India’s Top Broker Raises Red Flag on Unregulated Crypto Derivatives

India’s crypto conversation has mostly revolved around taxation, exchange compliance and the slow moving regulatory review by the government. But a fresh spark entered the debate this week when Nithin Kamath, founder of Zerodha, publicly warned that crypto derivatives in India exist in a regulatory no mans land.

His message stood out because it was not a generic “crypto is risky” caution. It was a direct critique of a specific segment, crypto futures and options, a segment that millions of Indian users actively trade on offshore platforms without fully understanding the risks or the complete absence of regulatory protection.

While the stablecoin discussion is moving forward, derivatives remain largely untouched, which is exactly why Kamath’s remarks deserve attention.

• The heart of the issue: There is no accountability
• The second problem: You rarely know who is on the other side of your bet
• The real danger: Extreme leverage magnifies losses beyond control
• Why this matters now: India’s crypto landscape is shifting fast
• Where India stands today: A gap waiting to be fixed

The heart of the issue: There is no accountability

Kamath compared the current state to Schrödinger’s cat, “neither fully regulated nor unregulated,” a condition where ambiguity becomes a business opportunity for platforms and a threat for users. His comments come at a time when India is reevaluating its broader digital asset approach, including proposals around a sovereign backed stablecoin, noted recently in India’s First Sovereign Backed Stablecoin Model Explained on EtherWorld.

Image Source: Michael Sandberg's Data Visualization Blog

Kamath’s first concern is straightforward. Most crypto derivative platforms available to Indian users operate outside Indian jurisdiction.

If a trade goes wrong or the platform freezes withdrawals, there is no regulator, no grievance redressal mechanism, no ombudsman and no legal pathway for ordinary users. This risk is not theoretical.

India has already witnessed multiple offshore collapses, platform shutdowns and exchange freezes. The Enforcement Directorate’s recent findings, including frauds like the 285 crore crypto driven scam highlighted earlier on EtherWorld, underline just how dangerous unregulated platforms can be.

Kamath’s message essentially brings that same concern into the derivative trading space, a space even more opaque than simple buy sell crypto.

The second problem: You rarely know who is on the other side of your bet

Unlike traditional exchanges, many crypto derivative platforms do not disclose counterparties. In fact, the counterparty is often the platform itself.

Kamath pointed out that this resembles dabba trading or contracts for difference style setups, where the platform can benefit directly when traders lose. This gives rise to a dangerous incentive structure:

1. If customers lose money, the platform profits
2. If customers win regularly, the platform loses
3. Therefore, the platform’s commercial interest is aligned with customer losses

This is a fundamental conflict of interest. In regulated markets like NSE and BSE, counterparties are cleared through an independent clearing corporation.
In crypto derivatives, the house often clears its own bets.

This mirrors the concerns raised earlier when India debated accountability during the crypto winter, documented in EtherWorld’s earlier regulatory coverage India Must Innovate Responsibly. Kamath’s warning essentially says this situation has quietly returned through the back door through unregulated futures and options markets.

Crypto derivative exchanges exist in regulatory limbo. A bit like Schrödinger's cat—neither fully regulated nor unregulated. This ambiguity is being exploited in dangerous ways. By the way, I am not referring to the actual buying and selling of Cryptocurrency.

The first risk…

— Nithin Kamath (@Nithin0dha) November 26, 2025

The real danger: Extreme leverage magnifies losses beyond control

Kamath highlighted another uncomfortable truth. Offshore derivative platforms routinely offer leverage in the range of one hundred to two hundred times.

At that level, even a zero point five percent price movement can wipe out an entire position. Crypto routinely moves five to fifteen percent within hours.

Leverage at this magnitude turns minor volatility into full liquidation. For an inexperienced trader, it is financially fatal.

This mirrors global concerns raised by regulators in South Korea, Singapore and the European Union. India has not even reached the stage of formal debate, partly because crypto derivatives operate in a shadow zone where platforms are headquartered elsewhere, servers are routed offshore and users access them through apps not governed domestically.

Why this matters now: India’s crypto landscape is shifting fast

To understand the full impact of Kamath’s message, it must be placed in context with recent developments:

1. India is reviewing its entire crypto regulatory framework: This includes taxation, classification, foreign remittance rules and potential licensing requirements. EtherWorld has been tracking this through multiple updates, including the ongoing review of India’s crypto rulebook.
2. India is experimenting with regulated digital assets: The government backed asset reserve certificate stablecoin is one example. A regulated digital rupee pilot in retail use cases is another.
3. Policymakers have repeatedly warned against unregulated platforms: Officials from the Reserve Bank of India recently emphasized the risks of “unregulated digital asset channels,” another angle documented in EtherWorld’s detailed report India Must Innovate Responsibly.
4. Retail participation in crypto is rising again: Polygon’s global traction, covered through reports like Polygon’s Expansion Into Real World Assets on EtherWorld, has reignited Indian retail interest. Derivative products often become the first temptation for new users chasing quick returns.

However, derivatives are not the same as spot trading. They are significantly more complex, significantly riskier and almost impossible to regulate without domestic oversight and custody requirements.

Where India stands today: A gap waiting to be fixed

Kamath’s concluding point is simple but powerful. The lack of regulatory clarity on crypto derivatives is bad for everyone in the long run.

• Bad for users because they lose money with no recourse.
• Bad for platforms because the opaque environment invites future crackdowns.
• Bad for the digital asset industry because manipulation, wash trading and counterparty fraud weaken long term credibility.

Yet crypto derivatives remain an ignored segment in policy discussions, not because the risks are less, but because the space operates away from India’s direct oversight. Kamath’s warning effectively pushes this missing segment to the forefront.

A future regulated crypto derivatives market in India would require:

• Mandatory licensing for derivative platforms
• A domestic presence with full legal accountability
• Restrictions on leverage
• A ban on platforms acting as counterparties
• Transparent order books and public reporting
• Mandatory disclosures about liquidation and margin rules
• Independent audits
• User protection norms
• Strict checks against money laundering

These are the same protections applied to traditional financial markets. Digital asset derivatives should not be treated differently.

India does not need to replicate offshore casino style trading. It needs a lawful, transparent, accountable ecosystem that aligns with the broader digital financial architecture built around UPI, ONDC and tokenized assets.

If you find any issues in this blog or notice any missing information, please feel free to reach out at yash@etherworld.co for clarifications or updates.

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