Published August 20-September 2, 2022
Hit or Miss
A recent headline in the Economic Times read: “Web3: Will India miss the bus to the Internet’s future?” Here are a few excerpts from the story:
Of the dozen Web3 startups ET Prime spoke with, over half of them have moved out of India. According to experts, as more such companies move overseas, India will not only miss the Web3 bus but also lose millions in tax dollars.
…It’s not a new phenomenon since India’s earliest unicorns such as Flipkart and InMobi are registered in Singapore. But with Web3, the scale is probably much higher. Over the last one year, many startups have shifted their base to Dubai, which is becoming a major centre for crypto innovation…The reason behind all of them moving out of India is the same — lack of regulatory clarity.
…Regulatory issues apart, there is another reason why founders are registering their companies overseas — funding…The lack of regulatory clarity in India has made it tough for investors to fund Web3 companies with ease in the country.
…Rashmi R Padhy, vice president – business operations, WazirX, a cryptocurrency exchange, agrees. He says that during the first two stages of the Internet’s evolution, companies like Facebook and Google emerged. Meanwhile, India could only become a service provider to these companies. Even with the mobile revolution, India was late into the game, he adds. “I think we are seeing another cycle come up now in Web3. My fear is that with the current approach, India is again going to get left out and will become the service provider for Web3. By the time we understand it, we will be late, and India will have missed the bus again,” Padhy says.
After attending a crypto/blockchain conference in the US a couple months ago, this is what I had written: “My starting belief was that there is a fundamentally new Internet being built, bringing back memories of the mid-1990s. I was not wrong; the excitement among the speakers brought back the heady days of the early Internet era, one which I saw and participated in first hand…My view, reinforced after the conference, is that these are early days in the creation of the next generation Internet infrastructure – decentralised, permissionless, ownership, built on cryptography, enabled by blockchain. It is up to entrepreneurs to ask the question: what is centralised today that can be decentralised? And from there will sprout a range of businesses…A new future is coming with the collision of Web3/blockchain, gamification, the creator economy and the metaverse. It will take many years to play out. Just like the Internet…If you are an entrepreneur or a CEO of a big business, pay attention to the Web3 world that is emerging. Plenty of capital and an awesome array of talent is leading the way in creating new ways for us to live, work, entertain and socialise.”
Just like Web 1.0 and Web 2.0, Web3 is going to become the foundation for a new wave of technological innovations. Entrepreneurs and investors are working together to bring new things to life. With India having both a critical mass of consumers and the tech talent, for the first time there is an opportunity to play on a level playing field with global companies. But uncertainty and excessive regulation are business killers. Will India’s government do the right thing and take a hands-off approach like it did with IT services and let businesses thrive? Or will it limit economic freedom with its short-sighted politics and let another trillion-dollar wealth creation opportunity pass by?
I was an entrepreneur during the early days of the Internet. After having returned to India from the US in mid-1992 to fulfil a promise I made to my father, I had experienced over two-and-a-half years of failure with my various startup ideas. It was in late 1994 that I realised that the World Wide Web (as it was then called) had the potential to bridge distance and connect people into an electronic marketplace. My big idea was to build an Indian information service (portal) for Indians globally – offering news, stock quotes, cricket scores, recipes and more. I launched IndiaWorld, India’s first Internet portal, in March 1995 – just around the time Yahoo and eBay went live with their services.
It wasn’t an easy launch. Commercial Internet services were not available in India at that time. The government had a monopoly on telecommunications in India. I hosted the content on a server outside India. Initially, I used a connection to ERNET (education and research network) to upload the content on the US server. When a bureaucrat disconnected my connection (ostensibly on the grounds that I was using it for “commercial purposes”), I tried to argue that many other Indian “commercial” organisations were also using the service. When I called up a Secretary in the Indian government, he refused to speak because he was “watching TV and didn’t want to be disturbed.” When I brought up the issue at an Indian business conference in the Bay Area after my connection was cut to a senior Indian Cabinet Minister, I was chastised by the organisers for “spoiling India’s name.” This was the (un)ease of doing business in India in mid-1995.
But entrepreneurs always find a way. In India, we call it ‘jugaad.’ For entrepreneurs, it is a matter of survival. With my dial-up connection to ERNET cut and no other alternatives available, I had to make international dial-up calls to a Web service provider in the US to upload the data daily. The time and money needed to do this increased manifold, but updates were never delayed.
