India’s Crypto Startups Come of Age, Despite Uncertainty

The Indian crypto ecosystem has seen rising investor interest. India recently ranked second on Chainalysis’s Global Crypto Adoption Index for 2021. Indian blockchain startups have also started acquiring capital flows from global markets for capital generation. Startups that have successfully fundraised recently include Vauld ($25 million led by Valar Ventures), GoSats ($700,000 from Alphabit Fund, Fulgur Ventures, Stacks Accelerator and SBX Capital), Biconomy ($9 million in private funding round led by DACM and Mechanism Capital including other investors), Mudrex ($2.5 million in a seed funding round led by Nexus Partners along with Village Global and prominent angels such as Kunal Shah (CRED), Anand C. (Five9 Inc.) and Anjali Bansal (Avaana Capital), and many others.

Tanvi Ratna, a CoinDesk columnist, is the founder and CEO of Policy 4.0, a research and advisory body working on new policy approaches for digital assets.

The funding garnered by crypto startups in India has crossed the $100 million mark, with India now seeing its first crypto unicorn in CoinDCX and first major protocol play in Polygon. A big reason behind this growth and investor interest is the rise of decentralized finance (DeFi), which has finally given India’s talented developers a product-market fit for technical and core crypto products.

The global adoption of decentralized finance has been running at its peak with the current total valued locked of around $90 billion gathering developers’ interest globally. The Indian ecosystem is now building products such as privacy stacks, protocols, decentralized exchanges (DEX), decentralized autonomous organizations (DAO) and so forth. DeFi gave Polygon its growth boost as the layer 2 protocol solved challenges faced by Ethereum including heavy fees, low transactions per second and poor user experience.

By facilitating faster and cheaper transactions, the project saw rapid adoption and interest from global investors. This brought attention to Indian projects that were building similar core crypto solutions. In addition, the team behind Polygon has now started providing funding and network support to other blockchain startups in India.

“Arcana Network had a significant helping hand from the team at Polygon guiding them for creation of credibility to the product and developing a network within the ecosystem”, said Aravindh Kumar, co-founder of Arcana Network, a project offering privacy stacks to developers that recently raised $375,000 from Coinbase’s Balaji Srinivasan, Sandeep Naiwal and JD Kanani (founders of Polygon), Kendrick Nguyen (founder and CEO of Republic), and other top angels.

This newfound focus on core crypto development is in stark contrast to the dire situation most startups found themselves in before 2020. Running a crypto exchange was the only feasible business model, and core technology players struggled to attract investment. With the enforcement of the Reserve Bank of India’s (RBI) 2018 circular that banned Indian banks from dealing with virtual currency, the fundraising ecosystem for existing startups became more difficult.

Indian venture firms and investors always had the fear of their bank account getting seized by regulators. The initial coin offering bubble in 2018 also created a widespread notion of crypto projects being “scams,” an idea also widely shared by regulators in the country. “Most of the banks turned us down thinking of our idea as one of the cryptos dealing scams,” said Mohammed Roshan, co-founder of GoSats, a crypto stacking app.

“Most of us startups began to consider the international market in which the system is legal with high-value generation,” said Darshan Bathija, co-founder and CEO of Vauld, a crypto lending and borrowing platform.

The industry faced restrictions for dealing with banks and financial institutions until March 2020 when the Supreme Court of India lifted the curb imposed by the RBI. The scope of opportunity and growth for startups opened up again along with the commencement of the bull market.

“The fundraising flow from investors to blockchain startups got escalated after bitcoin broke its previous all-time high of $20,000 in December 2020. It was the manifestation of the upcoming bull cycle in the market which global investors didn’t want to miss out,” said Siddhartha Jain, co-founder of DefiDollar, a meta stablecoin index. The surge in the prices of cryptocurrencies escalated the adoption pace in India. Meanwhile, the capital flow by foreign funds also increased which helped startups in building projects.

However, despite the enthusiasm of foreign investors, the participation of Indian venture capitalists and investment funds remains comparatively low. The primary reason being regulatory uncertainties. “The fundraising ecosystem within India has been limited by venture capital firms as they are taking cautious steps in the current scenario of regulatory uncertainty,” said Aniket Jindal, co-founder of Biconomy.

“One can say that the investment approach of global investors is from the long-term perspective with more understanding of the domain. Whereas for Indian investment funds, it might just be restrictive to projected returns and regulatory compliance”, said Darshan Bathija. This might indicate that along with clarity in regulations, Indian investment firms need to have a full appraisal and understanding of a project’s fundamentals.

To counter the bottlenecks of fundraising due to regulatory uncertainty, conventionally settled projects like Polygon are now building their own funds and support systems for emerging projects. At the same time, the whole ecosystem is waiting for India’s crypto bill which will help in understanding the intention of policymakers and government authorities. For India to become a leading center for the blockchain industry, the crypto industry hopes to see progressive regulations from the government soon.