Mumbai: A few blockchain and crypto-focused funds are rethinking their investment strategy amid speculation that trading in virtual currencies would be banned.
They are planning for contingencies to ensure they do not face a situation like in 2018 when the Reserve Bank of India cut banking access for the crypto and blockchain community.
Though the broader crypto community feels a ban is unlikely, some funds are erring on the side of caution.
Early-stage venture fund Amesten Capital, which has invested in a handful of Indian projects in the decentralised finance (DeFi) and non-fungible token (NFT) space, paused investments in November following reports that the cryptocurrency bill will be introduced in the upcoming winter session of the parliament.
“We are still unclear on the playbook set by the government; if there are certain terms which may hurt innovations in the space the builders will choose to move out, and we will also have to,” Amesten Capital cofounder Sachin Jain said.
More than $500 million in risk capital has flowed into Indian startups in the crypto and blockchain space, compared to less than $40 million last year, ET reported in October. The bulk of it has come from international investors eager to cash in on India’s large customer base as they backed companies with significant traction.
A possible ban will tarnish perception about the community and could possibly hinder the inflow of risk capital into India, said Akshay Aggarwal, cofounder of Blocumen Studios and Blockchained India, as part of which he facilitates investment by marquee funds into Indian startups in the sector.
Aggarwal said it has helped startups set up an investment and hiring structure that is not dependent on India, so that they can continue building if things go awry.
“When we talk about the ecosystem, we're affected by how the West looks at us because this is a global space and activity from the West puts forward a lot of momentum in the sector,” he said. “If a ban or even a slight negative regulation comes into play, we need to think about how we are supposed to navigate around this to continue with the momentum that we've had for the most part of the year.”
A few venture capitalists who have seen multiple cycles of regulatory uncertainty, however, remain bullish about the prospects of India and are pinning their hopes on the government unveiling innovation-friendly regulations.
“I expect them to regulate for any nefarious activities which is undoubtedly needed but support this fast-growing asset class of the modern era as well as empower local talent base to push India to the forefront of the new digital world,” said Saurabh Sharma, general partner at Jump Capital, which was an early investor in crypto exchange and unicorn CoinDCX.
Seasoned entrepreneurs and investors in the space have built up funding structures and registered their entities in locations that are crypto-friendly.
Crypto and blockchain serve a global community, so the market is also not dependent on India. However, India has a burgeoning developer community that has increased in the last nine months on the back of a bull run in the crypto market.
Nasdaq-listed Coinbase Inc. has set up an office in India and has been hiring from the tech community aggressively. Solana and Polygon have also organised hackathons to give a boost to the local developer community.
“It (the negative news) most affects young people that are entering Web 3.0 now, especially those at the early stages of their careers. It will deter them from taking job offers and making a switch. This happens every time the government makes such claims—that’s what I worry about,” said a senior member of an investment team at a blockchain and crypto-focused fund, requesting anonymity.
The last three years have been confusing for founders and developers in the sector in India.
According to multiple people, the ecosystem has mostly moved base to nations that have a friendlier approach and view it as a “safer bet to protect their family” until there is a clear direction from the government.
The new crop of talent that has joined the ecosystem this year could follow suit.
For instance, a 19-year-old developer who is building in the DeFi project said that despite repeated cycles of regulatory uncertainty in India, the current scenario makes him fear for the future of his project and that he was planning for contingencies, including shifting base to another country.
This year so far has been historic for the crypto industry in terms of retail participation and capital inflow. It has birthed two crypto unicorns and also saw mainstream Indian VCs enter the fray. Sequoia Capital India has made investments in Coinshift, CoinswitchKuber, and Faze Technologies this year, while VCs like Kalaari Capital and Elevation Capital are also entering the space.
Vaas Bhaskar, principal at Elevation Capital, said that the fund was optimistic about the dialogues this path to regulations would open up, and that it would continue to invest the same amount of time, capital and resources in this space.