In August 1995, VSNL (the government-owned PSU which had a monopoly on international communications) launched dial-up Internet access in India. It cost Rs 100 an hour – a big relief when regular international dialling cost about the same for a minute. That helped solve my data upload problem. Had I given up a few months ago when my dial-up connection was cut, the story of my life would have been very different.
Short-sighted policies by India’s government and regulators delayed the growth of India’s Internet through the Web 1.0 and Web 2.0 eras. Indian entrepreneurs could have created the Googles and Facebooks but for that they needed to move outside India. India lost a huge wealth creation opportunity with bad Internet policies in the late 1990s and the subsequent years.
Internet access remained a challenge in India for more than 20 years. We never really made it to the wired broadband era. High costs and limited access to desktop connectivity meant that the user base in India stayed low (compared to potential) through the first two Web cycles. It was only with Jio’s launch and the availability of cheap smartphones that Internet usage exploded in India. Today, thanks to competition, wired and wireless connectivity is easily available and at very affordable prices. This is what has spurred the Internet startups even as the absolute number of transacting users is limited by income. Capital is available in plenty as even a 50-100 million consumer base puts India among the larger Internet markets globally.
There are three types of startups blossoming in India: the B2C/D2C companies which seeks to deliver everything to us from anywhere in the country, B2B SaaS companies riding the shift to the cloud, and others solving problems in various verticals from agriculture to education to health (what I call the *tech – “startech” – companies). 90% or more of the companies will fail as is the nature of entrepreneurship. But the innovators who succeed will transform industries and individual lives, and create enough wealth to keep the investment cycle going.
Having seen the early days of the Internet, I sense a similar excitement with Web3. The crypto foundations are enabling a decentralised future built on the blockchain. Even as much of the attention is focused on Bitcoin and other cryptocurrencies (and more recently, the sharp fall in their value), there are many other applications being built. This is the “whole wide world” of Web3. From land records to loyalty programs, from financial inclusion to fashion provenance – the applications of the “chain” are many. It is in the world that for the first time India-domiciled companies and entrepreneurs have an opportunity to get in at ground zero and compete on a level playing field. It is this world that the Indian government policies, taxation and regulation is hurting. Entrepreneurs and investors don’t like uncertainty and that is exactly what is happening in India’s Web3 space. Given a history of “retrospective” actions and taxation by Indian governments, it is the rare brave entrepreneur who will create a Web3 company based in India. And when capital moves, so do people – and so does eventual wealth creation.
This is the fork in the road: the 1995 moment in India’s Web3 future. No bureaucrat or government policy maker whose tenure is measured in months will be bold enough to create a welcoming framework for Web3 startups. And so Indian entrepreneurs will simply go to Dubai or Switzerland or whichever country welcomes them. For once, can India’s government do the right thing – which is to simply promise freedom to entrepreneurs, and a freedom that no future retro policy will take away? Because Web3 promises to remake our tomorrow in ways we cannot even imagine.
Web3 – 1
Web3 has become conflated with cryptocurrencies. Regulators do not like cryptocurrencies and so are throwing the baby out with the bath water. Web3 is much bigger and more fundamental.
Here is an excerpt from Chainalysis’s June 2022 report on Web3:
One day in the near future, all companies will become crypto companies, complete with a “Connect wallet” button on their homepages. And web3 is how they’ll get there…As more people put a higher percentage of their net worth into cryptocurrency, they’ll want the ability to use cryptocurrency for the full range of transactions they can currently carry out with fiat, such as lending and borrowing, trading assets, and payments. Web3 will enable them to do that with cryptocurrency faster and more easily than they can today.
…Web3 won’t just streamline existing financial activity though. It’ll also unlock new use cases in finance that currently aren’t possible due to the illiquidity of traditional assets. Imagine a world where you could sell fractional ownership of physical assets like real estate or vehicles. Sellers would be able to access capital they can’t today, while buyers could invest in those assets more affordably via partial ownership. Web3 can make that happen. Web3 can also eliminate middlemen and foster more direct relationships between sellers and customers.
…Web3 can take middlemen out of the equation completely, and even opens up the possibility of fans purchasing full ownership of work from their favorite creators, rather than essentially renting it as they currently do from content providers like Netflix. NFTs are already enabling much of this, largely in static digital art, but the arrangement could easily be applied to music, film, and other mediums.
