SynopsisRegulatory uncertainty is a big debilitating factor for any industry, and all the more for a nascent one. Apart from managing capital, which can be scarce due to limited fundraising options, crypto entrepreneurs spent a large part of the day motivating their employees.
All ambitious entrepreneurs aspire to push their companies into the exalted territory of unicorns — startups valued at over $1 billion. Many startups have perished trying to reach this high echelon in entrepreneurship. Founders who scale this peak earn bragging rights for life.
But Polygon has been quiet, though the Bengaluru-based startup became a unicorn within two years and now commands a fully diluted market capitalisation of $2 billion. The founders — Sandeep Nailwal, Jaynti Kanani and Anurag Arjun — do not want to tom-tom the achievement just yet. And rightly so.
For one, Polygon is a platform that allows users to build applications around ethereum, a popular cryptocurrency. Secondly, everything around cryptocurrency falls in a regulatory twilight zone in India; a complete ban of all cryptorelated activities is very likely. Thirdly, Polygon has registered offices in crypto-friendly geographies such as Singapore and the British Virgin Islands, just in case they have to close their India operations.
A ban on crypto activity would only hurt the country, say all stakeholders, insisting that regulation instead can help the economy in several ways. “A crypto ban would kill years of IT modernisation in India. It is IT modernisation that has helped the spread of financial services in our country,” says Sandeep Nailwal, COO of Polygon.
Cryptocurrencies are not just about a handful of exchanges that facilitate buying and selling of virtual currencies. There are several businesses that are coming up in India with cryptos as the focal point. According to Crebaco, a rating agency for digital currencies and businesses, the crypto ecosystem in India is valued at $10-13 billion, and it employs over 20,000 people. Indian crypto exchanges hold assets in excess of Rs 10,000 crore — the value of cryptocurrencies held and wallet balances. The top-5 exchanges have 70-80% market share.
But these entrepreneurs are unsure about the outcome of a cryptocurrency bill mooted by the government. Regulatory uncertainty has already pushed several blockchain startups out of India. But hundreds of entrepreneurs have stayed back, and are trying to build businesses around cryptocurrencies. Polygon is a poster boy for these people. “Blockchain is now like the internet of the 1990s. People used to think, internet was only for porn and gambling. Much like how the internet grew, blockchain technology and cryptos will become popular in India in the years to come,” says Nailwal.
While Polygon is trying to make the ethereum blockchain accessible to leading application developers, Cashaa’s Kumar Gaurav has embarked on creating a bridge between conventional and crypto banking. Cashaa, a proponent of decentralised finance (DeFi), has tied up with United, a Jaipur-based multistate cooperative society, to form a brick-and-mortar “crypto bank” called Unicas. The bank will allow customers to deal in cryptocurrencies seamlessly, earn 9-10% interest on their crypto deposits and also get cash loans. Its three branches are operational in Rajasthan, Gujarat and New Delhi. “We’ve already signed up around 5,000 customers, and a good number of them are between 45 and 60 years of age,” says Kumar Gaurav, founder-CEO of Cashaa and chairman of Unicas.
A ban would be the worst thing that can happen, he says. “It will push the activity underground. Instead, if there are positive regulations such as mandatory licensing and registration of companies, periodical disclosure and third-party audits, this industry will grow in India.”
The uncertainty over government action has stunted the prospects of several promising start-ups. Take the case of Amesten Capital, which runs a portfolio management service for cryptocurrency investors. Amesten does not accept fiat currency from investors to buy cryptos but manages cryptos already purchased by investors. The minimum investment threshold to avail Amesten’s portfolio services is one bitcoin (currently priced at Rs 36 lakh).
Sachin Jain, founding partner at Amesten Capital, says they have reasons to be optimistic about this business. “Our model portfolio has yielded over 90% in the past two years. We’re finding it very easy to get new investors now.” A ban isn’t the answer, he says, adding that a strong regulator, like SEBI for capital markets, will help this business grow.
