Funding in global and Indian crypto ventures hit a record high in 2021 despite uncertainties on legal and policy fronts. Blockchain platform Polygon recently raised $450 million. What has caused the spurt in investments in the last two years? What is the strategy behind private equity and venture capital investors’ bets in this emerging space despite the uncertainty around crypto regulation in India?
Aseem Gujar & Partha Sinha find out…
Crypto companies spent millions of dollars on advertisements for the Super Bowl for the first time last Sunday, attracting over 100 million viewers. One of the ads which has gone viral features comedian Larry David. The creator of the hit sitcom ‘Curb Your Enthusiasm’ portrays skeptical figures during great moments in history. After scoffing at the invention of the light bulb and man landing on the moon, David suggests crypto will never amount to anything. But the advertiser, FTX Trading, an exchange, is persuasive: “Don’t be like Larry….Don’t miss out on crypto.”
Whether it’s FOMO or sensing a great potential, institutional and angel investors have ramped up funding for Indian crypto and blockchain startups despite policy uncertainties and legal ambiguity. Cryptocurrency and blockchain startups in the country raised a record $524 million in 2021 against just $5.5 million in 2019. Funding in this year has gotten off to a good start largely due to one company — Polygon — which contributed $450 million of the total $459 million raised this year till mid-February.
Customer Growth
Individuals betting on virtual assets like Bitcoin and Ether, and institutional and angel investors opening 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 trade and those specialising in its underlying blockchain technology have surged in the last two years due to a spurt in customer growth.
“The crypto space in India has seen customers grow from 3 million to 20 million in the last two years,” said Darshan Bathija, CEO and co-founder of crypto investment platform Vauld, which has raised nearly $28 million since 2020, according to data shared with TOI by industry tracker Tracxn.
The Supreme Court’s March 2020 ruling, which set aside an RBI circular that banned the facilitation of crypto trade by banks, was a turning point for crypto startups. “Companies that inducted more crypto enthusiasts by simplifying the product and providing investing information garnered VC interest,” said Ashish Singhal, co-chair of Blockchain and Crypto Assets Council (BACC), and founder & CEO of crypto exchange CoinSwitch, which is among the top-funded startups in this space in India (see graphic).
About 83% of the $524-million funding in 2021 went to startups directly involved in crypto, mostly exchanges like CoinDCX, CoinSwitch, and Vauld. Polygon, which raised $450 million this month, was set up to make transactions efficient on the Ethereum blockchain, which is home to the second-biggest cryptocurrency Ether, and most non-fungible tokens (NFTs).
Investment funds say 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 driven mass-awareness, and asset inflation amid Covid has led to very high returns. Also, a new Internet (Web3) and a new financial system (DeFi, or decentralised finance) are taking shape,” said Nitin Sharma, partner and global blockchain lead at Antler, which was among the lead investors in crypto platform Flint’s $5.1-million funding round in January.
Regulatory overhang
According to Sharma, who started investing in this space in 2017, regulatory clarity is a multi-year process. “We can take a very long-term view with regards to building infrastructure and tooling while being compliant,” he said.
Legal experts, who are involved in due diligence before such investment deals, said that India’s technological talent is another key factor for the growing funding despite regulatory overhang.
“VC and PE investors have traditionally been drawn towards sectors that are technologically disruptive, capable of growth, and looking to address a gap in the market. This sector is one that relies on technology, which attracts high-quality talent, and historically investment has followed talent,” said Manav Nagaraj, partner (general corporate) at law firm Shardul Amarchand Mangaldas.
“A crypto startup can engage in activities that are at the back-end and such companies can act as a technology provider to global companies even if there is a restriction on end-product usage in India and not all crypto startups develop a product,” Nagaraj said.
Manhar Garegrat, BACC member, and executive director (policy), at CoinDCX, also said that large-scale investments are well-calculated risks. “A few countries might take an adverse view on the space, but markets will continue to thrive in other countries,” he said.
How is capital spent
While there is no data available on how the capital raised by crypto startups is used, Vauld’s Bathija said that most of it goes into compliance, technology development, and marketing.
Industry watchers expect the funding momentum to continue this year. EY global markets and India leader, forensic & integrity services, said, “With several recognised names investing in crypto in India, funding is projected to increase. However, the introduction of a tax on transactions and anticipation of further regularisation can potentially impact the pace of growth of the industry. While the number of startups will continue to rise, the number of users may see a decline.”
The sector has seen a record year in funding globally too. Over $34 billion was raised by crypto companies worldwide in 2021 — higher than the amount from all prior years combined — according to a report released by PwC this month. More than half of that amount was raised in the US. Spends by crypto companies on lobbying in 2021 more than doubled to $5 million in the US compared to the previous year.