Finally, web3 can bring decentralization to the business world by enabling community ownership of companies rather than the current norm of top-down corporate control. We see this happening now with DAOs — decentralized autonomous organizations — in which anyone who buys in can help guide the direction of a company or project through an asynchronous voting process.
Praphul Chandra adds: “The biggest impact of Web3 is the ability to extend the process of creating any asset into capital – virtually on demand. It is trivially easy to create a trusted ledger of ownership of any asset using Blockchain and embodying it in a title as a NFT. This NFT can then be used as a put up as “collateral” for a loan. In Web3, the loan is facilitated by digital escrows (smart contracts) which are programmed to lock the NFTs as collaterals, release cryptocurrency based loans and vice versa. This is one of the innovations of DeFi (Decentralized Finance) – so called since there is no bank or financial institution intermediating the collateral-loan process. This is the real Aha! Moment. What Web3 is fundamentally about is the ability to create economies on demand by converting any asset into capital.”
As Chris Dixon puts it:
web2: read / write
web3: read / write / own
Ownership, enabled by decentralisation, is at the heart of Web3.
Li Jin and others wrote in a report on the Ownership Economy: “Ownership has long been embraced by Silicon Valley startups to align incentives among employees through option grants. Still, the vast majority of internet users own exactly 0% of the services they contribute to. Creators don’t own their content, developers can’t control their code, and consumers can’t influence the policies or decisions of the platforms they use. This scenario, which once went unquestioned, looks increasingly archaic. This is starting to change via the ownership economy—often referred to as web3—with products and services that turn users into owners. What started with Bitcoin and Ethereum—both of which reward participants who secure the network with their native tokens—is becoming prevalent across all categories of software, from developer infrastructure and new financial markets in DeFi to consumer products, marketplaces and social…If the last generation of software was built upon a foundation of user-generated content, the next generation of software will be user-owned, with digital ownership leveraged as a building block to enable novel user experiences.”
Web3 – 2
Momentum Works has a couple of slides which shows the simplified history of the Web through its three evolutions:
a16z’s May 2022 report on the state of crypto shows the evolution:
The three key points it makes about Web3:
- Web3 gives people property rights: the ability to own a piece of the internet
- Web3 aligns network participants to work together toward a common goal — the growth of the network
- Web3 empowers a collective owned future over a corporate or government owned future
It offers the following view on the future:
Web3 – 3
The crypto ecosystem has evolved a lot in the past few years. An April 2022 report by CV VC lists the categories in the value chain:
- Brokers & Crypto Banks
- Crypto Exchanges
- Market Makers
- NFTs & The Metaverse
- Platforms & Protocols
- Service Providers
- Token Issuance Platforms
From the introduction on the promise of crypto: “The world is globally transitioning as it rebuilds from a pandemic, endures geopolitical wars, and survives a climate crisis. Underpinning the transition is humanity’s new mindset. Climate, war, and a pandemic are only at the tip of the iceberg as an indicator of how humankind is reaching into itself and adopting a self-determining, caring, and globally focussed mindset. Institutions, companies, and brands will need to embrace this transition to stay relevant to existing and new customers. Humanity seeks trust and transparency, the democratization of institutions, and a better way of interacting and doing business. Throughout history, substantial global upheavals, as we are currently witnessing, have resulted in transformation and renaissance. When these renaissances occur, renewal emerges and heralds the world toward better functioning and wellbeing. We are already entering a new epoch, driven by the new mindset and underpinned by the internet and the catalyst technology known as blockchain.”
Mohit Mamoria outlines the importance and necessity of the blockchain:
To establish trust between ourselves, we depend on individual third-parties.
For years, we’ve depended on these middlemen to trust each other. You might ask, “what is the problem depending on them?”
The problem is that they are singular in number. If a chaos has to be injected in the society, all it requires is one person/organization to go corrupt, intentionally or unintentionally.
…For years, we have been putting all our eggs in one basket and that too in someone else’s.
Could there be a system where we can still transfer money without needing the bank?
…Think about it for a second, what does transferring money means? Just an entry in the register. The better question would then be —
Is there a way to maintain the register among ourselves instead of someone else doing it for us?
…The blockchain is the answer to the profound question.
It is a method to maintain that register among ourselves instead of depending on someone else to do it for us.
The requirement of this method is that there must be enough people who would like not to depend on a third-party. Only then this group can maintain the register on their own.
