If there was one recurring theme that cut across multiple Web3 meetups held in Bengaluru, New Delhi and Mumbai in the last month, it was Dubai. A city that has almost become an emotion and a panacea for entrepreneurs building on the Web3 platform—the so-called next version of the Internet, which will be decentralised and run on blockchain—even as they grapple with an uncertain regulatory landscape and hefty taxes in India. Every second founder we met at these meetups has either moved to Dubai or is in transition.
This was also visible at the Web3 events held in Dubai in March, the biggest ones being Binance Week and ETHDubai, where Indians made up the majority of attendees, with pictures being flooded on Twitter and Web3 Whatsapp groups.
“75 percent of the attendees were Indians. The others included Russians and Europeans,” says Santhosh Panda, founder of Foundership, which provides coaching and capital to Web3 projects, and was one of the attendees at these events.
india’s web3 capital: dubai pic.twitter.com/WF6Xr1BV9A
— Aditi Chopra (@aditichoprax) March 27, 2022
These meetups are no different from the ones in India. They help you meet peers, form partnerships, and have more productive discussions around your product, say some of the attendees.
But, it's not just events. India’s Web3 startups are moving to Dubai for a number of reasons. Similar to how India’s Web 2.0 entrepreneurs registered companies such as Flipkart, Ola, InMobi, in Singapore for ‘ease of business’, India’s Web3.0 entrepreneurs are now registering businesses in Dubai, Singapore, British Virgin Islands and Estonia.
The scene started changing fast after November 2021 as high taxes and stringent rules around cryptocurrencies were being anticipated in the Crypto Bill. Since then, over a hundred Indian entrepreneurs have moved to Dubai and registered businesses, according to anecdotal data from industry executives. There is no concrete research yet that pinpoints the exact numbers, but they say it is no longer a question of ‘Are you moving?’, but ‘When?’
Fabulous catching up with the OG in Dubai @_jdkanani An early supporter and backer of our vision @vcParadigmShift from Day 1, and a true confidante! @DhruvWashishth pic.twitter.com/lNPsJqwJsr
— Surabhi Washishth (@SWashishth) March 30, 2022
Moneycontrol spoke to over a dozen people from the space, including investors, entrepreneurs and researchers, but to speak candidly about this sensitive issue, most of them have requested anonymity.
Why are they moving out of India?
“India is still difficult for Web2 startups, who prefer registering outside. In the case of Web3, it is just a delay, till the entrepreneurs figure out where to move to,” says a Web3 entrepreneur who shifted to Dubai in 2021 to build security for decentralised apps (dApps).
He adds that while clarity in regulations is one part, the hostility with which these startups are treated is another reason. “Bank accounts are frozen, notices are served by separate departments of the government, no support is given if you ask for clarity, the builders then start wondering if it’s really worth the hassle.”
“We then move where we are welcome, supported and given benefits to build,” he adds.
The reasons almost read like a long laundry list: no clarity in regulations, 30 percent tax on virtual digital assets (effective April 1), 1 percent TDS per transaction (from July 1), no regulations around token launch (more on this later), regular notices from government bodies and red-tapism, say Web3 entrepreneurs and investors.
These concerns were exacerbated in the last few weeks, with crypto trading volumes falling by over 50-70 percent across top exchanges and UPI payments on these exchanges halted after Coinbase announced its entry into India.
“As a Web3 entrepreneur, you don’t know what you can build,” says an investor, who has heavily invested in this space. “When you start an organisation, there is a structure, some protocols, partnerships... In the Web3 world, as an entrepreneur you don’t even know what is fine with the Government and what is not. You don’t know if you can use a certain protocol, launch coins, securities around NFTs, you just don’t know. Then you need to go somewhere where you have clarity on what is legal to build and what is not.”
To make it clear, there are currently two types of businesses evolving in this space. One registers companies outside and works from India, while the second has moved base outside.
When a startup is launched, the initial phase mostly includes product building and fundraising. That is still feasible from India even though most of the Web3 startups have global investors as well and moving out brings more scope.
But, once these startups launch their own token, which gets listed on the exchanges, it becomes paramount to move outside as the token decides the fate of the project. “You owe it, to your retail and institutional investors, that you do not come under regulatory risks,” one of the persons cited above said.
Currently, India has no rules for the launch of tokens, which are an essential part of Web3 startups. Through these tokens, these startups build utilities that increase their value.
Apart from this, tokens act as a fuel for the growth of a Web3 startup, and help in community participation and incentivisation, say the Web3 founders.
“Every entrepreneur wants to focus on their product and operations, not the regulatory part of it. While the space is new and the Government is trying to understand, it is an opportunity cost for the entrepreneurs, and to avoid that, we move to jurisdictions that have more clarity,” said a Web3 entrepreneur who moved to Dubai a few years back and has been mentoring a lot of these startups.
