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Tokenised is your weekly read to navigate and mine the rich vein of crypto developments that flow through India and SouthEast Asia
Good Evening Dear Reader,

Welcome to this week’s edition of Tokenised.

It’s a new year and if 2021 was any indication, crypto assets are likely to stay in the spotlight across the world—especially as governments begin to get serious about regulating the ballooning sector. 


We’re kicking off this year with a look at investigations into possible tax evasion by Indian crypto exchanges. Six such exchanges are reportedly being probed, and founders at two of these exchanges estimated that the tax authorities will likely rake in Rs 100 crore (US$13 million) in unpaid taxes. And while the investigations might have begun with the trading commissions charged on crypto exchanges, non-fungible tokens (NFT) seem to be on the watchdogs’ radar as well.


Let’s jump right in.

Tax authorities sniff evasion by crypto exchanges

The Directorate General of GST Intelligence—a regulatory body responsible for detecting tax evasion in India—has been pouring over the data at Indian crypto exchanges over the past few months.


First coming to light in late December via the recovery of Rs. 49.2 (US$ 6.6 million) crore from crypto exchange WazirX, founders and executives at three crypto exchanges told The Ken that interactions with regulators on the matter have been ongoing since late October. 


At the heart of the investigation is how tax liability is calculated for services offered by these exchanges. 


There are two main ways an Indian user interacts with crypto assets: either by purchasing some in exchange for Indian Rupees (INR), or by exchanging one crypto token for another. While exchanges have been paying a tax of 18% on INR transactions, tax authorities have found that they haven’t been doing so when a user swaps one crypto token for another. 


WazirX charges a commission on both types of transactions—0.2% of volume on INR and 0.1% on its exchange-native token WRX. The latter is classified as a “utility token” by the exchange and is used to make payments on WazirX, but it can also be used for speculative purposes. Exchanges often issue their own tokens and provide incentives like fee discounts for using them.

The tax regulator found that while WazirX collects revenue by charging trading fees, deposit fees, and withdrawal fees on both rupee and WRX transactions, it was paying GST only on the commission earned in rupees, according to a statement by the Mumbai GST Commissionerate. 


“There’s no clarity on how regulators treat crypto assets, so it’s a little unfair to say that there was an intent to evade taxes,” argued the founder of one crypto exchange. They requested anonymity due to ongoing interactions with regulators. 


A senior executive at a second crypto exchange added that calculations get a little more tricky since exchanges often register the crypto-to-crypto transactions in their off-shore entities (registered in jurisdictions such as Singapore and Mauritius) and keep the INR transactions under the Indian entity. “It’s confusing under which tax regime the liability will be calculated if the assets are swapped outside Indian borders,” they noted. 


While WazirX has already ponied up and paid the shortfall as calculated by the authorities, other exchanges are still in deliberations with the regulators. Bengaluru-based Unocoin, for instance, expects to settle its dues in the coming week, according to co-founder Satvik Vishwanath. The exchange is likely to pay anywhere between Rs 6 to 7 crore (~US$ 805,000 to US$940,000) in additional tax dues. 


“The authorities have asked us to share transaction data and we have been complying,” said the founder of a third crypto exchange, adding that they aren’t likely to incur significant dues since they don’t operate a token of their own. 


Even though accusations of tax evasion aren’t exactly gold stars on Indian crypto exchanges’ report cards, Viswanath said that he sees these interactions as a “positive step.” By calculating such liabilities, he noted, the tax authorities also indicate the way crypto assets may be treated from a regulatory standpoint. By his estimate, the asset class is likely to fall under the broad definition of capital assets and, from a transactional GST liability perspective for businesses, be treated akin to assets such as land. 


But silver linings notwithstanding, tax authorities have already recovered about Rs 70 crore (US$ 9.3 million) from crypto exchanges, according to newswire ANI. And two exchange founders told The Ken that by the time the dust settles in a week or two, regulators will likely rake in over Rs 100 crore (US$13 million) in dues. 


This might just be the beginning of a tax regime for all Indian crypto assets. Because if the statement of Mumbai-based authorities is anything to go by, trading activity in NFTs might be on their radar next. “The CGST department will cover all the cryptocurrency exchanges falling in the Mumbai zone and will also intensify this drive in the coming days,” the statement noted, adding that tax officers are investigating transactions related to “emerging economic space like e-commerce, online gaming, Non-Fungible Tokens”.


