"Just started the Startup Registration in Singapore. Disheartened that we could not do it in India due to the uncertainty around the entire space," Bengaluru-based entrepreneur Puru Bansal tweeted on Wednesday. A dismayed Bansal added three hashtags at the end of the tweet—#BrainDrain, #Web3 and #Blockchain—which effectively tell the story of India’s emerging space through the eyes of a young entrepreneur.
With a flourishing start-up ecosystem and new-age entrepreneurs who are eager to explore uncharted territories, India is being touted as a strong contender to lead the blockchain and crypto pack. However, Bansal points out how the uncertainty over India’s position on the blockchain and crypto space has cast a shadow over its future in the country, forcing entrepreneurs to consider other countries to set up shop.
While the Indian government has maintained that it does not recognise crypto as a legal currency, in her 2022-23 Union Budget speech, Finance Minister Nirmala Sitharaman announced a 30 per cent tax on income generated from the transfer of any digital asset. In February this year, RBI Governor Shaktikanta Das had said that crypto is a big threat to the country’s financial and macroeconomic stability and warned investors that the digital currency "does not have any underlying asset, not even a tulip"—referring to a 17th century Dutch tulip price bubble.
In terms of blockchain, the National Strategy on Blockchain was brought out by the Ministry of Electronics and Information Technology in December last year to promote and build infrastructure around blockchain but there is no specific regulatory policy in place.
A senior government official says that the government is studying how these models have been adapted internationally and how foolproof the systems are. There is still no clarity on how to classify cryptocurrency and who the regulator would be. "This is a virgin territory for policymakers. What people refuse to understand is that the government has to study it extensively to understand the threats and strengths this ecosystem brings with it. Taxing is one step in the right direction, moving towards more transparency,” the official says.
Talking about proceeding with caution, the official says that the country cannot open up its financial system to vulnerabilities—perceived or genuine—just to be on the right side of what is trending.
“We are still in the process of forming regulations…India has a lot of talent in the start-up space as well as other developing and nascent technology areas. And, it will be there in the future, too. But policymaking is not a day's work. That is not how it works."
Bansal’s tweet, however, tells a tale of despondency that is creeping into the minds of young entrepreneurs when they think about India as a destination for their ventures. This has compelled many, like Bansal, to explore opportunities in places like Dubai, Mauritius, Singapore, among others, now that even Web 3.0 is in the picture.
Missing The Web 3.0, Crypto Bus
The Web 3.0 that Bansal alluded to in his tweet is the third installment of the internet which is based on blockchain technology and is said to be the future of the internet. Currently, we are in Web 2.0 which has seen several big tech companies, ecommerce, and social media platforms flourish. That said, only a few companies in the US, China and other big countries have ended up monopolising everything we see on the internet by making use of the swathes of data that they have collected along the way—raising concerns about privacy and manipulation.
Web 3.0, a decentralised platform still at its nascent stage, is being seen as a solution to that, as it promises equal opportunity to all the players, even smaller ones like start-ups, across the globe. Several companies, big and small, including Meta (previously known as Facebook), have already jumped in.
A. Damodaran, professor of economics and social sciences at the Indian Institute of Management, Bangalore, says that India has an impressive pool of talent to build the digital technological infrastructure required for Web 3.0 to take off. The key issue, however, is how the country mobilises its dormant strengths and marks its presence in Web 3.0. “India is yet to crystallise its regulatory framework on distributed network technologies like blockchains, much less on cryptocurrencies,” Damodaran adds.
Delving into the complexity of Web 3.0, Damodaran says that it can severely test the notion that public order and morality falls within the eminent domain of the state. “Web 3.0 can increase agency costs. Unheralded artists and designers will get the opportunity to showcase their wares and monetise them in cryptocurrencies…More than fiscal incentives, we need to anticipate the implications of Web 3.0 on intellectual property rights, privacy and on the ability of the government to enforce norms of social conduct,” he says.
Young entrepreneurs, bubbling with ideas and energy to execute, are tired of waiting. India's loss is turning out to be other countries' gain as lucrative offers and regulatory clarity seem to be draining the talent from the country. Eventually, India will end up getting the short end of the stick.