Lumiere Law Partners managing partner Probal Bhaduri said, “India, with its focus on IT, will play a big role in contributing to the global crypto ecosystem. PE-VC investors are making sure that they come in early and identify opportunities.”
Aseem Gujar & Partha Sinha find out…
Crypto companies spent millions of dollars on advertisements for the Super Bowl for the first time last Sunday, attracting over 100 million viewers. One of the ads which has gone viral features comedian Larry David. The creator of the hit sitcom ‘Curb Your Enthusiasm’ portrays skeptical figures during great moments in history. After scoffing at the invention of the light bulb and man landing on the moon, David suggests crypto will never amount to anything. But the advertiser, FTX Trading, an exchange, is persuasive: “Don’t be like Larry….Don’t miss out on crypto.”
Whether it’s FOMO or sensing a great potential, institutional and angel investors have ramped up funding for Indian crypto and blockchain startups despite policy uncertainties and legal ambiguity. Cryptocurrency and blockchain startups in the country raised a record $524 million in 2021 against just $5.5 million in 2019. Funding in this year has gotten off to a good start largely due to one company — Polygon — which contributed $450 million of the total $459 million raised this year till mid-February.
Customer Growth
Individuals betting on virtual assets like Bitcoin and Ether, and institutional and angel investors opening 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 trade and those specialising in its underlying blockchain technology have surged in the last two years due to a spurt in customer growth.
“The crypto space in India has seen customers grow from 3 million to 20 million in the last two years,” said Darshan Bathija, CEO and co-founder of crypto investment platform Vauld, which has raised nearly $28 million since 2020, according to data shared with TOI by industry tracker Tracxn.
The Supreme Court’s March 2020 ruling, which set aside an RBI circular that banned the facilitation of crypto trade by banks, was a turning point for crypto startups. “Companies that inducted more crypto enthusiasts by simplifying the product and providing investing information garnered VC interest,” said Ashish Singhal, co-chair of Blockchain and Crypto Assets Council (BACC), and founder & CEO of crypto exchange CoinSwitch, which is among the top-funded startups in this space in India (see graphic).
About 83% of the $524-million funding in 2021 went to startups directly involved in crypto, mostly exchanges like CoinDCX, CoinSwitch, and Vauld. Polygon, which raised $450 million this month, was set up to make transactions efficient on the Ethereum blockchain, which is home to the second-biggest cryptocurrency Ether, and most non-fungible tokens (NFTs).
Investment funds say 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 driven mass-awareness, and asset inflation amid Covid has led to very high returns. Also, a new Internet (Web3) and a new financial system (DeFi, or decentralised finance) are taking shape,” said Nitin Sharma, partner and global blockchain lead at Antler, which was among the lead investors in crypto platform Flint’s $5.1-million funding round in January.
Regulatory overhang
According to Sharma, who started investing in this space in 2017, regulatory clarity is a multi-year process. “We can take a very long-term view with regards to building infrastructure and tooling while being compliant,” he said.
Legal experts, who are involved in due diligence before such investment deals, said that India’s technological talent is another key factor for the growing funding despite regulatory overhang.
“VC and PE investors have traditionally been drawn towards sectors that are technologically disruptive, capable of growth, and looking to address a gap in the market. This sector is one that relies on technology, which attracts high-quality talent, and historically investment has followed talent,” said Manav Nagaraj, partner (general corporate) at law firm Shardul Amarchand Mangaldas.
“A crypto startup can engage in activities that are at the back-end and such companies can act as a technology provider to global companies even if there is a restriction on end-product usage in India and not all crypto startups develop a product,” Nagaraj said.
Manhar Garegrat, BACC member, and executive director (policy), at CoinDCX, also said that large-scale investments are well-calculated risks. “A few countries might take an adverse view on the space, but markets will continue to thrive in other countries,” he said.
How is capital spent
While there is no data available on how the capital raised by crypto startups is used, Vauld’s Bathija said that most of it goes into compliance, technology development, and marketing.
Industry watchers expect the funding momentum to continue this year. EY global markets and India leader, forensic & integrity services, said, “With several recognised names investing in crypto in India, funding is projected to increase. However, the introduction of a tax on transactions and anticipation of further regularisation can potentially impact the pace of growth of the industry. While the number of startups will continue to rise, the number of users may see a decline.”
The sector has seen a record year in funding globally too. Over $34 billion was raised by crypto companies worldwide in 2021 — higher than the amount from all prior years combined — according to a report released by PwC this month. More than half of that amount was raised in the US. Spends by crypto companies on lobbying in 2021 more than doubled to $5 million in the US compared to the previous year.
Lumiere Law Partners managing partner Probal Bhaduri said, “India, with its focus on IT, will play a big role in contributing to the global crypto ecosystem. PE-VC investors are making sure that they come in early and identify opportunities.”
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