Given that Mumbai hosts multiple crypto exchanges and Bolloywood celebrities—like Salman Khan, Amitabh Bachchan, and Kamal Hassan—have been jumping into the NFT sector, it only makes sense that the tax authorities want to keep a keener eye on the space. 


With that, let’s turn to a few other things that happened in crypto over the last few days:

Crispy bytes


  • In 2021, buyers spent US$41 billion on NFTs. A niche product in January 2021, these tokens are now almost as large as the traditional art market. [Financial Times]
  • China’s crackdown on crypto has sparked a mining frenzy in Thailand with small investors participating with fervour. [Al Jazeera]
  • NFT marketplace OpenSea has raised US$300 million in a funding round led by Paradigm and Coatue. The round valued the firm at US$13.3 billion. [TechCrunch]
  • India should pursue a “basic” CBDC before jumping headfirst into a retail focused offering: Reserve Bank of India [Business Standard]
  • Binance has received regulatory approvals to provide crypto services in Canada and Bahrain. [Forbes]
  • Jamaica has completed its central bank digital currency (CBDC) pilot and plans to begin roll-out in the first quarter of 2022. [Jamaica Information Service]
  • South Korea has laid out plans to tax gifted or inherited crypto assets. [KBS News]
Back of the envelope

Decentralised Exchange - These entities facilitate the exchange of assets between peers by bypassing intermediaries like traditional exchanges or clearing houses. Such platforms use algorithmic market makers to match supply and demand instead of a traditional order-book mechanism.

  • Prominent examples - UniSwap, PancakeSwap, Curve Finance
  • Trading volume - The three exchanges mentioned above had a combined trading volume of US$2.4 billion on Thursday, according to CoinGecko data
  • Caveat - Due to the absence of KYC norms, there’s no way to revert a transaction. Users might also end up being front-run on prices by crypto miners (or other participants) who see their incoming transactions and place theirs ahead in the queue.
What caught my eye this week

[Source: Project Deconstruction: Axie Infinity/Naavik]


While play-to-earn blockchain game Axie Infinity had a breakout year in 2021, player earnings have dipped significantly since August. 


The game involves players battling characters—called Axies—in teams of three. But in order to enter the game, participants must also own these characters. As the popularity of the game grew, this became an expensive proposition and created room for cash-rich owners to rent out their characters to time-rich players, taking a cut out of what they earn in the game. 


Axie Infinity was once touted in the Philippines as something that could almost replace a full-time job, but Axie players at lower levels—and without ownership of their own Axie(s)—have since seen their earnings go below the minimum wage level, according to a report compiled by video game research firm Naavik. 


Given that a majority of players in Philippines depend on wealthier benefactors/sponsors to give them an Axie to participate in the game with, “scholars [players who receive Axies from sponsors] are very close to realising that playing Axie isn’t so different from a minimum wage job after all,” the report noted. 


Although Axie’s user numbers hit 2 million in October 2021, the game’s economic model heavily relies on new players entering the game in order to be able to compensate existing players. “We project that even if DAUs [daily active users] steadily grow, if the pace of new monthly DAU declines then total monthly revenues may also decline,” noted the Naavik report, highlighting that the team behind Axie knows that model is unsustainable and has plans to make broader changes. 

The success of those plans might just end up determining the future of many bets on play-to-earn games, including heavy ones placed by venture capital groups such as Andreessen Horowitz.
[Bonus: If you’ve been wondering what in the world is going on with every celebrity and major commercial brand jumping onto the NFT-bandwagon, South Park has a take on what might actually be going on inside the board-rooms. TL;DR - “You lure your customers in with some good pancakes and french fries… and then you ****’em with some NFTs.”]
Share this edition

That’s all for this week’s edition. If you have any overarching thoughts (or even nitpicky ones) about this newsletter, please do write to me at [email protected]. I would love to hear your comments and/or suggestions.


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Take care.
Jaspreet Kalra
Tokenised is your weekly read to navigate and mine the rich vein of crypto developments that flow through India and SouthEast Asia
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This newsletter has been discontinued. But you can read The Stack which includes our newsletters around cleantech, fintech, personal finance and e-commerce in India!