Why decentralised finance is the new buzzword

Vibhor Jain, the founder of Chained Ventures, has been rather unlucky dealing with institutions providing financial services. In 2019, he had almost signed an agreement with Yes Bank to co-brand and distribute an all-in-one prepaid card designed by his fintech startup. The deal fell through as Yes Bank sank deeper into a pile of bad debts late last year and the Reserve Bank of India (RBI) reconstituted its board. Undaunted, the 24-year-old businessman got into a similar co-branding deal with German payments firm Wirecard early this year. As things started to look up for Chained Ventures, Wirecard found itself embroiled in a multi-billion-euro fraud spread across continents. In end-June, Wirecard filed for insolvency.Talking to ET Magazine over phone from his Delhi office, Jain says he now has enough experience to list all the problems with traditional banking and finance. Alluding to the collapse of institutions such as Punjab and Maharashtra Co-operative Bank, he says these put depositors in misery.“I wouldn’t want to keep all my money in a bank.” Apart from the stability issue, the current low interest on deposits also encourages people to look at other options. “I’d rather buy some stablecoins (cryptocurrencies pegged to a fiat currency), put them on the blockchain and earn 9-12% interest on my crypto-deposit.” The 24-year-old is among the several young Indians who are increasingly getting drawn to the world of cryptocurrencies and the way it can change banking and finance the way we know it today. While rumours are rife that the government is working out ways to ban cryptocurrencies (or cryptos), a clutch of tech startups and a few foreign players are laying the groundwork in India to introduce decentralised finance — or DeFi, which simply involves providing banking and financial services with cryptos as the medium of transaction. This system doesn’t have a middleman or a regulator. (See “What is Decentralised Finance”). These startups were perhaps emboldened by the Supreme Court’s decision in March to overturn an RBI ban on cryptos. 78471757The founder and CEO of crypto bank Vauld, Darshan Bathija, says DeFi is “a well-paved super highway, without any speed limit” that can achieve any banking or finance-related objective with cryptos as the base asset. Startups like Vauld, Nuo Network and Cashaa and crypto-exchanges such as CoinDCX and WazirX have started offering “bank-like” products such as saving accounts as well as credit, payments and remittances options. However, the base currency they use are top line digital currencies such as Bitcoin and Ethereum and stablecoins such as Tether and USDCoin.Bathija says the crypto network is already doing the basic functions of a traditional banking system that stores money, facilitates payments and gives credit. “Credit — which involves loans on one side and interest on the other — is also happening in smaller measures.”A crypto savings account deposit can earn interest of 8-13% per annum. Buying and lending using certain cryptos can give returns of up to 20%. But, experts warn, lending lesser-known cryptos on relatively unestablished DeFi protocols could be risky. It is pretty much like trading weak fiat currencies on not-so-secure exchanges, they say. Vauld’s “savings account” yields 8% on crypto deposits. “Interest will go up once there is more demand for cryptos,” Bathija adds. Sumit Gupta, founder and CEO of CoinDCX, an exchange that offers crypto-lending opportunities, says: “The industry is trying to set up a basic infrastructure for DeFi currently. We’re solving problems related to tech-adoption now. Cryptos will get a boost once all elements of DeFi are in place.” 78471766No doubt people like Jain of Chained Ventures are interested. Thousands of Indians weary of getting 3-4% interest on savings bank deposits are looking at better “banking options” in the world of decentralised finance — where there are no central banks or governments meddling with the natural flow of money.Some like Prashant Adurty, the COO of alcohol delivery app Hipbar, see cryptos more like an asset than a currency. “I am just trying to sweat my crypto assets a bit, by lending them out and earning a fee for it. Last six months, I pocketed 9-11% gains. That apart, I am also getting some capital appreciation as my dollar-linked stablecoin is gaining strength over the rupee.” Stablecoins like USDCoin are pegged to the dollar, while the value of Bitcoin and Ethereum, among others, is based on the demand-supply dynamics.There is a niche global market where some cryptos can be used for liquidity pooling or leverage trading. This route, mostly used by hedge funds and others, gives crypto holders space to generate revenues. The returns are also in the form of cryptos and have to be routed through a crypto exchange to get an equivalent amount in rupees. This routing through blockchain technology, say these traders, makes cryptos safe, public and traceable. But cryptos are still not legal tender in India.There is a narrow elbow room to move cryptos in India, says Raghu Mohan, the cofounder and CEO of innovation management firm Lumos Labs, so there is no easy pathway for DeFi here. A fairly reliable banking system, robust digital banking options and government’s anti-crypto stance are hurdles. “That apart, DeFi developers suck at user experience and are unable to make the process easy-to-understand and seamless,” Raghu adds.Almost all crypto experts agree. “It is a complex system,” says Daniel Hwang, head of ecosystem development at Terra, a South Korea-based firm specialising in crypto-based payments. “DeFi developers have to create applications that hide the complexities. But for this, there has to be regulatory friendliness.”Several countries like South Korea, the US and Japan have payment apps that work on the crypto blockchain. When a user pays using her payment wallet, the money is converted to cryptos. The receiver receives cash. The use of blockchain brings down the cost of money transfer to just about 0.50% of the amount; traditional remittance channels charge 4-6%. 