Hostile laws prompting crypto entrepreneurs to move out of India is not new. The RBI’s April 2018 ban on providing banking services to crypto exchanges started an exodus. Startups like Instadapp, now among the world’s best DeFi pathway aggregators, set up shop in crypto-friendly countries such as Australia, the UK, Malaysia, the US and Singapore. ZebPay, one of India’s earliest and busiest crypto exchanges, shifted to Singapore. When the Supreme Court lifted the ban in 2020, ZebPay returned to India. Instadapp did not. “The RBI ban of 2018 hit us quite badly,” says Rahul Pagidipati, CEO of ZebPay. “We were the biggest exchange in India at that time. If that ban had not come about, we’d have grown much like America’s Coinbase. We may have even gone public.”
Regulatory uncertainty is a big debilitating factor for any industry, and all the more for a nascent one. Apart from managing capital, which can be scarce due to limited fundraising options, crypto entrepreneurs spent a large part of the day motivating their employees. “With the right policies,” says Pagidipati, “blockchain tech will grow in India as it has quality developers. A lot of skilled professionals are not entering this segment because of unclear laws. The real good ones are poached by overseas blockchain or crypto companies.”
Players like Polygon pick developers from engineering campuses across the country. “A lot of innovation around blockchain technology is coming from India. Some of our developers are exceptional. If we don’t give due credit to their work, they may just leave,” says Harsh Rajat, founder of EPNS, which develops communication middleware for blockchain and Web 3.0 companies.
The widening of ecosystem has also resulted in an uptick in ratings and research services in this segment. Players like Crebaco offer rating services to issuers of cryptocurrencies, crypto exchanges, investors and DeFi enablers. Such innovation should be encouraged with regulation. “The government’s questions around cryptocurrencies are valid, but there are enough safeguards in place to permit cryptocurrencies in India,” says Sidharth Sogani, founder and CEO, Crebaco. “India has had its share of crypto-related scams in the past. If the ecosystem is regulated, we’ll be able to prevent such incidents.”
Sogani expects the government to act in one of the three plausible ways: Let cryptocurrencies remain in the regulatory gray zone for some more time, send the bill to a parliamentary committee for further study or announce a ban.
The crypto community is unlikely to accept the third alternative without some resistance. “If there is a ban, we’ll challenge it in court,” says Jagdish Pandya, chairman, BlockOn Capital, a fund that invests in Indian blockchain startups. “An upcoming technology, which can aid economic growth and create employment opportunities, should not be banned.”
Pandya says an environment should be created to ensure India can compete with global entities. “India has always lagged in new tech adoption and innovation. In blockchain technology alone, we’re lagging behind other countries by a decade. But with our skilled developer pool and policy support, we’ll be able to catch up with other countries. If our companies are nurtured well, we’ll have several more unicorns and soonicorns — startups that have the potential to be unicorns,” he adds.
Institutional investors like BlockOn Capital and Woodstock Funds have started deploying funds in crypto startups. Industry watchers point out that more institutional capital will come.
Pranav Sharma, managing partner, Woodstock Funds, lists the reasons why the country can be a fertile ground for the crypto ecosystem. “India has unlimited potential; there’s a cost advantage, largest Englishspeaking developer base, highest mobile penetration and large consumer market, among others.” He says some startups with Indian roots have already proven their worth in the distributed ledger tech (DLT) space. “There is no country like India for building sustainable DLT startups and outsourcing.”
Not only institutional investors, but several thousand retail investors have also started allocating a small part of their savings for cryptocurrencies. Exchange owners say retail investors punch trades worth $80-120 million every day — up from $3-5 million in January last year.
There are well-informed investors like Nirali Solani, a family office head from Mumbai, who started investing in cryptos last year. “Bitcoin is probably the best hedge against inflation, just like gold. If one believes there’s even a 1% chance of wealth erosion due to external factors, they should invest 1% of their long-term portfolio in bitcoin,” says Solani, who is also a chartered financial analyst.
These investors are keen the government not ban cryptocurrencies. “You cannot ban a thing that is open source. Many countries are moving to adopting these now,” she says. Regulate it and tax incomes, they urge the government, but do not ban it. And if banning cryptos is a must, also ban lotteries, turf clubs, rummy and small-cap stocks, goes the street speak.