Other Indian crypto exchanges say their trading volumes have been hit too.

Sumit Gupta, co-founder and CEO at CoinDCX, blames the 30-35% drop in trading volume on his exchange, one of India’s largest, on global and domestic factors. Bitcoin has been stagnant at $39,000 to $40,000 for several months, while large traders have slowed their activity due to new taxes, he says.

Drops in trading volume vary from exchange to exchange, but volumes on most crypto platforms have dipped 30%-40% in April from the prior month, says Raj Kapoor, founder of India Blockchain Alliance, a trade body for the crypto industry.

“It is just the beginning. Volumes will drop substantially if there is no [government] intervention,” says Kapoor. “It is not going to be healthy for a nation like ours. When you have an elephant in the room [like crypto], you have to learn how to dance with it or get trampled.”

The double whammy of new taxes and limited payment mechanisms has soured crypto investors’ sentiment in the South Asian country, home to 25 million investors who hold assets worth more than $6 billion—putting the future of crypto in India in doubt.

India’s new budget, which took effect when the new fiscal year started on April 1, imposed a 30% capital gains tax on cryptocurrency earnings, the same rate the government applies to winnings from horse racing and a significant increase from the previous scheme that didn’t specify taxes for crypto but applied income-based rates that maxed out at 30%. Under the new tax rules, cryptocurrencies are subject to a heavier tax than traditional asset classes like stocks, which are taxed at varying rates starting at 10%. The 30% tax rate on cryptocurrency gains applies even to earners whose total annual income is below INR 250,000 or $3,300 and are otherwise exempt from paying income tax.

“That is causing a lot of fear and stress in the younger population who are into crypto trading,” says Shetty.

In addition to the 30% tax on earnings, the finance ministry is levying a 1% tax on every crypto transaction starting in July in an effort to rein in speculative trading.

“Historical data indicates that transaction taxes significantly reduce trading volumes,” says. Kristin Boggiano, president of crypto exchange Cross Tower.

Italy, for example, introduced a 0.1% tax on equity transactions in 2012 that caused a 35% decline in trading volumes over a two-year period, Boggiano says.

A recent decision by Indian banks to stop funneling rupees to crypto exchanges via state-run Unified Payments Interface (UPI) is also hitting trading volume.

Typically, investors could transfer money from their banks to a crypto exchange wallet over UPI, India’s ubiquitous payments processor that’s responsible for 75% of all crypto transactions in India, according to Shetty’s estimates. Once the transfer hits a wallet, investors can use the money to trade cryptocurrencies, such as Bitcoin. But earlier this month, banks severed that financial plumbing, says Shetty.

The trouble started after Nasdaq-listed crypto exchange Coinbase, which launched rupee-based operations in India earlier this month, publicly said that its users could easily deposit funds to their accounts on the exchange using UPI, throwing the behind-the-scenes payments system into a glaring spotlight. In response to the ad, the state-run National Payments Corporation of India (NPCI), which runs UPI, said it was not aware that the payment platform was being used to buy cryptocurrencies.

The statement by the Payments Corporation caused banks to second-guess the legality of routing payments to crypto exchanges. Banks have operated in a state of semi-limbo regarding crypto transactions for years after the country’s Supreme Court in 2020 overturned an order by the Reserve Bank of India for financial institutions to cut all ties with individuals and businesses dealing in cryptocurrency. The Supreme Court said the order violated the freedom of trade guaranteed by India’s Constitution, freeing up banks to facilitate crypto transactions until the latest NPCI statement delivered another dose of ambiguity.

Without access to UPI, crypto investors are finding it tough to deposit money from bank accounts to their wallets on crypto exchanges.

“We are on a wait and watch mode,” BuyUcoin’s Bhatt. “We are hoping that this is a temporary situation.”

India’s crypto enthusiasts had been hoping that the sector’s era of uncertainty was coming to a close.

Last year, Reserve Bank of India governor Shaktikanta Das said he had “serious concerns” about the potential risks of cryptocurrencies, and the government had proposed prohibiting certain private cryptocurrencies. However, the imposition of taxes on crypto earnings had signaled the government’s intent to regulate digital assets, rather than ban them outright.

But the new tax burden and UPI saga have cast the market back into the unknown, and industry executives say scores of startups in blockchain and crypto are exploring bases outside of India as a result.

“What we are seeing is a flight of funds to outside the country. A lot of people are opening payment wallets outside of India,” Kapoor says. High volume traders and firms are opting for locations like Dubai because it’s easier for crypto businesses to operate there, says Kapoor.

This week, India’s Business Today reported that WazirX founders Shetty and Siddharth Menon had shifted their base of operations from India to Dubai. In an interview with Fortune, Shetty declined to comment on the report. “WazirX is headquartered in Mumbai and Bengaluru, and there is no change in our operating procedure,” the company said in a statement.

BuyUcoin’s Bhatt admits the company has considered relocating from India but says that “[moving is] not a topmost priority as we would like to serve users in India.”

Anndy Lian, Singapore-based chairman of BigOne Exchange, a cryptocurrency exchange based in the Netherlands, expects investors to leave India’s crypto market for rivals in Singapore and Dubai.

“Constantly, we have been asked by Indian communities to start in India. We do not have intentions to set up a base in India currently,” Lian says. “If the regulations are clearer, we might consider.”