“These startups are building globally and there are many countries bringing in rules in favour of entrepreneurs. So, why will we not move there?”
He adds: “If you are active in the space, you will find that every six months, a new country comes up with favourable regulations and invites entrepreneurs with luring rules. A lot of places are mushrooming as epicentres for Web3.”
Take the example of this entrepreneur who has been in the space for quite a few years and registered his business in Saint Vincent and the Grenadines. “Three-four years back, Malta was a very popular destination but gradually they started bringing in more strict regulations, which became difficult for crypto startups. When we started our registration process, we checked tokenisation rules, fundraising rules, and fund management rules.”
This is not the first time crypto startups are moving out of India. In 2017-2018, when a ban around cryptocurrencies was being discussed, a string of entrepreneurs had moved out.
Crypto exchanges such as ZebPay and Vauld are two such examples. Unicorns such as CoinSwitch Kuber and CoinDCX are also registered in Singapore. Polygon (earlier known as Matic), which was founded in India, shifted its base to Dubai and has become a global name that entrepreneurs reckon as a Web3 enabler.
“When they raise millions, you need to understand this capital is not even coming to India. The country, which has the business registered, is gaining from it,” says a research and policy expert tracking this space. “They structure themselves that way and their sister subsidiaries are based in India.”
Earlier while there were no taxes, there was still a market to cater to; but now, with the staggering tax level, the momentum in the space and the market will fizzle out, he adds.
“Dubai’s Marina has become a small hub for Web3 startups,” says Kasif Raza, co-founder of Bitnning, who was also in Dubai to attend these events.
He argues that tax is not the only reason to move out, given that living costs are very high in Dubai. “It's not possible for everyone to move there. But, things are so easy there. From meeting people with one hour’s notice to experimentation in building and travelling across countries, everything is fitting in. So, these young entrepreneurs are sharing flats, staying and working together.”
Last month, the ruler of Dubai, Sheikh Mohammed Bin Rashid Al Maktoum, announced the creation of a Virtual Assets Regulatory Authority (VARA) to regulate the cryptocurrency sector. The law does not curtail any innovation at this point unlike in other countries, and this has been a major factor in drawing these startups. With stricter laws being implemented in Singapore, it is slowly losing preference, say experts.
Today, we approved the virtual assets law and established the Dubai Virtual Assets Regulatory Authority. A step that establishes the UAE’s position in this sector. The Authority will cooperate with all related entities to ensure maximum transparency and security for investors. pic.twitter.com/LuNtuIW8FM
— HH Sheikh Mohammed (@HHShkMohd) March 9, 2022
Additionally, Dubai has no personal income tax. This means that there is zero tax on any gains, including gains on crypto currency. This also means there is no need for extensive record keeping and filing.
“Dubai has a lot of clarity and a Sandbox approach. Although you need a license to issue a token, the hassles are much less compared to India,” says the entrepreneur cited above. In a regulatory sandbox, one can test innovations under a regulator's oversight, allowing novel financial products and business models to be tested with safeguards.
Entrepreneurs say advantages such as networking opportunities, no restrictions in innovation, access to global opportunities and resources outweigh the cost of living in Dubai.
Bengaluru-based Nilesh Lalwani, who is working to build BigBuc, a Web 3.0 Shopping Platform with crypto cashback and a Buy Now Pay Later model in a decentralised way, has started to look for options in registering his startup. Some of his options include the British Virgin Islands, Dubai and Wyoming. “We will be launching our token by the third quarter this year, so we need to register before that as launching a token is not feasible in India.”
“Registering takes a maximum of 15 days and the whole process is online,” he says. The startup is also raising its seed round. Lalwani, though, will continue operations in India, after registering outside.
Talent moving out
Besides entrepreneurs, talent around blockchain, crypto and Web3 is also moving out to find better opportunities. While many are contributing to multiple international projects from India, many prefer to move out as it is easier to find international opportunities.
A major reason for this is the payment process. A number of developers and others earn in crypto. With the 30 percent tax, these developers find it difficult as they work for multiple DAOs and other projects as freelancers, so keeping records and filing them as income is an uphill task for most of them.
A number of Indian entrepreneurs also look to hire from the international pool as they have more experience in the space. “I will not find the same talent in India as I will in the US or Dubai as they have more experience in the space,” said a founder who has recently raised and is looking to expand the team.
The investor cited above also added, “Churn has been a massive problem. In Web3, the beginning itself is very distributed. Borderless work will be the future of work. And, no doubt, this will be a challenge for Indian founders. That’s when you need to inspire the workforce to work for you, and build something bigger.”
A lot of the entrepreneurs are still bullish about returning to India. “If given a choice, we would not have moved out. So, if the regulation is in favour of the industry, we will always build for India,” says an entrepreneur. Many echo that view.