‘India has the potential to be a crypto powerhouse," says Polygon co-founder Sandeep Nailwal

‘India has the potential to be a crypto powerhouse," says Polygon co-founder Sandeep Nailwal

 

India’s dithering on whether to embrace digital assets is causing thousands of developers, investors, and entrepreneurs to leave for places with more friendly regulation, according to the co-founder of the country’s most famous crypto startup.

"The brain drain is absolutely crazy," said Sandeep Nailwal, whose Polygon operates the biggest so-called Layer 2 protocol for the Ethereum blockchain system.

The country, with an estimated 15 million active crypto users, has been stuck in regulatory limbo since the Supreme Court in 2020 overturned a central bank ban on digital tokens. The government this year unveiled a tax on crypto transactions without formally declaring that it wouldn’t ban trading, a move that became emblematic of the confusion.

Finance Minister Nirmala Sitharaman said the government has yet to make a final call on whether to ban virtual coins or regulate them. At the same time, she acknowledged the industry’s potential as a source of tax income:

"Many Indians have seen a future in it, therefore I see a possibility for revenue in it," she said. The government imposes a 30% tax on digital coin transactions.

Nailwal, who co-founded Polygon in 2017, relocated to Dubai two years ago. The emirate is aspiring to be a crypto hub for the Middle East, and has moved ahead in regulating all digital assets.

Polygon’s eponymous protocol is used by developers to make Ethereum transactions cheaper and faster. It has some 7,000 decentralized apps (popularly known as Dapps), more than 130 million unique users, and handles over 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," the 34-year-old said. "But overall, the way the regulatory uncertainty is there and how big Polygon has become, it doesn’t make sense for us or for any team to expose their protocols to local risks."

On the face of it, India has the potential to be a crypto powerhouse. The population of 1.4 billion people skews young, with a growing, well-educated middle class. That, combined with a less-developed traditional financial system, has led to the world’s second-highest crypto adoption rate, behind Vietnam, according to blockchain research firm Chainalysis. Overall crypto transactions have jumped 641% between July 2020 and June 2021, as per the October report of Chainalysis.

Governments around the world have long grappled with the need to tame the worst excesses of an industry beset by speculation, fraud, and hacking incidents, while at the same time harnessing its explosive growth and potential for innovation. Countries like Singapore and the U.S. are now moving towards a more structured approach to regulating the sector.

Investors and entrepreneurs around the world have clamored for more clarity. The cryptocurrency market surged after U.S. President Joe Biden signed an executive order on March 9, in a first-of-its-kind executive order toward regulating digital currencies.

"Countries will keep losing new talent capabilities until the time they figure it out," Nailwal said.

"Crypto is very disruptive in the sense that it has the potential not only to disrupt the concept of money but also the 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 express skepticism toward crypto, the Reserve Bank of India’s criticism has been particularly withering.

Last month, Governor Shaktikanta Das compared the asset class unfavorably to the 17th-century Dutch tulip market bubble; a few days later, his deputy said cryptocurrencies are akin to Ponzi schemes, that 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 company in the U.S. in 2019 after the central bank cut off crypto-related businesses from India’s payment network. The central bank’s move was later reversed by the Supreme Court.

Right now, many Indian crypto companies, developers, and founders are trying to move to places like Dubai. Patel also cited Dubai’s proximity to India and an open, transparent, and friendly taxation regime for creators.

One selling point for Dubai is its "sandbox approach," something India lacks for crypto, Patel said in an interview. Governments often use so-called "sandbox" setups as a testing ground for promising but unproven financial technologies.

In a significant move the first virtual assets law has been adopted in Dubai, and the Dubai Virtual Assets Regulatory Authority (VARA) has been founded, according to Sheikh Mohammed bin Rashid Al Maktoum's official Twitter account. This has further enhanced Dubai’s aspirations to emerge as the crypto hub of the Middle East.