5 questions cryptocurrency exchanges must answer now about their operations – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/invest/5-questions-cryptocurrency-exchanges-must-answer-now-about-their-operations/articleshow/88087819.cmsSynopsis

Whatever the new crypto law holds, self-styled crypto exchanges must be forced to reveal facts about operations urgently. Is there any verifiable proof that the underlying cryptocurrencies actually exist in possession of the exchanges?

The cryptocurrency bill is on its way and the government has shown its hand by the text of the listing of bills for parliament. Cryptocurrencies appear set to be banned. Notwithstanding the decidedly strange new meanings of the word ‘private’ that are being invented, it’s quite clear that there will be one cryptocurrency allowed in India, and that will be an official one issued by the Reserve Bank of India.

However, it will be some time before this bill becomes law. Meanwhile, if stories are to be believed, crores of Indians are trading in cryptocurrencies, on Indian crypto exchanges as well foreign ones. It’s worrisome that this volume of money is being put to use, apparently as an investment and yet there is no regulatory oversight as to what is happening to that money. The people who are buying crypto think it’s an investment, it’s being promoted (if in a slightly disguised manner) as an investment and yet there is no provenance of the very basics of an investment activity.

What do I mean by the basics? When I buy some stock, I go to a stockbroker. I transfer the broker some money from my bank account and in return I see some numbers appearing on the screen where I’m trading. These numbers claim to tell me that I now own some stock. What is the provenance of these numbers? How do I know that there is any underlying reality connected to them? I know that because the stock markets and all entities connected to them are minutely regulated. The brokers are members of an exchange and there is a distinct entity, a stock depository, that connects all this to the underlying reality of the existence and ownership of what I gave my money for. I get live information of what’s happening to my money from multiple independent entities that operate under intense regulatory scrutiny.

There are equivalent regulatory structures for banking, mutual funds, insurance, bonds and pretty much anything that involves handling other people’s money. The entities that call themselves exchanges are nothing of the sort in any legal sense. They are businesses that take your money and in exchange, show you some numbers and a graph on your screen.

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Cryptocurrencies are a new investment class, with little data for fundamental performance analysis. Regulatory uncertainty no bar, many investors are finding favour with these. In this video, we tell you the 7 thumb rules to remember when entering this high-risk high-reward arena. | Based on text by: Babar ZaidiNo one seems to show any curiosity as to what exactly is the modus operandi of these exchanges. There are some simple questions that can be asked, drawing a parallel from other kinds of exchanges

  • Is there any publicly verifiable proof that the underlying cryptocurrencies actually exist in possession of the exchanges in the quantum required?
  • When one investor buys a cryptocurrency and another sells the same, do these self-styled exchanges net it out, or do they independently buy and sell the underlying on some parent market for each?
  • If they net it out, at what frequency do they reconcile the actual holdings with a parent market? Given that cryptocurrencies are famously volatile, what happens to the gaps in value that must get created?
  • In particular, on the day when news of the impending law came, a vast gap was created between Indian and international prices of cryptocurrencies. Surely, a lot of money must have been made or lost in this arbitrage opportunity. Can someone explain? Not a hand-waving explanation but a real rupee-paisa explanation.
  • If these self-styled exchanges are pooling investment and then netting them out on a parent market, then why can’t they be treated like mutual funds, because this is exactly what funds do? This is of course more a question for Sebi to answer.

Let’s take a hypothetical situation: One day, a new law puts a stop to the activity of these self-styled exchanges. When the music stops, will investors find that they actually possess exactly what their app screens show? Can these exchanges publicly release verifiable information that proves this? I suspect they may not because if they could have been this transparent then they would already have been so. So if there are really crores of Indians who are into all this, can someone in a position of authority start asking some serious questions.

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