78471773“A lot of vendor and freelancer services payments are made using cryptos and DeFi pathways these days,” says Sowmay Jain, the 22-year-old CEO of DeFi pathway aggregator Instadapp. “You can build any financial product around DeFi.” DeFi enthusiasts claim the system can solve a lot of problems that centralised finance and fiat currency cannot. DeFi-based financial products can reach unbanked denizens faster, remove the needs for an intermediary and eliminate bureaucracy. “DeFi can even help the traditional banking system to upgrade its services,” says Hemanth Kumar, CEO of Pontis, a plug-and-play DeFi solutions provider. “But from a regulatory point of view, cryptos and DeFi face huge risks. The government should not try to ban cryptos now. They should regulate it like the US, Japan and South Korea.”Crypto exchanges in India saw a tidal wave of new customer sign-ups since April. Experts say investors flocked to cryptocurrencies in the hope that these would be a natural hedge against weak economic growth and an infirm currency. “A good number of them are just speculators,” says Kishorkumar Balpalli, a Bengaluru-based wealth manager. Ashish Mehta, cofounder of crypto exchange DigitX, says it is also an alternative asset class like gold or silver. 78471781There are over 20 exchanges in India that accept trades across all major cryptos. These enablers log $75-80 million worth of trades every day — up from $3-5 million a day in January. Even though the business looks good for now, exchange owners are a worried lot as prospects of a cryptocurrency ban looms large. The government is still sitting on the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, drafted by an inter-ministerial committee headed by former finance secretary SC Garg. The bill recommends a complete ban on cryptos issued by private parties. It also proposes that dealing in cryptos be made a criminal offence – punishable with a 10-year jail sentence and fine upto Rs 25 crore.“Most governments do not understand how cryptos work and how these can be tapped for good,” says Changpeng Zhao, CEO of Binance, one of the largest crypto exchanges in the world. “Banning cryptos is not the right choice. Not accepting cryptocurrencies may damage local economies in the long run. More so because several progressive governments are supporting cryptos now. Governments must realise that cryptos will not replace fiat currency; both can coexist.”A ban is not a viable or practical option, says Nischal Shetty, founder and CEO of crypto exchange WazirX. “Crypto is just one part of a broad-based technology. Now how can you ban a technology? If you miss technology in its evolving phase, we will be left behind.”Gupta of CoinDCX also says cryptos can coexist with fiat currencies. "Cryptocurrency will be more of a storer of value,” he says.Value is the most debated aspect of cryptocurrencies. Several finance professionals and economists point to the fact that there is no “underlying value” in cryptocurrencies. “It is an absurd idea to invest in cryptos – which is just a code with numbers and hash,” says one.However, Ashish Singhal, founder and CEO of cryptocurrency exchange app CoinswitchKuber, says it is a code that is “equal for all – and it does not differentiate between rich and poor.” “If codes have no value, then Google and Uber are worthless.” WHAT IS BLOCKCHAIN?A blockchain is a list of records called blocks. Each block is linked cryptographically, and it consists of a time-stamp and transaction details. When a transaction is initiated on the blockchain, millions of internet-linked computers distributed around the world verifies the transaction. The verified block is linked to the chain and stored on the net for anyone to see or audit. The data on the blockchain is identified by a “public key” — but not everyone knows who holds it (much like a smart user ID). The blockchain is an immutable cryptographic chain,and it cannot be corrupted. The blockchain cuts down the “middlemen” in a transaction and makes it peer to peer. So for a simple money transfer transaction, you don’t need to send money via a bank or payment gateways, you may simply pass cryptos (worth the money you want to send) to the person on the receiving end. It’s a much cheaper way of money transfer than traditional channels.WHAT IS DECENTRALISED FINANCE? Decentralised finance or DeFi refers to an ecosystem of financial applications built on blockchain networks. This form of finance would be open-source, transparent and would not have a central regulatory authority. Using cryptos as the underlying asset, DeFi has the potential to create new financial products and services on the blockchain.ARE CRYPTOS LEGAL?There are no laws that prohibit cryptocurrencies in India. “Cryptos are operating in a regulatory vacuum. Therefore, it is not illegal to buy, sell or deal in digital currencies,” says Mohammed Danish, an advocate and cofounder of Crypto Kanoon, a platform for blockchain regulatory news and analysis. Cryptocurrencies are not considered legal tender in India. But that doesn’t stop you from selling your old car to a friend for a few Bitcoins. “According to the Contract Act, for every commercial dealing, there has to be a consideration. But nowhere has it said the consideration has to be in a form of fiat money,” Danish adds.TAXATION & CRYPTOCURRENCIESThere are no provisions in the Income Tax Act on taxability of cryptocurrencies. Therefore, the taxation will depend on the regularity of transactions and treatment in the books of accounts. “Since cryptocurrency does not fall within the definition of currency under the current statute definitions, the gains would be taxed either as income from business/ profession or as capital gains,” says Riaz Thingna, director, Grant Thornton Advisory. Crypto investors will have to bear long-or short-term capital tax depending on the holding period. Long-term gains would be taxed at 20%, while shortterm gains would be taxed at the individual slab rate. So, will I have to pay tax if I sell my old car to a friend in exchange for cryptocurrencies? “Well, if that is legally possible, the taxability would depend on whether the car is for personal use or business use. If the car is for personal use, the transaction will not be taxable. If it is for business use, the gains from sale of the car — value of cryptocurrency minus the cost of car — would be chargeable to tax in your hands as capital. With inputs from Shelley Singh

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