A series in New York Times in March 2022 offered a simplified explanation of the blockchain:
You can think of a blockchain like a Google spreadsheet, except that instead of being hosted on Google’s servers, blockchains are maintained by a network of computers all over the world. These computers (sometimes called miners or validators) are responsible for storing their own copies of the database, adding and verifying new entries, and securing the database against hackers.
So blockchains are … fancy Google spreadsheets?
Sort of! But there are at least three important conceptual differences.
First, a blockchain is decentralized. It doesn’t need a company like Google overseeing it. All of that work is done by the computers on the network, using what’s called a consensus mechanism — basically, a complicated algorithm that allows them to agree on what’s in a database without the need for a neutral referee. This makes blockchains more secure than traditional record-keeping systems, proponents believe, since no single person or company can take down the blockchain or alter its contents, and anyone trying to hack or change the records in the ledger would need to break into many computers simultaneously.
The second major feature of blockchains is that they’re typically public and open source, meaning that unlike a Google spreadsheet, anyone can inspect a public blockchain’s code or see a record of any transaction. (There are private blockchains, but they’re less important than the public ones.)
Third, blockchains are typically append-only and permanent, meaning that unlike with a Google spreadsheet, data that’s added to a blockchain typically can’t be deleted or changed after the fact.
The blockchain is the underlying construct for Web3, just like the HTTP protocol is for data exchange on the Web.
Web3 – 4
Gilad Edelman in Wired:
If cryptocurrency was originally about decentralizing money, Web3 is about decentralizing … everything. Its mission is almost achingly idealistic: to free humanity not only from Big Tech domination but also from exploitative capitalism itself—and to do it purely through code.
Bitcoin, the original blockchain-based cryptocurrency, created a way to send and receive digital money without needing a bank to approve those transactions. Instead of regulators and cops, a set of carefully designed incentives would, in theory, keep everyone acting in the best interests of all Bitcoin users. Web3 aims to apply these two concepts—decentralization and game theory—to all of digital life.
…One way to think about Web3 is right there in the name: It’s the successor to Web 2.0, the era that was supposed to democratize the internet but instead became dominated by a handful of huge platforms, like Google and Facebook. Web3 is about re-decentralizing the web.
…At the most basic level, Web3’s approach to financial incentives is an ingenious way of solving new technology’s adoption problem. Let’s say you make a new decentralized platform built on the blockchain, one that works so smoothly that people can use it without getting a PhD in cryptography. Users control their own data and everything is open source. The thing is, those ordinary users probably don’t care much about data ownership or immutable public ledgers. They care about convenience and fun and being where their friends are. So how do you get anyone to use your new Web3 app?
The answer is tokenomics. The business model of nearly every proposed Web3 platform entails distributing tokens to everyone involved, thus incentivizing them to use and improve the platform to make the value of those tokens go up. In Web3-speak, this is called “aligning the incentives.”
Web3 platforms…have the potential to unlock a novel and especially powerful form of network effect through community engagement and social cohesion. Ownership of digital assets fosters a sense of psychological ownership that can make consumers feel so invested in a product that it becomes almost an extension of themselves. A platform’s users literally become “fans” who form a bond through the shared platform experience — similar to how fans of a sports team or obscure band see themselves as a community.
…More generally, sharing ownership allows for more incentive alignment between products and their derivatives, creating incentives for everyone to become a builder and contributor. The underlying technology standards also enable every Web3 company to be built on top of. This means the community around a platform can co-create in a way that’s much less adversarial than in the past and with more derivatives in circulation — making the platform ecosystem grow even stronger.
…In the short-run, this model gives up some share of consumer surplus to the builder or creator. But because the builders get more, they’re strongly incentivized to invest and grow the total pie for everyone – which means that in the long run, Web3 should raise consumer surplus as well.
In their textbook on economics, Tyler Cowen and Alex Tabarrok have a chapter on Cryptoeconomics. They end with a couple open questions: “The first is how effectively crypto and blockchain innovators will be able to capture additional gains from trade. The second question is how the authorities will regulate these markets. Cryptocurrencies and decentralized finance are not immune to problems of traditional finance including bubbles, excess leverage, and bank runs. Thus, as these markets get bigger, we may expect more regulation. As regulation increases on crypto innovations that may slow their future growth and also make traditional and decentralized finance more similar. Governments may also create new digital currencies of their own, sometimes called central bank digital currencies (CBDCs), which will be convenient but won’t necessarily have the privacy or security of an unregulated digital currency like bitcoin.”
