Web3: A look at its growing infrastructure and future in India

The evolution of technology, the introduction of ground-breaking applications, and ongoing regulatory conversations are all vital components of the future of Web3.

Two years back, predicting the direction of crypto assets in India was essentially guessing in the dark, plagued by deep-seated uncertainties. However, since then, there has been a significant shift in the industry outlook. Although the future of digital assets is still an unwritten story, several compelling reasons now contribute to a hopeful vision for the coming five years—a period expected to witness transformation, potential rapid expansion, and enhanced regulatory supervision.

India in the last five years has witnessed several regulatory changes in the crypto-asset sector. With the 1 percent TDS on every transaction and a 30 percent income tax rate on crypto income, the last few years have been turbulent for investors, traders, and the overall ecosystem. However, this has given the opportunity to homegrown crypto-asset companies to differentiate themselves, by becoming champions and stewards of the industry in India, by providing services to users and creating an ecosystem of a Web3 infrastructure in India.

The Indian government has taken a progressive step by incorporating crypto-asset service providers into the fold of the Prevention of Money Laundering Act (PMLA), marking a milestone in the sector's legitimacy. Recently, The Financial Intelligence Unit (FIU) under the Finance Ministry issued show cause notices to nine offshore virtual digital assets platforms, like Binance and Kucoin, for non-compliance with anti-money laundering law. Additionally, FIU had asked MEITY to block the URLs associated with these nine entities, further emphasising the Indian government’s determination to curb any illicit activities related to digital assets.

Harnessing Web3’s Potential

Yet, there's a misalignment within the Indian startup ecosystem, which often dismisses Web3 as mere "bitcoin and blockchain", overlooking its broader scope. Contrasting this narrow view, Web3’s multifaceted nature is evident in the Maharashtra State Board of Skill Development (MSBSD) issuance of over 100,000 digital diplomas via blockchain, a leap in efficiency from the previous manual verification system.

Similarly, the Telangana government’s initiative with local farmers, supported by AlgoBharat, employs blockchain to promote sustainable agriculture and establish a carbon credit market. These are significant steps in using blockchain to enhance the delivery of public services, heralding a new era for governance. Similarly, Web3 startups such as Dygnify are building a blockchain-based credit enablement and data traceability platform for businesses in climate action to get access to credit and global carbon markets.

A startup like DRIFE is taking on companies such as Uber, Lyft and Careem by offering an innovative, transparent solution that empowers both drivers and riders. The DRIFE platform offers a zero commission fee structure which allows drivers to earn more income and pass on the benefits to the riders in the form of savings. Recently, Dubai Road and Transport Authority issued a licence to DRIFE, making it the first web3 taxi platform in UAE – a company that is Made in India.

Moreover, there's a surge in commitment from blockchain infrastructure firms focusing on India's burgeoning developer community. Ava Labs, creators of the Avalanche protocol, are engaging with top educational institutions and developers through hackathons and workshops to spur innovation on their platform. And they're not alone; with India's economy ranking fifth globally, other major blockchain entities like Polygon, Near Foundation, and Algorand are also setting their sights on expansion within the country.

Investor Interest in Bitcoin ETF

Globally, the introduction of Bitcoin ETFs has sparked significant interest among institutional investors, suggesting a move towards deeper involvement driven by evolving technology and the promise of clearer regulatory guidelines. ETFs aim to leverage this sector’s vibrancy by broadening their portfolios to include a wide array of this expanding field.

This broadening could include a variety of digital assets, blockchain ventures, to Decentralised Finance (DeFi) protocols, offering investors a comprehensive view of the sector without the complexity of selecting individual assets. The introduction of institutional funds is expected to drive the market towards maturity, following the well-known pattern where traditional financial methods have supported new tech territories.

There's an expected surge in innovation leading to the creation of new tools like Decentralised Autonomous Organizations (DAOs), and an expansion in the use of smart contracts. Smart contracts might extend beyond their current scope, entering various industries, while DAOs could significantly change industry structures over the next five years. DAOs hold the promise to create transparent, democratic, and self-governing systems, potentially replacing traditional management structures.

For example, DAOs have been started to be used in various scientific research projects. Scientific research right now has three big DAO projects: the “flagship” VitaDAO, which focuses on longevity; ValleyDAO, which funds synthetic biology and climate change research; and AthenaDAO, which explores the significantly under-funded field of women’s health.

Demand for Crypto Assets Rise

Crypto assets are also expected to play a crucial role in cross-border payments. For example, the Monetary Authority of Singapore's recent initiative for real-time payments between Singapore’s PayNow and Malaysia’s DuitNow sets the stage for instant transfers and remittances between the two countries, involving central banks, payment systems, and financial institutions. More countries will likely follow this example.

While some are highly optimistic about Bitcoin reaching unprecedented prices, a more cautious view and careful risk management are recommended. At the start of this year, Bitcoin has become one of the top ten global assets by market cap, surpassing companies like Visa, Mastercard, and Tesla. Ethereum has also solidified its position as the primary asset among institutional investors, indicating a rise in market confidence, which is also expected to rise further after the anticipated Dencun upgrade.

Regulatory discussions will remain central, with governments worldwide trying to balance fostering innovation with protecting consumers in the next five years. This balance will be key in shaping the future of the crypto-asset industry, with increased oversight expected to eliminate bad actors, potentially leading to a more stable sector. Under India’s leadership, the G20 has called for a swift implementation of the Crypto-Asset Reporting Framework and Common Reporting Standards.

This will enable the countries to compare notes on their policy framework, coordinate with central banks and supervisory agencies; and address the relevant data gaps. In the next five years, India will put in place a regulatory framework that is at par with various jurisdictions such as South Korea, the European Union, United Kingdom and develop cooperation agreements to share data and information of customers to counter the risks faced due to money laundering and financing terrorism in the crypto-asset space.

Ultimately, the evolution of technology, the introduction of ground-breaking applications, and ongoing regulatory conversations are all vital components of the future of Web3 – a future that promises to be as dynamic as it is uncertain.

Sohom Bhowmick is Director of Policy at Smahi Foundation of Policy and Research and Neha Singh is Director of Public Policy at CoinDCX. Views are personal, and do not represent the stand of this publication.