Regulatory policy

Why funding for crypto startups has surged despite politics and legal issues

Funding for global and Indian crypto businesses hit an all-time high in 2021 despite uncertainties on legal and political fronts. The Polygon blockchain platform recently raised $450 million. What has caused the surge in investment over the past two years? What is the strategy behind the bets of private equity and venture capitalists in this emerging space despite the uncertainty surrounding crypto regulation in India?
Aseem Gujar and Partha Sinha discover…
Crypto companies spent millions on Super Bowl ads for the first time last Sunday, attracting over 100 million viewers. One of the ads that went viral features comedian Larry David. The creator of the hit sitcom “Curb Your Enthusiasm” portrays skeptical characters during major moments in history. After poking fun at the invention of the light bulb and the landing of man on the moon, David suggests that crypto will never be for nothing. But the advertiser, FTX Trading, an exchange, is persuasive: “Don’t be like Larry…Don’t miss the crypto.”
From FOMO to detecting great potential, institutional and angel investors have increased funding for Indian crypto and blockchain startups despite political uncertainties and legal ambiguity. Cryptocurrency and blockchain startups in the country raised a record $524 million in 2021 from just $5.5 million in 2019. This year’s funding got off to a strong start thanks in large part to a company – Polygon – which has contributed $450 million of the total $459 million raised this year through mid-February.
Customer Growth
Individuals betting on virtual assets like Bitcoin and Ether, and institutional and angel investors turning on the funding tap for Indian crypto and blockchain startups have a common strategy – high risk, high reward. Private equity (PE) and venture capital (VC) investments in startups enabling crypto commerce and those specializing in its underlying blockchain technology have increased over the past two years due to a customer growth spurt.
“The crypto space in India has seen its customers grow from 3 million to 20 million over the past two years,” said Darshan Bathija, CEO and co-founder of crypto investment platform Vauld, which has raised nearly $28 million since 2020, according to the data. shared with TOI by the industrial tracker Tracxn.
The March 2020 Supreme Court decision, which overturned an RBI circular banning the facilitation of crypto trade by banks, was a turning point for crypto startups. “Companies that have inducted more crypto enthusiasts by simplifying the product and providing investment insights have garnered interest from venture capitalists,” said Blockchain and Crypto Assets Council (BACC) co-chair Ashish Singhal. and founder and CEO of crypto exchange CoinSwitch, which is among the best-funded startups in this space in India (see chart).
About 83% of the $524 million in funding in 2021 went to startups directly involved in crypto, primarily exchanges like CoinDCX, CoinSwitch, and Vauld. Polygon, which raised $450 million this month, was set up to make transactions efficient on the Ethereum blockchain, home to the second-largest cryptocurrency Ether, and most non-fungible tokens (NFTs) .
Investment funds claim that a combination of various factors in the crypto space make it an attractive risk-reward proposition for them. “Blockchain infrastructure has become more mature, NFTs have sparked mass awareness, and asset inflation amid Covid has led to very high returns. Additionally, a new internet (Web3) and a new financial system (DeFi, or decentralized finance) are taking shape,” said Nitin Sharma, Partner and Global Head of Blockchain at Antler, who was among the platform’s top investors. $5.1 million Flint crypto form. round of funding in January.
Regulation overhang
According to Sharma, who began investing in this space in 2017, regulatory clarity is a multi-year process. “We can take a very long-term view when it comes to building infrastructure and tools and still being compliant,” he said.
Legal experts, who are involved in due diligence ahead of such investment deals, said India’s tech talent is another key driver for growing funding despite regulatory overhang.
“Venture and private equity investors have traditionally been drawn to sectors that are technologically disruptive, capable of growth and looking to fill a gap in the market. This sector is driven by technology, which attracts high-quality talent, and historically investment has followed talent,” said Manav Nagaraj, Partner (General Contractor) at law firm Shardul Amarchand Mangaldas.
“A crypto startup can engage in activities that are behind the scenes and these companies can act as a technology provider for global companies even though there is a restriction on using the end product in India and that not all crypto startups develop a product,” Nagaraj says.
Manhar Garegrat, BACC Member and Executive Director (Policy), at CoinDCX, also said that large-scale investments are well-calculated risks. “A few countries might have a negative view of the space, but markets will continue to thrive in other countries,” he said.
How is the capital spent
Although there is no data available on how the capital raised by crypto startups is used, Bathija de Vauld said most of it is spent on compliance, technology development and marketing.
Industry watchers expect the funding momentum to continue this year. EY Global Markets and India’s leading forensic and integrity services, said: “With several recognized names investing in crypto in India, funding is expected to increase. However, the introduction of a transaction tax and the anticipation of further regularization can potentially impact the pace of industry growth. While the number of startups will continue to grow, the number of users may experience a decline.
The sector also had a record year for funding globally. More than $34 billion was raised by crypto companies globally in 2021 – more than the amount of all previous years combined – according to a report published by PwC this month. More than half of this amount was collected in the United States. Spending by crypto companies on lobbying in 2021 more than doubled to $5 million in the United States from the previous year.
Lumiere Law Partners Managing Partner Probal Bhaduri said, “India, with its focus on IT, will play an important role in contributing to the global crypto ecosystem. PE-VC investors make sure to step in early and identify opportunities. »