Zerodha’s founder and CEO Nithin Kamath flagged concerns over the risks associated with trading on crypto derivatives exchanges as they exist in a ‘regulatory limbo’.
In a LinkedIn post on Wednesday, Kamath said: “Crypto derivative exchanges exist in regulatory limbo. A bit like Schrödinger’s cat—neither fully regulated nor unregulated. This ambiguity is being exploited in dangerous ways.
Tax Arbitrage Driving Derivatives Over Spot Trade
In the past year, some of these platforms have seen a sharp rise in crypto derivatives trading and this has outpaced spot trades also. A spot trade faces a flat 30% capital gains tax on profits and 1% tax deducted at source but futures avoid TDS and qualify for slab-based taxation with loss offsets. Moreover, derivatives trades do not involve an outright transfer of the underlying asset, because of which the profits can be declared as ‘income from other sources.
Regulatory Void
Kamath explained that the first risk with unregulated platforms is that there’s nothing you can do if something goes wrong and there is no idea who’s on the other side of your order. “In many cases, the platform itself can be the counterparty to all trades, like dabba trading or CFDs,” he said adding that if the platform is the house, the incentives are distorted. It’s good for the platform if the customer loses money because every customer win is the platform’s loss, according to him.
He added that to make matters worse, these platforms offer 100 to 200x leverage and at that level, even a small move is enough to make you go bust. Considering the volatile nature of crypto, this is all but guaranteed.
Under the existing regulations, crypto assets are treated as “Virtual Direct Assets” under the income tax act and are not legal tender. Last year, the capital market regulator Sebi had recommended that several regulators should oversee crypto trade. Currently, both domestic and international exchanges, offer crypto derivatives trading to Indian users after registering with the Financial Intelligence Unit – India. Some of these are Delta Exchange, Coin DCX, and Mudrex.