It is the second question which has been worrying governments – the loss of possible control in the future, especially on their fiat currencies.
India – 1
Mint wrote about RBI’s dislike for crypto:
The RBI has made its displeasure towards cryptos more than clear, over and over again. In fact, in the latest edition of the Financial Stability Report (FSR), published June-end, it offered several reasons for the same.
First, “anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name.” Second, “cryptocurrencies, typically created on decentralised systems, are designed to bypass the financial system and all its controls, including Anti Money Laundering (AML)/Combatting the Financial Terrorism (CFT) and Know Your Customer (KYC) regulations.”
… Third, “historically, private currencies have resulted in instability over time… as they create parallel currency system(s), which can undermine sovereign control over money supply, interest rates and macroeconomic stability.” This is the RBI’s and many other central banks’ major fear.
Fourth, cryptos “are characterised by highly volatile prices” and this can create its own set of problems along with the “increased use of leverage in investment strategies; concentration risk of trading platforms; and opacity and lack of regulatory oversight of the sector.”
Given these reasons, it is hardly surprising that the central bank has been highly vociferous in opposing cryptos.
T C A Srinivasa-Raghavan wrote about the government stance:
The latest official statement on cryptocurrencies comes in the form of a written Lok Sabha answer by Finance Minister Nirmala Sitharaman on July 18, 2022.
“Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”
In other words, there’s not going to be any regulatory legislation on cryptocurrencies, probably for decades. That’s the bad news for investors because even in the best of times major economies around the world take decades to hammer out a common approach toward regulatory or taxation issues.
WSJ wrote that “India has almost killed domestic crypto trading with draconian taxes that signal potentially more pain for virtual-currency investors.”
Investment in India’s crypto sector surged after the Supreme Court quashed a ban on banks facilitating crypto trades in 2020. According to data shared by private-markets data provider Tracxn Technologies, India’s cryptocurrency industry has raised $24.2 billion in funding since the beginning of 2020.
But things have taken a turn for the worse this year. In July, India imposed a 1% tax on all digital-asset transfers above a certain size, deductible at the time of transaction. That tax is on top of a 30% rate on income from such assets promulgated in April.
… India’s move to both tax crypto more and dilute some of its signature anonymity should be deeply worrying for the technology’s backers—particularly if other rapidly growing markets begin to believe it has the right idea.
India – 2
The Indian bureaucrat’s innovation in the crypto regulation game has been to define a category called “virtual digital asset” (VDA) and then tax it heavily to the point where every incentive to transact is taken away. From Bloomberg: “On July 1, a tax deductible at source of 1% on all digital-asset transfers above a certain size takes effect despite industry warnings that it will sap liquidity. That’s on top of an existing 30% rate on income from such assets plus a proposed value-added tax increase that’s making its way through the bureaucracy. The government also doesn’t permit offsetting of trading losses on cryptocurrencies, treating them differently from stocks and bonds.” If that wasn’t enough to kill the golden goose, there’s more: “Adding to the pain, crypto exchanges have been largely cut off from the regular banking system since mid-April. That’s when India’s ubiquitous United Payments Interface was made unavailable to them without explanation, prompting some banks and payment gateways to also cut off service, which in turn meant traders couldn’t top up their accounts with cash.”
The definition of VDA is explained in this note from E&Y
- It means any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called,
- Providing a digital representation of value which is exchanged with or without consideration,
- With the promise or representation of having inherent value or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to investment scheme; and
- It can be transferred, stored, or traded electronically.
- A NFT or any other token of similar nature, by whatever name called. But NFT itself is defined to mean such digital asset as the CG (Central Government) may, by notification in the Official Gazette, specify
any other digital asset, as the CG may, by notification in the Official Gazette, specify
Of course, Indian and foreign currency is excluded from the above.
And as so often happens, there came an exclusion list:
- Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
- Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
- Subscription to websites or platforms or application
Another clarification was issued: “The CG has notified that a “token” which fulfils the definition of VDA under Limb A shall be NFT. But it shall not include a NFT whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.”
VDA and the concomitant crypto regulation is now a bureaucrat’s delight and an entrepreneur’s nightmare. The ostensible targets were the cryptocurrencies and crypto exchanges. The Indian government succeeded; trading in alternate currencies has now almost ground to a halt.