Ankit Arora, member of the Blockchain and Crypto Assets Council which is part of the Internet and Mobile Association of India , and co-founder of Metasky, says, "People are already looking outside. For an entrepreneur, it does not matter much—(where he is) registering a company. However, the people of the country will be left behind because we will not be able to offer our services here," adding that India will start to lag behind in yet another tech revolution.
"The government has to be extra cautious. Unless we start taking a leading role in regulation, we will wait for 10 or 20 other countries to do something and then start,” he adds.
Former finance secretary Subhash Garg, however, is of a different opinion. He says that some traders and miners will move out of India to Dubai or elsewhere on account of the country’s “harsh” taxation regime. However, the talented players, researchers and Web 3.0 developers are already out of India because of the poor R&D ecosystem here and the opportunity to do original work abroad, not because the Indian Web 3.0 ecosystem is not getting government policy support.
“Most of the people who claim to be Web 3.0 developers in India are crypto investors, traders or exchange owners. While I do feel that they have been wronged by the government’s decision to put a 1 per cent TDS on transactions and not allow legitimate loss set-offs, let us be clear—those exchanges are not developing any Web 3.0-based original technology or applications,“ says a skeptical Garg.
The Brain Drain Dilemma
Sandeep Nailwal, co-founder, Polygon, which operates the biggest Layer-2 protocol for the Ethereum blockchain system, in a recent interview with Bloomberg, warned of mass exodus of talent from India. “I want to live in India and promote the Web 3.0 ecosystem…But, overall, the way the regulatory uncertainty is there and how big Polygon has become, it does not make sense for us or, for any team, to expose their protocols to local risks,” said the 34-year-old, adding that the brain drain is “absolutely crazy”.
Like many, Nailwal also shifted to Dubai, a fast-growing hub for crypto and digital assets. The UAE adopted its first law to regulate crypto assets in March this year, joining Singapore, the US, the UK, and El Salvador in the list of countries that have announced laws related to cryptocurrencies.
Nitin Sharma, the co-founder and partner of venture capital firm Antler, says that while the Budget offered some positive signals in terms of the government showing the need for a long-term framework, starting with taxation, the reality is still “tricky" for many.
“Since 2017, many of us in the venture capital and start-up community have been making the case that while the government’s concerns around the risks posed by crypto assets are valid, there are ways to create regulatory mitigants, perhaps via a sandbox approach that allows for certain exceptions for India-based developers creating infrastructure for Web 3.0," he says, adding that the vast majority of Web 3.0 founders continue to domicile their ventures in Dubai or Singapore. “The brain drain has not stopped,” says Sharma.
Arjun Reddy, CTO, Guardian Link, an NFT ecosystem technology framework, says that India has a big chance of "losing this revolution". "Web 2.0 grew gradually but Web 3.0 is growing rapidly. So, we will have to be quick. I do not want India to not have an Infosys of Web 3.0. I want the Google of Web 3.0 to come from India," he says, pointing out that the only reason the transition to Web 3.0 has not happened in India so far is because of the government's stance.
In terms of crypto, he says that the government saying taxation does not mean it (crypto) is legal was a blow to the industry. “There is ambiguity because of the government's dilemma and it would be a sin to let this much talent go away," Reddy says, adding that if the government made crypto legal, India will dominate the global market.
Echoing Reddy’s sentiment, Aritra Sarkhel, director of public policy at crypto exchange WazirX, says that the industry needs more clarity on the larger bill (Finance Bill, 2022) and a few changes on the taxation. Sarkhel is of the opinion that further discussions on research and deliberations are required and that the Finance Bill should also include other aspects of Web 3.0 like decentralised finance and non-fungible tokens. That way, companies dealing with those aspects will have to be included in the discussion.
To make his argument clear, Sarkhel uses the example of the drone industry and how a lot of companies are looking towards India with new start-ups also coming up in the space after the government completely overturned the rules over the last one year.
"Dubai now has a regulatory authority to deal with the Web 3.0 industry. This means there is clarity that every business person would need. If clarity is missing, companies start looking at other havens," he says, adding that the average age of entrepreneurs in the crypto industry has already gone down and they would look to explore countries that have regulations in place. "Our appeal is to have better clarity and better tax layers for crypto and blockchain companies in India so that they register here, pay taxes here and the revenue goes back to the government" he says.
(With Inputs from Kamalika Ghosh and Neeraj Thakur)