India’s Web3 Ecosystem Thrives Amid Crypto Policy Hurdles

Despite facing significant regulatory challenges, India's Web3 ecosystem has witnessed remarkable growth in 2024, driven by a new generation of developers and substantial investments. The country has emerged as a key player in the global Web3 landscape, contributing significantly to sectors like software development, gaming, and decentralized finance (DeFi). This growth is taking place even as India grapples with a lack of locally tailored crypto regulations and a high-tax environment on cryptocurrencies.

India’s Growing Role in the Global Web3 Ecosystem

India’s contribution to the global Web3 ecosystem has surged in recent years. According to the India Web3 Landscape Report 2024 by Hashed Emergent, India’s share of global Web3 developers has increased from 5% to 12% over the last decade. As of 2024, India ranks second globally in terms of Web3 development, trailing only the United States. This growth can be attributed to several factors, including a booming retail crypto market, high trading volumes, and increasing institutional and retail adoption of decentralized financial systems.

Tak Lee, CEO and Managing Partner at Hashed Emergent, identified four key drivers behind India’s growing position in global crypto adoption:

• Retail crypto transactions on centralized platforms

• The country’s highest trading volumes in crypto

• Increased institutional adoption of Web3 technologies

• A growing number of retail DeFi transactions

Gen Z Developers Leading the Charge

One of the most striking features of India’s Web3 revolution is the dominance of Gen Z developers. Around 80% of blockchain developers in India are aged between 18 and 27. These young developers are especially active in decentralized finance (DeFi), payments, artificial intelligence (AI), and SocialFi sectors, with Solana being the blockchain of choice for many. The report also highlights the growing popularity of blockchains like Ton, Aptos, and Base, which are gaining traction in various Web3 sectors due to the expanding presence of both layer-1 and layer-2 ecosystems.

However, despite the enthusiasm and rapid growth, challenges persist. Indian developers have expressed frustration over employers’ reluctance to offer salaries that match global industry standards. This discrepancy remains a significant barrier to retaining talent and fostering long-term growth in the Web3 space.

Challenges for Web3 Gaming

Web3 gaming projects, which have garnered considerable interest in recent years, are facing significant hurdles. The primary challenge lies in the high cost of customer acquisition (CAC) needed to onboard Web3 users. Additionally, retaining Web2 gamers has proven difficult, as many Web3 games focus too heavily on financial incentives rather than providing high-quality gameplay experiences. As a result, many Web3 games are shifting their focus to creating exceptional gameplay first, before integrating blockchain mechanics or targeting the growing interest in real-money gaming (RMG) among Indian gamers.

Surge in Web3 Investments

Despite regulatory challenges, investments into India’s Web3 ecosystem have soared, increasing by a staggering 224% in 2024 compared to the previous year. The funding has come from a variety of sources, including local funds, ecosystem funds, and corporate venture arms of major exchanges. However, Tak Lee notes that the lack of traditional venture and growth capital, as well as the absence of private equity funds, has made it difficult for Indian Web3 firms to raise substantial capital. As a result, entrepreneurs are increasingly turning to crowd sales to fund their growth.

“The absence of growth capital in the Web3 sector, combined with the absence of traditional venture funds, pushes entrepreneurs toward crowd sales,” Lee explained. “Although some blue-chip projects may consider this route due to the high valuations offered, crowd sales remain relatively rare.”

Barriers to Investment

India is home to the second-largest developer market and the third-largest founder base globally. Despite this, the country faces barriers that prevent large-scale investments in its Web3 ecosystem. One of the key obstacles is the slower-than-expected growth of many Web3 startups, compounded by unclear regulations and compliance issues. These challenges continue to hinder the flow of investments into India’s Web3 sector.

Navigating Regulatory Challenges

India’s tax policies on cryptocurrencies remain one of the most significant challenges for the Web3 sector. The country’s high-tax environment has driven small-scale crypto investments, with traders preferring frequent, smaller trades. An interesting demographic shift has been observed, with females now representing 1 in 10 futures traders in India, suggesting untapped potential for broader participation in the sector.

Despite these challenges, the Web3 ecosystem in India is thriving, albeit slowly. The India Web3 Landscape Report advocates for regulatory reforms, particularly in crypto tax deductions and reporting. Clearer federal guidance on crypto tax implications is essential to foster innovation in the space and incentivize further growth.

The report calls for several key policy reforms, including:

• A clear regulatory framework for virtual asset service providers (VASPs)

• Tax rationalization and exemptions for VASPs

• Streamlined banking and payment access for Web3 companies

• Clarity on existing regulations affecting the sector

Recent actions by the Indian government, such as blocking unlicensed crypto exchanges, have led to an influx of funds into decentralized exchanges (DEXs) and domestic exchanges regulated under Indian law.

Looking Ahead

Despite the hurdles, India’s Web3 ecosystem is growing rapidly, fueled by a young and vibrant developer community, increased investment, and a growing global presence. If India can address its regulatory challenges and create a more conducive environment for innovation, it has the potential to become a leading global hub for Web3 development and investment. As the landscape evolves, both entrepreneurs and policymakers must work together to ensure that India’s Web3 sector can continue to thrive against all odds.