The side-effect of this is going to be that any Web3/crypto company with a token as its model will not be able to operate in India. They will simply domicile themselves outside India. And Indians will figure out a way – like they always have – to participate. Black money and smuggling were the answer to high taxation and bans in the India of the 1970s. Governments will never learn. The phrase “laissez faire” which literally means “let go” does not exist in their dictionaries.
So, where does India go from here? What are the Web3 opportunities in India? What about Indian entrepreneurs wanting to build Web3 businesses?
India is a poor country. At $2,000 annual per capita, we are a long way to being wealthy. India should be looking to adopt the newest technologies. This can only happen if entrepreneurs are given the freedom to innovate. Unfortunately, the history of Indian policy-making has been one of interventions. Every intervention creates obstacles for entrepreneurs driven by the profit motive – and profits can only come if they offer something that consumers are willing to pay for. Web3 is one of those technologies where India’s policymakers have got it wrong. With a definition so wide as to almost put a stop to all Web3 activity (tokens are at the heart of Web3’s ownership model), Indian policymakers will make it impossible for a Web3 company to do business in the country.
Atanu Dey explains technology thus: “Our lives are immersed in technology. More accurately, we are immersed in the products of technology. But what is technology? The simplest broad definition is that technology is “know how.” More precisely, technology is about knowing how to do something…We use technology. By that we mean, we use the products of technology. Since technology is “know how”, and “know how” is essentially ideas, the products of technology are “embodied ideas.” Technology products are ideas given a physical form, or made incarnate…Technology gets transmitted from person to person through the transmission of ideas. Ideas are what in economics are known as “non-rival goods”, as opposed to “private goods.” Non-rival goods can be shared without reducing the quantity available. We both can’t eat the same apple: which makes apples a private good. But if I have an idea and I share it with you, we both will have the idea. If there are 10 people each of whom has one idea, and they share the ideas among themselves, then each person will have 10 ideas.”
Entrepreneurs have transformed the world around us. In an as-yet-unpublished essay, Atanu writes:
People invent technology. And the number of people who have ever lived grows with time. Therefore, our flow of technological inventions per unit of time grows. And with the increasing flow of technology, the rate of growth of the stock of technology grows with time.
There’s a positive feedback loop in this process. The greater stock of technology enables more people to spend more time developing technology, which in turn increases the flow (and stock) of technology, which goes full circle and allows more people to devote to developing technology.
Economic growth — the growth in the amount of useful stuff produced by people — is both a cause and a consequence of technology. It is because of our present state of our technology that the earth can support a population of nearly 8 billion people at the level of material prosperity we have today. That would have been impossible any time in the past because they just did not have the knowledge we have.
It is this world of technology that Indians need to be part of. When policymakers introduce legislation, taxation or regulation to curb its use, they hurt and impoverish their people. This is where India’s policymakers have made a wrong turn with Web3.
In the early days of the Internet, its promise was thought to be in democratising access to information. No longer was one limited by geography and what was available in the vicinity of where one lived. What I did with IndiaWorld was something similar. Indian newspapers and magazines would take 7-10 days to reach the US. The Internet enabled me to publish news and make it available to anyone with an Internet connection the next instant. Then, entrepreneurs like Jeff Bezos realised that as they made information about products (books to begin with) available, they could also build a distribution system to ship products anywhere and drive ecommerce. Later, came the social networks and OTT platforms and myriad other ideas building on the foundation of the Internet. While many ideas failed, entrepreneurs learnt rapidly from both successes and failures of others to keep improving the technology (“know-how”) and make lives better. The early pioneers of the Internet could not have imagined today’s world – and it has been less than three decades.
When I returned from the US in 1992 to set up base as an entrepreneur in India, it was very difficult to get new computers in India – one had to import them. I remember importing a Sun Microsystems Unix workstation – I had to classify my company as a software export entity and create a room in the office as a “bonded warehouse”. The computer could not be moved out of that room and was subject to inspection by a government official at any time. Import duties were high. Once when I had bought a new iPhone in the US, I was stopped by customs officials who assessed its value to be higher than what I was allowed and therefore had to pay duty.
For a while, I thought we had gone past that era. But when the core beliefs are not about economic freedom but of economic control, the next bad regulation is not far away. Sometimes, it is not just the regulation, but the threat of impending controls and constraints that kills entrepreneurship.
