The Web3 space in India is teeming with young entrepreneurs below the age of 35, with disruptive ideas but are hamstrung by a ‘tricky’ taxation system, limited domain knowledge and security issues.
The new taxation regime, which faced a backlash from the crypto industry, remains a problem for Web3 entrepreneurs as well.
“If you need fees to run a smart contract, you procure ether from an exchange, transfer it to a meta mask wallet and then transfer it again to the contract. At every transfer, you are taxed,” Mohammed Roshan, chief executive officer and founder of GoSats, said.
Starting July 1, buyers of digital assets in India are required to deduct 1 per cent of the amount payable to sellers as tax. This is in addition to a flat 30 per cent income tax on earnings from cryptocurrencies that started on April 1.
Regulatory clarity needed
Most entrepreneurs in this space feel that regulatory clarity in this emerging industry is a big question mark in India and globally as well.
Anmol Chawla, Co-Founder of TaxCryp, believes that the current solutions are not equipped to solve their tax challenges.
“Clear guidelines, better formal reporting practices and VDA-specific tax solutions will be necessary to help these young founders navigate through these challenges while they focus on the vision of their company,” he said.
Raj Kapoor, Founder of India Blockchain Alliance, believes that some of the taxation-related proposals passed in the Union Budget 2022-23 have both crypto exchanges and investors worried and the opaque stance has left the community unsure and the future uncertain.
No country has ever had a TDS in crypto withdrawals, Roshan said, adding. “TDS is still okay but the 1 percent tax on transactions could essentially push India back in this innovation.”
Calling the taxation system of the country “extremely tricky”, he said the new laws, especially the TDS, are going to be extremely difficult to navigate.
Srijan Shetty, Founder, of Allround.club, however, sees the brighter side.
“Regulation and information asymmetry uncertainties are probably the most important challenges everyone is facing in the ecosystem. But both these challenges brew new ideas and provide you with a blank canvas of building structures which are not bound to the past,” he said.
Calling taxation a welcome change, he said it provides legality to space and builds trust in the audience.
“Taxation isn't as much of a problem as the uncertainty is, taxation is a good step towards providing regulation which can help us consolidate India as the frontier of Web3 innovation,” he said.
Raghuram Trikutam, Founder of Descrypt, said, “Taxation is a huge problem at this point, both at institutional and retail levels. But it's also good news as this means that regulators do tend to see merit in crypto investments and their positioning as an alternate asset class.”
Security issues
Taxation is not the only worry for Web3 players.
Kapoor of India Blockchain Alliance feels that key challenges faced by young entrepreneurs in this space will be around security.
“Since blockchain technology is trustless by default, Web 3.0 remains vulnerable to certain types of attacks: from hard fork and 51% attack to DDoS, DNS hijack and sniping bots. Regular scams, including targeted ads, may also work in the new environment. Also, malicious smart contracts may place malware as a smart contract code,” he said.
Limited knowledge
Further, he said that the third-party tools used to develop solutions may introduce weaknesses, too. Testing, debugging, and auditing require time and resources, which may also increase the development period.
Pearl Agarwal, Founder and Managing Director, Eximius Ventures, believes that since blockchain is a new space, it is difficult and expensive to hire people with good knowledge.
“Only a handful of people have started learning about the technological innovations in this space. Moreover, most of them do not have more than 3-4 years of experience making it difficult to get quality talent,” she said.
Eximius Ventures in its new report has said that millennial entrepreneurs are attracted to Web3 as it is cheaper and quicker to scale and involves less hardware and physical involvement.
There is also a significant capital infusion in the space to experiment and youngsters are attracted to the idea of Web3 disruption, which in a way has faster career advancement potential, according to the report.
However, Agarwal said, only limited know-how is available from seasoned founders and investors that can be passed down to new founders since the market is learning about engineering challenges and developments together.
The promise
So what’s fuelling the Web3 space in India?
Agarwal said, “Web 3.0 is a new and emerging space that has attracted a lot of young talent and investors in the last few years. This is primarily due to two factors – increasing opportunity to develop innovative ideas in the space and the capital that is available from both retail investors and institutional investors to support this growth.”
In addition, millennials and GenZ are digital native individuals, who see their digital identity as an extension of their physical one, she said.
“This makes them want to have more control over the data that they are generating and be able to benefit from it as well, which is only possible in the Web3 world.”
Raj Kapoor of India Blockchain Alliance, on the other hand, believes that Web3 represents a generational shift because of its emergence and is propelled by a millennial backlash to centralised control of data and identity.
“They believe that users should have control of their data and identity. This works well for Web3 apps, which never use a single sign-on mechanism (i.e., logging in using Facebook or Google IDs) because a user exists as a discreet entity in the community—one that is not tied to their offline identity. Now add to that the play-to-earn opportunities, involving crypto payments or a brand-related reward system that isn’t cold, hard cash but functions as a currency,” he said.
What millennial entrepreneurs think
Roshan of GoSats discovered Bitcoin in 2014 and has been passionate about exploring the field since then. While he notes facing challenges because of a few bad actors tarnishing the image of the industry, he was passionate to begin his Bitcoin reward startup firm.
Trikutam of Descrypt believes that Web3 as a paradigm is fast picking up.
“As millennials, what helps us is identify such opportunities better, thanks to the experiences we would have gathered over the years. Experience tends to teach you ‘how to build a business’ vis a vis ‘launch a project’; that perhaps is the reason for millennials getting into space. In general, it’s good news for Web3 as this only means greater adoption and maturity kicking into the ecosystem,” he said.
Shetty of Allround.club said the fact that how early we are and how much say we have in building the infrastructure for the next iteration of the internet excites him the most about Web3.
“I was a part of some Usenet forums back in the early 2000s, and some of those forums shaped the last 20 years of the internet, we're at the same crossroads now. Learning from the past deficiencies of Web2 and building a more equitable internet infrastructure for the next generation excites me about the future,” he said.
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