However, it will take some time for this bill to become law. Meanwhile, if stories are to be believed, crores of Indians are trading in cryptocurrencies on Indian crypto Exchanges as well as foreign ones. It is worrying that this quantity Pennies being used, apparently an . In form of Investment And yet there is no regulatory oversight of what is happening to that money. People who are buying crypto think it is an investment, it is being promoted as an investment (if in a slightly disguised way) and yet there is no evidence of the fundamentals of the investment activity.
What do I mean by fundamentals? When I buy some stocks, I go to the stockbroker. I transfer some money from my bank account to the broker and in return I see some numbers on the screen where I am trading. These numbers claim to tell me that I now have some stock. What is the origin of these numbers? How do I know if there is an underlying reality attached to them? I know that because the stock market and all the entities associated with them are finely regulated. Brokers are members of an exchange and there is a separate entity, a stock depository, which links all this to the underlying reality of existence and ownership for which I have given my money. I get live information on what is happening to my money from several independent entities that operate under intense regulatory scrutiny.
There are similar regulatory structures for banking, mutual funds, insurance, bonds and much more involved in handling money among others. Entities that call themselves exchanges are nothing in any legal sense. They are businesses that take your money and, in return, show you some numbers and a graph on your screen.
There is no showing any curiosity as to what exactly is the functioning of these exchanges. There are a few simple questions that can be asked, drawing parallels from other types of exchange.
- Is there any publicly verifiable evidence that the underlying cryptocurrency actually exists in the possession of the exchange in the required amount?
- When one investor buys a cryptocurrency and another sells it, do these self-styled exchanges purge it, or do they independently buy and sell the underlying on some parent? Market For each?
- If they net it, at what frequency do they reconcile actual holdings with the parent market? Given that cryptocurrencies are famously volatile, what happens to the gaps in price that must be created?
- Notably, on the day the news of the impending legislation broke, a huge gap between the Indian and international prices of cryptocurrencies was created. Certainly, a lot of money would have been made or lost in this arbitrage opportunity. Can anyone explain? Not a handshake explanation but a genuine rupee-penny explanation.
- If these self-styled exchanges are pooling investments and then depositing them in the parent market, why can’t they be treated like mutual funds, since that’s what funds do? That is certainly another question for SEBI to answer.
Let’s take a hypothetical situation: One day, a new law stops the activity of these self-styled exchanges. When the music stops, will investors Find that they really have what their app screens show? Can these exchanges release publicly verifiable information that proves this? I doubt they can’t because if they were so transparent they would already be like that. So if there are indeed crores of Indians who are involved in all this, can someone in a position of authority start asking some serious questions?
(The writer is CEO, Value Research)