Policymakers would do well to remember Milton Friedman: “Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government– in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”
Web3 is a new world that’s getting created. No one even knows how it is going to play out. Cryptocurrencies, DeFi and NFTs are just the start. Despite the recent ‘crypto winter’, there is massive capital flowing into the space attracting the smartest minds to solve the toughest problems. New infrastructure to support Web3 is being built and improved. Entrepreneurs are thinking about problems to solve and investors are willing to back many of them. For once, India was not a laggard. But that is going to change. Once again, Indian policymakers are killing a nascent industry. None of them will pay the price; that will be borne by billions of Indians who will be unable to benefit easily from the promise of new innovations. Phrases like ‘Digital India’ have little meaning when the real enablers are blocked.
There is the other side of the coin also. Skeptics claim that bitcoin is used for money laundering and ransomware. There are many bad uses of cryptocurrencies which offer (to a large extent) anonymity and untraceability. And so, “national interest” and “security” become the reasons why a new regulation is brought in. And rule by rule, a new industry is killed. Can crypto challenge fiat currencies? Perhaps. And maybe there should be competition if one looks at how central banks (especially, the US Fed) have printed trillions of dollars in the past 15 years and debased currencies by creating rampant inflation. Every action has a reaction, and entrepreneurship and technological innovation cannot be stopped. Yes, there will be the wrong uses also, but that is true for almost anything.
The doomsday scenarios forecast by so-called experts find favour with risk-averse policymakers – most of whom have lived in rent-free accommodation all their life, and have little interaction or understanding of the real world. They have no skin in the game. No one is going to hold them accountable for their actions. They do not pay a price for their bad policies. It requires bold and visionary political leadership to rise above the short-sightedness and anti-business sentiment so prevalent in policymakers worldwide.
India has such an opportunity with Web3. It should lead the world by “unlocking Web3.” All it needs is a decade or so of permissionless innovation. Entrepreneurs are the ones who will drive wealth creation and enlarge the pie for all; governments only do redistribution and are mostly engaged in shrinking the pie with their bad policies. Web3 and its ecosystem of gaming, metaverse, DAOs and the likes is uncharted territory. That is why it should be left alone. A commitment needs to be made by government officials that no obstacles will be put in the path of entrepreneurs. For the first time, India has a mix of entrepreneurs, investors and capital who can help build out new industries. What they need is freedom.
Web3 offers India an opportunity to lead. There are many inefficiencies that it can solve. Centralisation has failed in many areas like land records, agricultural marketplaces, education, healthcare, digitisation of kirana stores, and so on. Maybe Web3 and its decentralised approach can work. In a way, ONDC (Open Network for Digital Commerce) is a decentralised initiative – it is Web3-like without the underlying crypto framework.
India has much catching up to do in the world. It needs sustained growth of 10% and higher for a generation to create prosperity. That is not going to happen through government subsidies which tax the rich and distribute via welfare schemes to the poor. India needs its entrepreneurs to solve problems and flourish. This is the realisation that still doesn’t exist in policymakers.
Web3 is a test for India. We missed the Web 1.0 and 2.0 waves that created trillions of dollars in wealth and made lives better. We cannot afford to miss another one. Political leadership is about not just making new policies, but also knowing when to step back. Let’s not send Indian entrepreneurs to foreign shores – like was done by another set of political leaders 50-60 years ago.
Quotes – 1
A new world beckons. For every bull, there is a bear. For every one company that succeeds, there will be a hundred others that will fail. I saw it in the early days of the Internet also. Entrepreneurs are optimists, seeing the world through a lens of making things better. The ones who succeed show us a better way to do things; the ones who fail show us how not to do certain things. Web3 will also go through its ups and downs. But the inevitable trajectory is of progress and betterment, and that is why India needs to be a part of the ecosystem.
Here are a few quotes about the promise of Web3 and blockchains:
Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs. The first telephone could only carry voices a mile or two. The leading telco of the time, Western Union, passed on acquiring the phone because they didn’t see how it could possibly be useful to businesses and railroads – their primary customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve (technology adoption is usually non-linear due to so-called complementary network effects). The same was true of how mainframe companies viewed the PC (microcomputer), and how modern telecom companies
…This does not mean every product that looks like a toy will turn out to be the next big thing. To distinguish toys that are disruptive from toys that will remain just toys, you need to look at products as processes. Obviously, products get better inasmuch as the designer adds features, but this is a relatively weak force. Much more powerful are external forces: microchips getting cheaper, bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive it needs to be designed to ride these changes up the utility curve.
