Why Crypto Term Deposits Are Riskier Despite Yields
The crypto industry offers products that mimic the offerings of traditional asset classes. So far, crypto exchanges offer Systematic Investment Plans (SIPs) and baskets of crypto tokens, just like mutual funds. Then there is the “crypto deposit”, presented as similar to a fixed bank deposit. As these products are not regulated, their characteristics and their interests differ enormously from one exchange to another.
Generally, under the “locked” option of crypto deposits, clients have to pledge their crypto assets for a stipulated term, which can be 7, 30, 60, 90 days, etc. They will get a fixed return at a pre-determined interest rate for the chosen term. The interest payment, which can be as low as 1% per annum or as high as 24%, varies depending on the type of crypto asset and the exchange. Interest earned is credited to the portfolio at the end of the term. However, clients will lose any interest earned if they decide to withdraw the asset before the lock-up period expires.
Usually, “blue-chip” cryptos such as bitcoin, ethereum, and cardano earn a lower interest rate, while smaller tokens earn more.
CoinDCX recently launched its earning program, “Earn”, where customers can earn interest on their dormant crypto assets. The exchange deploys the assets through multiple yield-generating opportunities such as margin trading, lending or staking to generate returns.
Keep in mind that unlike bank fixed deposits, in the crypto “deposit” feature, the value of the principal amount can change depending on the price of the token. However, some platforms also offer a principal amount lock.
Bharat Vivek, co-founder and COO of Kassio, a global crypto asset management platform, said, “In the Kassio earning program, if you invest in crypto fixed deposits, your initial principal amount will remain the same. (in rupees) for the duration of the fixed deposit.”
The platforms also claim to have introduced security features such as cold wallet storage and insurance up to a certain level to keep investors’ assets safe.
“Deposits are managed through the hot and cold wallet balance – 99% of funds are stored in the cold wallet, which is powered by the best custody solution to reduce exposure to any potential security risk,” Vivek said. .
A key difference between bank FDs and crypto FDs is government security. In accordance with the Law on the Deposit Insurance and Credit Guarantee Company (DICGC), each depositor of a bank is insured up to a maximum of ₹5 lakh for principal and amount of interest held. However, no such collateral is available for a crypto deposit.
Financial advisors have warned against using these investment instruments as they are usually not a fixed deposit but a loan product. Moreover, there is no clarity on the current crypto regulations in India, which makes the legal status of these deposits questionable. “Investing in cryptocurrency is a big risk as it is still unregulated in India. Also, as an investor, you don’t know where your funds are lent to. Investors should understand that this is not akin to a fixed deposit,” said Mrin Agarwal, Founding Director of Finsafe India Pvt Ltd.
Investors should also note the tax angle when it comes to crypto “fixed deposits”. “Currently, the law has not solved all these problems. But it is clear that the resulting income would be taxable. So, if you have income, which is in the nature of interest, you must include it under “income from other sources” and pay tax on it according to the slab rate. This is assuming the investor hasn’t exited the crypto, because the moment you transfer the crypto, the 30% tax rate would kick in,” said Archit Gupta, Founder and CEO of Clear.