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Crypto effect: Lack of policy clarity casts shadow on blockchain startups

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There’s a thought that’s gathering steam among India’s entrepreneurial circles. Blockchain, the wonder technology they once saw as an answer to some of the biggest problems that the country face today, has become a victim of the Indian government’s regressive views on cryptocurrency. 

To be sure, while cryptocurrencies such as Bitcoin and Ethereum are only one of the use cases of Blockchain, they’re by far the biggest users of the technology.

If it wasn’t bad enough that the government and authorities have repeatedly made statements dissuading the use of cryptocurrencies (all while staying away from laying down any concrete regulations for their use), the ecosystem was in for a shock when Harish B V and Sathvik Vishwanath, founders of cryptocurrency exchange Unocoin, were arrested by a central crime branch team in Bengaluru last month. 

It sent a shiver down the spine not just of other cryptocurrency startups in India, but also the investors (though their numbers are just a few) that backed them. One investor in Unocoin who did not want to be named said that his trust in the system was shaken as he didn’t want any founder he motivated with either money or his guidance to go to jail for what is clearly a misunderstanding by the authorities. Other venture capital investors also share his views.

“After spending nearly a year studying blockchain, I still don’t understand all of it, but I can say with certainty that the only way a blockchain network works is if transactions happen over the same network,” said one VC investor who is looking at exclusively backing blockchain companies. “What the Indian government has done is essentially killed blockchain innovation here without even fully understanding what the technology is,” the person added requesting anonymity. 

Without backing of the venture capital investors, there’s little hope for blockchain startups to thrive in India. At least two VCs Business Standard spoke to said, they have now started looking at backing blockchain companies outside of India as they don’t lose out on the massive opportunity that the technology offers. However, they want to wait for more clarity from the Indian government to invest in blockchain companies here.

To be fair, several countries have taken a cautious approach to cryptocurrencies, but few have gone to the extent of dissuading their use like India has done. It’s misunderstood that India has banned cryptocurrencies, but the intent was implied when Finance Minister Arun Jaitley in his budgetary speech said that no cryptocurrency could be used as legal tender in India.

“What the government is essentially saying is, we allow the use of the internet, but we’re not allowing you to transact on the internet. Cryptocurrencies that we see today are more meant for transactions on the internet as opposed to credit/debit cards, net banking and other methods. There has to be some value associated with every blockchain action, otherwise it becomes like email spam,” said Sathvik Vishwanath, CEO and co-founder of Unocoin.

Vishwanath, despite his ordeal, is still positive that Unocoin will grow and says that the allegations levelled against the company are just hiccups that will hopefully be sorted out soon. His bone of contention is largely with the lack of clarity from the government, the RBI and other officials, who he says, are currently functioning in silos to regulate cryptocurrencies, rather than working with each other to come up with an effective policy or regulation.

The conversations around the future of blockchain and especially cryptocurrencies in India might look bleak at the moment, but others say this isn’t a roadblock. Workarounds to the Indian government’s dislike for cryptocurrencies do exist and for the moment, especially with a technology that is still evolving, it’s fine to use them, says Ravi Jagannathan, CEO of KrypC, a blockchain software company.

“We have to wait for the cryptocurrency at a large scale. Not just the acceptance by the Indian government, but by all players in the world which is the only way this ecosystem will work. But we have a lot of workarounds, especially by using UPI instead of cryptocoins,” added Jagannathan.

Moreover, he believes that one of the biggest drawbacks of blockchain is the variance in value of the cryptocurrencies. In today’s construct, this is the biggest hindrance to adoption of cryptocurrencies as payments for any work done on the blockchain. 

According to online media platform YourStory, there were around 127 blockchain and cryptocurreny startups in India as of April 2018. However, 90 per cent of those were less than 18 months old and had not yet raised any external funding. 

Interestingly, India is also said to be home to the second-largest base of blockchain developers, next only to the US, according to a recent report. However, most of them work with large global and Indian tech companies helping them building blockchain solutions for global clients. However, with the current outlook of the blockchain and cryptocurrency sector in India, experts say that not many would be keen to startup their own business. 

Be it to track every step of producing medicines to crack down on spurious drugs or to enable banks to transact seamlessly between each other, blockchain still needs to find stability.

What is blockchain?

Blockchain is essentially a digital ledger that is decentralised in nature to record transactions, making it a highly secure and transparent system. In order to tamper with a transaction that has been made on a blockchain network, one would potentially have to change every single block created by that transaction, making it a near impossible task. The decentralised nature also makes the system extremely efficient.

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