Nikhil Kamath | Zerodha | Crypto: Crypto a fine asset class but if taxed like trading income, may not be so popular: Nikhil Kamath

“From a regulation standpoint, if it were to be taxed the way trading income is taxed, they would suddenly become a lot less attractive even for people who think of it as an asset class,” says Nikhil Kamath, Co-Founder & CIO, Zerodha.

You have very clear views on crypto currencies. A lot of gen Z investors have loved the returns that they have got in 2021. We are ending the year with continuing confusion and lack of clarity on policy measures but it seems pretty clear that they are not going to be forced to shut shop. Do you think the crypto craze will continue?
It will because there are such big champions for the cause. Each time I say something about it on my twitter, I get a lot of critique. It could be the silliest thing like calling it cryptos versus calling it crypto which I meant to do and stuff like that. These early backers and proponents of crypto will not let it die down for a long time. I do not think there is anything wrong with crypto as an asset class if one is able to regulate it and tax it efficiently like they are proposing.

It is fine as an investment asset class. But is it relevant as a currency, is it relevant as a means of exchange between people in the manner that it is structured today? I do not think so. But if a group of people want to come together and believe something has value and they want to store a certain part of their asset base there because they all together think it has value, that is their call; it is up to them. Will it become the means of exchange for me and you and for people in the general public to transact with? I doubt that.

It is pretty clear that it is not going to be a form of currency. The crypto community is pushing for it as an asset class. Do you think that even the extent to which average Indians can transact or acquire crypto as an asset class is likely to be curtailed?
There should definitely be regulation around these fancy sales pitches that you see online – make 200% a year in trade in crypto – stuff like that. I do not think that should be allowed. That will trick a lot of innocent people into participating in that ecosystem. From a regulation standpoint, if it were to be taxed the way trading income is taxed, they would suddenly become a lot less attractive even for people who think of it as an asset class.

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We did a tiny research project and we were trying to figure out where crypto has concentrated. We looked at the world and we figured 85% is in the US or people in the US who hold wallets. Even in terms of exchanging hands, there is not very much data but I do not think anybody is exchanging or a reasonable enough proportion of say Bitcoin for anything relevant or for anything that has value.

I feel like a lot of below ground kind of business happens in crypto and I do not think allowing it to flourish in an unregulated manner is the right way to do it. There should be some kind of regulation. It has to be fair and a lot of people have put in so much work into crypto that dealing with them in a manner and saying that all of you have to shut down or all of you cannot continue to operate might not be fair. But maybe there is a middle ground that has to be found there from the regulators and the government.

How has this year been for Zerodha and your outlook going forward? It has been a phenomenal year for you guys?
Yes, I would say for everybody in the

ecosystem, with some kind of a tech first platform, everybody has done well. They have done well. Every competitor of ours has grown and done well.I do not think the pace of growth is necessarily sustainable and nor should it be because it is an anomaly that all these people had so much time at hand and they suddenly started investing. I think it will rationalise to a more normal – 20-30% kind of growth rate year on year in the future. We are happy with that as long as we have stable markets where the valuations do not run up so much that one day we have this 30% correction. As long as that is not the case, it is good. I guess the market should go up a little, come down a little and trend up over the long term. But the gains and losses, as long as they both are reasonable, is okay.

In broad terms, of the number of people who came in at the start of the pandemic or even the start of the year, how many have stuck around? Have those investors stuck around or have some of them fallen by the wayside after making their initial returns?
A lot of them have stuck around for the simple fact that a lot of them are very profitable today. Everything has rallied in the recent past. Everything that you know. you could buy. The magnitude of the rally could be different if something has gone up 50% but most stocks have done well in this last one year and people who have invested have been beneficiaries of that. I do not think people stop investing when things are profitable. People generally stop investing when they have that one big loss and are stuck with some equity. They do not look at their screen for the next one year, waiting for it to come back. So right now, since people are profitable, they will continue to participate.

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