Indian cryptocurrency investors currently have over ten exchanges open for business – and more are poised to enter the country. Almost two crore Indians currently hold cryptocurrency, with just a single exchange accounting for $21.8 billion of trading volume in the first seven months of this year.
To a person who trades in cryptocurrency, the exchange they use makes a big difference in the outcome. “But wait,” you say, “Cryptocurrency is decentralized and can be moved directly peer-to-peer (P2P), right?” That is true, yet more than half of Bitcoin’s trades in the last two years were made through an exchange.
An exchange plays a key role in enabling cryptocurrency trade and use. In the simplest terms, it serves as the entry point for ‘normal’ money, such as rupees to enter when buying crypto and the exit point to redeem rupees when selling crypto. Essentially, it serves as a matchmaker to connect those who want to buy with those who want to sell. At a sufficient scale, an exchange could have an ‘order book’ large enough to offer ‘currency pairs’ that help users who want to directly convert one unit of crypto to another, such as from Bitcoin to Ethereum.
Since exchanges earn from transactions made, they’ve lately been promoting wider adoption of cryptocurrency, introducing users to crypto lending, crypto borrowing, and NFT art auctions. In addition to economic functions, law enforcement agencies rely on the identity verification that exchanges are mandated to perform to investigate any probable crimes.
Theoretically, anyone could set up a crypto exchange with readily available software modules. However, in practice, only registered verifiable businesses are able to accept Indian users and payment methods. This is due to needing recognition from payment gateways to receive/send money, interfacing with govt IDs to verify users with PAN/Aadhaar cards, and tax audit requirements, thus reducing the risk of fly-by-night operators.