Do we want to create new jobs in this economy? How do we welcome entrepreneurs and investors in these circles? You can think about a framework once the policy is set.


This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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Written By

I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

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