cryptocurrency: Interest on idle virtual assets: How do crypto deposits work?

Synopsis

These FD-like products promise passive income to those seeking exposure to crypto. These products have an investment tenure ranging from a week to a year and allow cashing out early if needed without any penalty. Though these seem similar to bank FDs, such crypto-linked investments are outside the regulatory purview and hence risky.

Many fly-by-night operators exist in the crypto space due to lack of regulation, hence one should check the credentials of investment platforms and seek out expert opinion to avoid loss of capital.(This story originally appeared in on Mar 15, 2022)Cryptocurrency startups have begun offering investors an option to earn interest on virtual assets to battle volatility even as the industry awaits regulatory and legal clarity on the issue. Crypto startups are offering fixed returns on one’s holdings. How do these investment products work? What makes them different from conventional deposits? What should investors watch out for? Aseem Gujar & Partha Sinha find out…

One can buy crypto either through an exchange’s app or invest indirectly via exchange-traded funds (ETFs) as was explained last week in this column.

Cryptocurrency startups are giving another option to investors: Some call it fixed deposit or fixed income product, while others steer clear of traditional finance terminology and refer to it as interest-generating investment.
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These FD-like products promise passive income to those seeking exposure to crypto. These products have an investment tenure ranging from a week to a year and allow cashing out early if needed without any penalty. Though these seem similar to bank FDs, such crypto-linked investments are outside the regulatory purview and hence risky.

Sumit Gupta, CEO and co-founder of crypto exchange CoinDCX, which has such offerings, said that there are products which allow users to monetise their idle assets.

Exchanges Borrow Your Tokens

Industry players said that such products are mostly targeted at those who understand crypto technology. Those who own crypto can transfer tokens to an exchange or an investment platform that offers FD-like products. Those who don’t own crypto, can buy, and lend it back to the same investment platform.

Just like how a bank FD can be booked through netbanking, crypto holders too can perform the transaction online after selecting a lock-in period. The platform then lends your crypto holdings to other exchange users as a margin for trading or even lets other bourses borrow for their liquidity needs.

At the end of the lock-in period, the platform returns the principal back with interest — all in crypto terms. The crypto platform earns from the difference between the borrowing and lending rates. Also, it’s the crypto bourse that takes the risk in fixed-income products, according to an exchange executive.

If you have 100 Bitcoin and the interest rate is, say, 10%, at the end of the year, your wallet will be credited with 110 Bitcoin. However, as returns on your deposits will be in crypto, earnings in fiat money terms will depend on the value of the virtual asset at the end of the tenure.

Expected Interest Rate

The interest rate for cryptocurrencies can vary depending on demand. For example, crypto exchange Vauld offers 3% per annum for tokens like Matic and Lumen, 6.5% per for Bitcoin and Ether, and 12% for stablecoins like Tether & USD Coin, according to its website. Demand and interest rate for stablecoins is relatively higher as having an underlying asset like the US dollar or gold makes them less volatile.

However, returns may not be fully guaranteed. For instance, crypto investment platform Flint said it promises ‘up to’ 13% returns on some stablecoins for compliance purposes. “We keep the returns stable as much as possible,” said Flint co-founder Anshu Agrawal.

Investor Checklist

Many fly-by-night operators exist in the crypto space due to lack of regulation, hence one should check the credentials of investment platforms and seek out expert opinion to avoid loss of capital.

Industry players also said that they have seen instances where individuals withdrew their bank FDs to invest the amount in crypto deposits. Investors should adhere to their asset allocation plan and not go overboard with crypto equivalents as there is no regulator to fall back upon in case of grievances.

Recently, the Advertising Standards Council of India (ASCI) introduced guidelines for advertising and marketing of crypto assets in which companies have been prohibited from using words “currency”, “securities”, “custodian” and “depositories” as consumers associate these terms with regulated products.

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Updated: 03/17/2022 — 04:00