The opportunity for innovation lies in what my colleague Henry King and I define as relationship transformation: it’s the “why” of technology, reimagining web3’s trajectory to design concepts, inventions, and businesses around user relationships, those between companies and assets and people, and also between people and communities. With relationship transformation, we can define how we use decentralized and trustless technologies to create new asset classes and productive, collaborative communities and platforms that turn users and consumers into stakeholders and owners.
We can reimagine every industry from finance and insurance to healthcare and education to gaming, media, and music to accounting and legal to politics and governance to royalties and loyalty programs to software and technology to retail, marketplaces, and consumer goods and everything in between.
Therein lies the vast opportunity: we get to create the future. We get to define not only the trajectory that we’re on but an entirely new trajectory altogether. We’re not just striving to avoid web3’s equivalent of Web 1.0’s dot bomb phase, or the ethics failure and data conundrum of Web 2.0 to get us through the hype cycle. We’re striving for an alternate path that gives web3 utility and meaning, one that builds an equitable community and offers a more sustainable impact while giving access, power, autonomy, and portability to users.
David Andolfatto and Fernando M. Martin: “These traditional forms of record-keeping are likely to be challenged by blockchain technology, which provides a very different model of information management and communication. Competitive pressures compel organizations and institutional arrangements to evolve in response to technological advances in data storage and communications. Consider, for example, how the telegraph, telephone, computer and internet have transformed the way people interact and organize themselves. Advances in blockchain technology are likely to generate even more dramatic changes, though what these may be remains highly uncertain.”
…The marvels of the internet multiplied, magic that by now seems unremarkable: a map of the world, street by street, in your pocket; instant translations from almost any language; a look-up service for every branch of knowledge; global, near-instantaneous news. Today’s internet is deeply woven into the world’s economies, media, politics, industry and social life, in good ways and bad.
A similar evolution is in the works for crypto. Blockchain, the technology that makes cryptocurrency possible, has the potential to be just as transformative as the internet innovations on which we depend every day, and industries like supply chain management, finance and pharma have already begun to find uses for it.
It’s possible to imagine a future where you might look up the fate of every tax dollar you’ve paid, and government corruption becomes all but impossible; where beautiful and important stories and music, games and art would never disappear from the internet; where, instead of being forced to rely on a big power company, you might buy and sell surplus solar energy from or to your own neighbors, and never face another blackout. Wherever tamper-proof, independent record-keeping is needed, blockchain could keep all the receipts, available and safe, for anyone to see.
Jaspreet Bindra: “While the arc lights focus on Bitcoin and crypto, Blockchain has been at work to solve problems in the less glamorous world of supply chains, financial services, large enterprises and energy. It is being harnessed to untangle complex supply chains by shippers and retailers. Blockchain-based solutions can make remittances less painful and expensive for itinerant workers who must send money home. Blockchain experiments to authenticate educational and other qualifications, making them less cumbersome to store and share, can make education loans more affordable. Blockchain-based energy grids are trying to take cheap energy to underserved areas. Governments are testing the technology for secure identity systems. Tamper and fraud proof transaction records may be enabled. The decentralized nature of blockchains is being harnessed for distributed business models like Helium, ‘a people’s Wi-Fi’ that’s not owned by any telecom firm but collectively shared. Blockchains are striving to reward online art and creativity with NFTs, while powering parallel (if unproven) worlds like the metaverse and laying the base for a ‘creator economy’.”
Marc Andreessen: “I think this is a foundational technology change, a new architecture for building an entirely new generation of computing systems. We have become convinced that Web3/blockchain/crypto is foundational. It’s a big hill. It’s as foundational an architecture shift as the ones from mainframes to PCs, from PCs to web, from web to mobile, or from traditional software to AI. It’s a fundamental shift and building this out is a 25- to 30-year process.”
So, to summarise my key points: By coming down hard on everything crypto, India is making a wrong turn. India needs to let its entrepreneurs free to create tomorrow’s world. Yes, there will be some negatives as they are there with many new innovations. But the good will be far greater. India needs to leapfrog with new technologies to remove friction in people’s lives and create prosperity. Web3 is one of those paths. I hope (but I am not optimistic) that we can learn from our past mistakes and create a policy environment which allows Web3 entrepreneurs to flourish – in India. Because flourish they will.