According to the co-founder of the country’s most famous crypto startup, India’s hesitation about whether or not to embrace digital assets is driving thousands of developers, investors and entrepreneurs to places with friendlier regulations.
“The brain drain is absolutely crazy,” Sandeep Nailwal, whose Polygon operates the largest so-called Layer 2 protocol for the Ethereum blockchain system, said in an interview from Dubai.
India, with an estimated 15 million active crypto users, has been stuck in regulations since the Supreme Court overturned a central bank ban on digital tokens in 2020. The government unveiled a tax on crypto transactions this year without formally declaring that it will not ban the trade, a move that has become symbolic of the confusion.
Finance Minister Nirmala Sitharaman said on Tuesday that the government has yet to make a final decision on whether or not to ban or regulate virtual coins. At the same time, she recognized the industry’s potential as a source of tax revenue: “Many Indians have seen a future in it, so I see an opportunity for revenue in it,” she said. The government levies a 30% tax on digital currency transactions.
Nailwal, co-founder of Polygon in 2017, moved to Dubai two years ago. The emirate aims to be a crypto hub for the Middle East — just as it is for traditional financial services — and passed a law on Wednesday regulating digital assets.
Polygon’s protocol of the same name is used by developers to make Ethereum transactions cheaper and faster. It has about 7,000 decentralized apps (or dapps), more than 130 million unique users, and processes more than 3 million daily transactions. In February, Polygon raised $450 million by selling its Matic token to investors led by Sequoia Capital India.
“I want to live in India and promote the Web3 ecosystem,” said the 34-year-old. “But overall, the way the regulatory uncertainty is there and how big Polygon has become doesn’t make sense for us or any team to expose their protocols to localized risks.”
On the face of it, India has the potential to be a crypto powerhouse. The population of 1.4 billion people attracts the youth, with a growing, well-educated middle class. That, coupled with a less developed traditional financial system, has led to the world’s second-highest crypto adoption rate after Vietnam, according to blockchain research firm Chainalysis. Total crypto transactions jumped 641% between July 2020 and June 2021, Chainalysis said in an October report.
China, the only country with a larger population, declared all cryptocurrency transactions illegal last year.
Governments around the world have long grappled with the need to tame the worst frenzy of an industry plagued by speculation, fraud and hacking incidents, while harnessing its explosive growth and innovation potential. Countries from Singapore to the US are now moving towards a more structured approach to regulation of the sector.
Investors and entrepreneurs around the world have pushed for greater clarity. Bitcoin rose a whopping 11% on Thursday as news came out of a looming executive order from US President Joe Biden to coordinate the government’s approach to crypto.
“Countries will keep losing new talents until they find out,” Nailwal said. “Crypto is highly disruptive in the sense that it can disrupt not only the concept of money, but the very concept of government itself.”
Even as Indians embrace digital assets and the government warms to the potential for tax revenue, the industry still faces determined opposition from the central bank. And while it’s not uncommon for central banks to be skeptical of crypto, criticism from the Reserve Bank of India has been particularly withered.
Governor Shaktikanta Das compared the asset class unfavorably last month to the 17th-century bubble in the Dutch tulip market; a few days later, his deputy said that cryptocurrencies are akin to Ponzi schemes, threaten financial stability and should be banned.
Edul Patel, the co-founder of Mudrex, an automated digital asset trading platform backed by Y Combinator, chose to set up his business in the US in 2019 after the central bank shut down crypto-related businesses from the Indian payment network. The central bank’s move was later overturned by the Supreme Court.
At the moment, many Indian crypto companies, developers and founders are trying to relocate to places like Dubai, Patel said in an interview. One selling point for Dubai is the “sandbox approach,” something India lacks for crypto, he said. Governments often use so-called sandbox setups as a testing ground for promising but unproven financial technologies.
Patel also mentioned Dubai’s proximity to India and its open, transparent and friendly tax system for creators.
“I’ve often heard the joke that Dubai is the best city in India,” said Nitin Sharma, the Bengaluru-based founder of venture capital firm Antler, which plans to invest in Indian startups focusing on blockchain and web3 applications. “And once you have known founders or startups move, it starts to attract many others, creating a community.”