5 Questions Cryptocurrency Exchanges Need to Answer About Their Operations Now

The cryptocurrency bill is on the way and the government has shown its hand by the text of the list of bills for parliament. Cryptocurrencies seem about to be banned. Despite the decidedly strange new meanings of the word “private” being invented, it is quite clear that there will be an authorized cryptocurrency in India, and it will be an official cryptocurrency issued by the Reserve Bank of India.

However, it will take some time before this bill becomes law. Meanwhile, if the stories are to be believed, millions of Indians are trading cryptocurrencies, on Indian crypto exchanges as well as foreign exchanges. It is disturbing that this volume of money is being used, ostensibly as an investment, and yet there is no regulatory oversight as to what happens to this money. People who buy crypto think it’s an investment, it’s being promoted (albeit in a slightly disguised way) as an investment and yet there’s no provenance from the very basics of a business of investment.

What do I mean by the basics? When I buy stocks, I go to a stockbroker. I transfer money from my bank account to the broker and in return I see numbers appear on the screen where I am trading. These numbers claim to tell me that I now own stock. Where do these numbers come from? How do I know that there is an underlying reality related to them? I know this because the stock markets and all entities related to them are meticulously regulated. Brokers are members of an exchange and there is a separate entity, a stock custodian, which ties all of this to the underlying reality of existence and ownership of what I gave my money for. I receive live information about what happens to my money from several independent entities that operate under intense regulatory scrutiny.

There are equivalent regulatory structures for banks, mutual funds, insurance, bonds, and just about anything that involves managing other people’s money. Entities that call themselves exchanges are nothing of the sort in the legal sense. These are companies that take your money and in exchange show you numbers and a graph on your screen.

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Nobody seems curious to know what exactly the modus operandi of these exchanges is. There are a few simple questions that can be asked, drawing parallels with other types of exchanges

  • Is there publicly verifiable evidence that the underlying cryptocurrencies actually exist in possession of the exchanges in the required quantum?
  • When an investor buys a cryptocurrency and another sells the same, do these self-proclaimed exchanges compensate for it, or do they independently buy and sell the underlying in a parent market for each?
  • If they clear it, how often do they reconcile the actual holdings with a parent market? Since cryptocurrencies are notoriously volatile, what happens to the value gaps that need to be created?
  • In particular, on the day the news of the impending law came, a vast gap was created between Indian and international cryptocurrency prices. Surely a lot of money must have been won or lost in this arbitrage opportunity. Can anyone explain? Not a waving explanation, but a real rupee-paisa explanation.
  • If these self-proclaimed exchanges aggregate investments and then distribute them to a parent market, then why can’t they be treated as mutual funds, because that’s exactly what funds do? This is of course more of a question for Sebi to answer.

Let’s take a hypothetical situation: one day, a new law puts an end to the activity of these so-called exchanges. When the music stops, will investors find they own exactly what their app screens show? Can these exchanges publicly disclose verifiable information that proves this? I suspect they can’t, because if they could have been that transparent, they already would have been. So if there really are millions of Indians who are in on this, can someone in a position of authority start asking some serious questions.

(The author is CEO, Value Research)

The Crypto Craze: 4 Facts About Cryptocurrency That Will Surprise You

Cryptomania everywhere

Have you heard of the ups and downs of Bitcoin, Ethereum, etc. lately ? And you probably haven’t missed the Dogecoin memes doing the rounds on social media either. The news is buzzing about cryptocurrencies. The superior yields, among other things, made headlines. The crypto space has grown significantly over the past few years. There are almost 12 to 15 crypto exchanges operating in India and estimates of daily exchange turnover range from Rs 500 crore to Rs 1,500 crore.

Did you know that the market cap of Bitcoin (Rs 50,57,561 crore) is more than three times that of India’s most valuable company, Reliance Industries (market cap of Rs 14,11,500 crore)? Here are some other facts you probably didn’t know.