When you click to buy shares, the brokerage firm, where you opened a demat account, places an order on your behalf on the BSE or NSE. The exchanges then find a match and pass the transaction details to the custodians – CDSL or NSDL. These custodians process the actual transfer of shares to your demat account within two business days.
Once you tap to buy crypto, the exchange, where you have an account, will find a match for you in the market, take delivery of the asset from the seller, and then store it on your behalf. To invest in virtual currencies, you need to open an account with a crypto exchange, provide KYC details and upload rupees to the platform’s bank account to trade on the exchange using that balance. Cashing out is also an instant process.
Unlike exchanges, crypto exchanges act as an exchange, custodian, and broker. Another key difference is that crypto exchanges are unregulated entities.
No consistency between exchanges
Many crypto exchanges have sprung up in India to meet the demand for these risky assets in the pandemic-induced low interest rate environment. However, these exchanges do not have a uniform method for sourcing crypto or managing liquidity risk.
Bhagaban Behera, CEO and co-founder of social crypto exchange Defy, said that for every order, there is an attempt to find a buyer/seller within the same platform. Otherwise, exchanges source crypto from major exchanges or buy from institutions.
Behera said they keep the crypto purchased by the user in an insured wallet, but some exchanges give custody of the assets to the buyer. Mridul Gupta, COO of crypto exchange CoinDCX, said investors’ assets are stored on the exchange’s wallet. And user funds can only be moved from these wallets after permission.
Who keeps the “private keys”?
“Not your keys, not your crypto” is a popular saying among crypto backers referring to token custody. Typically, possession of a “private key” (a string of alphanumeric characters) grants a person ownership of a cryptographic asset. However, in India, most exchanges are ‘centralised’, meaning they hold these ‘keys’ on behalf of the investor. While this may go against the crypto concept of cutting out the middleman, industry players said it was done for convenience, as “custody wallets” allow for faster transactions. . Also, not all investors want to take on the responsibility of keeping the “keys” safe, because “misplacing” them would mean losing access to their assets.
Regulated entities have obligations regarding the management of financial assets. But since there is no governance framework in India over how crypto exchanges operate, their operations are determined by their business models, said a legal researcher, who did not wish to be named. Lack of regulation means there is no uniformity in terms of trade settlement, liquidity management and customer security measures.
Sathvik Vishwanath, co-founder and CEO of crypto exchange Unocoin, said his clients can either take custody of their assets or keep them with the platform.
“Many crypto exchanges offer wallet services but may not transfer full control of the underlying private keys to users. Exchanges often retain this control so they can create a convenient interface and execute transactions on behalf of users,” said Shilpa Mankar Ahluwalia, Partner and Head (fintech) at Shardul Amarchand Mangaldas.
Hacking, data protection issues
Savvy investors said they preferred to retain custody of their assets due to data protection concerns and because centralized exchanges are susceptible to theft and hacking.
“Centralized exchanges are easy to use for non-techies. But overreliance on it can rob people of the fundamentals of crypto. Crypto allows the user to be their own bank. But whether the end user is willing to take on this responsibility is up to them,” said a Reddit CryptoIndia forum moderator, who recently hosted a Q&A with Unocoin’s Vishwanath.
Ahluwalia of Shardul Amarchand Mangaldas said the new regulations may mandate that all crypto transactions must only be conducted through licensed exchanges that comply with KYC and other requirements.
Gaurav Mehta, founder of Catax, a crypto tax and audit platform, said: “After regulation, exchanges will have to prioritize price discovery, risk management and compliance over injecting artificial liquidity or offering their own coin.”