Zerodha CEO Warns: Crypto Derivatives in ‘Regulatory Limbo’

‘Regulatory Limbo’ Around Crypto F&O Alarms India’s Top Broker

Zerodha co-founder and CEO Nithin Kamath has issued one of the sharpest warnings yet about cryptocurrency derivatives, flagging that many platforms offering crypto futures and options (F&O) to Indian users operate in what he calls a dangerous “regulatory limbo”.

In a widely discussed social media post, Kamath compared these platforms to Schrödinger’s cat: “neither fully regulated nor unregulated”. This ambiguity, he warned, is being actively exploited, leaving traders exposed to a combination of opaque counterparties, extreme leverage and almost no formal investor protection if something goes wrong.

Importantly, Kamath clarified that his concern is not about spot buying and selling of cryptocurrencies themselves, but about the rapidly growing segment of crypto F&O, where users bet on price movements using leveraged contracts rather than owning the underlying asset.

Platform as the House: When Your Loss Can Be Their Profit

One of the central issues highlighted by Kamath is how many crypto derivative platforms are structured. Unlike regulated exchanges in equity or commodity markets, where trades are cleared through independent clearing corporations, several offshore and domestic-facing crypto F&O venues reportedly act as the counterparty to their own customers’ trades.

In plain language, this means that:

• The platform itself may be on the opposite side of your bet.
• When a trader loses money, the platform may gain.
• Every profitable client trade can directly reduce the platform’s own P&L.

Kamath compared this setup to “dabba trading” and CFDs (Contracts for Difference), models historically associated with high-conflict incentives. If the “house” wins when customers lose, he argued, the entire system becomes structurally skewed against retail traders — especially those who mistake these platforms for regulated exchanges on par with stock or commodity markets.

100x–200x Leverage on a Volatile Asset Class

The second layer of concern is the level of leverage on offer. Kamath pointed out that some crypto derivative platforms allow traders to take positions with 100x to 200x leverage.

At that scale:

• A 1% adverse price move can effectively wipe out the trader’s capital.
• Crypto’s inherent volatility means such moves are not rare outliers but routine market noise.
• Losses can be near-instant, often faster than inexperienced traders can react or cut positions.

In regulated markets, leverage on retail derivatives is typically capped and accompanied by strict margin norms, risk frameworks and oversight. In contrast, crypto F&O platforms operating in regulatory grey areas can use high leverage as an aggressive marketing tool, enticing traders with the prospect of outsized gains while silently magnifying the probability of total loss.

No Regulator, No Escalation Path, No Safety Net

Kamath also underscored a more basic but crucial point: many of these crypto derivatives venues are not under direct supervision of market regulators like SEBI, nor do they come under traditional exchange-member frameworks seen in India’s securities markets.

That has three big consequences for users:

• There is often no formal grievance redressal mechanism backed by a regulator.
• If the platform suffers a hack, halts withdrawals, or changes rules mid-way, traders may have no clear recourse.
• Disputes can quickly turn into cross-border legal battles, which most retail users are ill-equipped to pursue.

In a traditional broker–exchange–regulator ecosystem, investors at least have defined escalation paths. In many crypto F&O setups, Kamath warned, users are effectively on their own, relying on the platform’s goodwill and internal policies rather than enforceable regulatory protection.

Tax and Regulatory Arbitrage: Why Derivatives Are Booming

The rise of crypto derivatives is not just a technology story; it is closely tied to tax treatment and regulatory gaps. Reports cited by Kamath note that in India:

• Spot crypto trades typically face a 30% flat tax on profits and 1% TDS on each transaction.
• Crypto F&O, depending on how traders classify it, may fall under business income with slab-based tax and loss-offset possibilities.
• Because derivatives don’t always involve on-chain transfer of underlying assets, some traders treat them differently in their books or skip disclosures altogether.

This combination creates a powerful tax arbitrage incentive in favour of derivatives over spot trading, even as the risk profile becomes far more aggressive. Kamath’s core argument is that such incentives, when combined with regulatory ambiguity, are a recipe for misuse — by both platforms and investors who are tempted to chase short-term gains without understanding the downside.

India’s Policy Gap: Ahead on Tax, Behind on Derivatives Rules

While India has moved ahead with taxation of virtual digital assets, comprehensive regulation specific to crypto derivatives remains a work in progress. Multiple agencies — including the Finance Ministry, the Reserve Bank of India and SEBI — have all flagged concerns, but a unified framework has yet to emerge.

Kamath’s warning lands at a moment when:

• Global regulators in several jurisdictions have started imposing limits on leverage and mandating licenses for crypto derivatives.
• Indian users continue to access offshore platforms through apps and web interfaces, often without realising they are outside domestic regulatory protection.
• Domestic exchanges are experimenting with product structures that can sit within existing rules, while competing with unregulated offerings.

His message to policymakers is clear: treat crypto derivatives as a distinct regulatory problem, not just as an extension of spot trading or a generic “crypto” issue.

What Retail Traders Should Take Away

For individual traders, Kamath’s post reads less like a theoretical policy note and more like a practical survival guide. Key takeaways include:

• Understand that crypto derivatives are not investments in the traditional sense; they are highly speculative leveraged bets.
• Before opening an account, ask: who is the counterparty to my trades? Is the platform acting as the “house”?
• Assume that high leverage dramatically raises the odds of going bust, especially in a volatile asset class.
• Never trade with money you cannot afford to lose, and avoid viewing F&O as a shortcut to wealth creation.

The broader theme is simple: if you cannot fully explain how the product works, how it is regulated, and what happens if the platform disappears tomorrow, you are likely taking on risks you do not see.

Shunyatax Global Insight: Compliance, Risk Governance and Digital Assets

At Shunyatax Global, we see Kamath’s intervention as a timely reminder that innovation in financial products must be matched by risk governance and compliance discipline. Crypto and digital assets are here to stay, but the way they are packaged — especially in leveraged derivative form — can turn them from opportunity into systemic hazard.

For:

• Investors and traders – this is the moment to tighten your personal risk rules, diversify wisely and avoid over-leverage.
• Platforms and fintechs – robust disclosures, conflict-of-interest management and strong compliance frameworks will be critical to long-term credibility.
• Institutions and corporates considering digital-asset exposure – independent risk assessments and regulatory mapping are non-negotiable.

To explore how Shunyatax Global can help you design safer trading policies, assess digital-asset risks or strengthen regulatory compliance, visit Shunyatax Global Services. Our advisory team blends markets experience, tax insight and risk governance expertise to help you navigate the fast-evolving crypto and derivatives landscape.