Crypto queries have wealth advisers in India in a tangle

“Is this a good time to invest in bitcoin?”

“Should I buy cryptocurrencies instead of gold this year?”

“What are the downside risks of Dogecoin?”

“Why is Elon Musk so influential?”

These are some of the queries that a wealth adviser in India would have heard in the last few weeks.

Whether the client is a salaried individual with SIP portfolios or a High Net-worth Individual (HNI) planning their budget for FY22, this could be equally relevant.

Despite the massive demand for cryptocurrency in India, thousands of licensed advisers and wealth managers are not sure whether rendering advice about cryptocurrency trading is permitted under existing regulations of the Securities and Exchange Board of India (Sebi). The capital markets regulator’s unusual silence on cryptocurrency means that various advisory firms and lawyers have been interpreting the existing rules in different ways.

In most cases, they are shying away from offering formal guidance to clients.

This means that even a high-profile investor is left with the same source of information as a college student or a young professional—the internet. This space is being rapidly occupied by influencers, celebrities and peer circles who are outside the ambit of regulations.

According to the chief executive of a leading Indian fintech advisory firm, the number of crypto-related queries its agents have been receiving has put them on the defensive. “We are receiving anywhere between 800 and 1,000 queries every day on our platform. Even those who we typically categorize as a ‘safe’ investor are asking about various kinds of cryptocurrency,” the executive said, requesting anonymity. “We are not offering any specific advice; it’s a regulatory grey area if you ask me. Instead, we are just pointing our customers to authentic sources of information with a warning about potential risks."

According to another executive from a leading advisory firm, when they receive queries on cryptocurrency from clients, they simply offer a list of curated do’s and don’t’s rather than specific advice on trading.

The speculative nature of the asset class itself makes it challenging for anyone to offer informed guidance, experts said. “There is a massive demand and value in offering good quality advisory service for crypto. However, no firm in India is doing so. No one wants to put their reputation on the line for a speculative asset class,” says Pranjal Kamra, CEO of Finology, a financial advisory firm.

Legal experts told ET that the absence of law or regulation makes offering cryptocurrency advisory neither legal nor illegal—a situation referred to in legal parlance as a regulatory "grey area".

Also read today's ETtech Morning Dispatch for an in-depth crypto coverage

Under Sebi’s Investment Advisor Regulations, ‘investment advice’ is specific to securities or "investment products". There is no definition of the latter, which is causing the confusion. “While securities are defined in regulations, investment products are not,” explains Akshay Nagpal, Partner, L&L Partners.

“Since crypto currencies are not regulated by any regulator in India yet, Sebi may take a stance that it doesn't fall in the definition of investment products and it is likely that Sebi-registered investment advisors will err on the side of caution and not issue any advice on the same," he added.

Similarly, cryptocurrencies also do not squarely fall within the category of “commodity derivatives” or “securities” under the Securities Contracts (Regulation) Act, 1956.

“This pushes the product in an unregulated space and not strictly illegal,” says Prashaant Vikram Rajput, Partner, White & Brief Advocates and Solicitors.

“However, considering the increasing number of entities looking at crypto currencies to mobilise funds, the regulatory scrutiny over the product could surely be incisive, not sparing the investment advisers as well,” Rajput added.

Another important caveat is that under Sebi (Investment Adviser) Regulations, 2013, advisers are required to maintain a register or record containing list of clients, date of advice and nature of advice and such records have to be maintained for a minimum period of 5 years, subject to inspection by the regulator.

In the event of a retrospective ban, this could create unnecessary scrutiny from the regulator, causing firms to shy away from rendering this service as well, Rajput said.

While the Reserve Bank of India (RBI) has been clear in its prohibitive stance regarding cryptocurrency, the lack of clarity over Sebi’s approach is adding to the confusion among traders and external observers.

Meanwhile, lay investors are struggling to find authentic sources of information. Discord, Telegram and Instagram have emerged as alternative platforms for the influencer community to gain from the recent traction.

However, in recent weeks, leading exchanges are also seeing a distinctive shift in their investor profile.

Even those aged above 45 are now
venturing into this space, meaning that this asset class is gradually attaining the status of mass market in India.

“We are seeing an eclectic mix of users coming onto the platform. While millennials and GenZ constitute a large chunk of our user base, we are witnessing a rise in senior citizen signups. Another interesting trend to note is that 45% of our users come from smaller cities (Tier 2 and 3)," said Sharan Nair, Chief Business Officer, CoinSwitch Kuber.

"Most of these decisions are research-based. We are also revamping the content on our blog KuberVerse and YouTube channel to educate our users about crypto, investing and blockchain so that they can make an informed decision," added Nair.

According to data shared by Tiger Global-backed CoinSwitch Kuber, 40% of its users are in the 18-25 age group. Investors over the age of 35 make up almost a quarter of its user base. Other exchanges—including WazirX—say 62.1% of its users are below 34 years. CoinDCX's primary user base is male, between ages 25 and 40.

The cryptocurrency market in India is far from mature, as even long-term investors are not able to access professional advisory services, experts added.

“Typically, for stocks and other securities, there is a value-buying community that gets active when prices plunge. In the previous cycles of crypto boom in India in 2017 and 2019, this didn’t happen here, which means that after every crash the ecosystem goes into obscurity. It’ll be interesting to see how early Indian investors react this time,” Kamra from Finology said.

Dated: May 21, 2021
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