Bengaluru: Despite a negative outlook among regulators and venture capital funds, cryptocurrency-based initial coin offerings (ICOs) have become prevalent among start-ups based out of India. Many start-ups with roots in India have either moved base to overseas markets or registered their companies in countries that legally allow trading in cryptocurrencies.

According to blockchain technology start-ups that Mint spoke to, regulatory issues have forced several Indian companies to shift base to overseas markets to raise ICOs since they have a legal system in place to trade in cryptocurrencies.

An ICO is an unregulated means of raising money from potential investors using cryptocurrencies such as Ethereum and Bitcoin.

Investors who put money in ICOs are allowed to purchase cryptographic tokens which entitle them to a share of revenue generated by the company offering the ICO. This acts as kind of security for their investment.

Mumbai-based online car rental platform Drivezy, which raised $5 million from its first security-based ICO offering in February, had registered its parent company in the US to offer the ICO. According to Ankur Sengupta, who heads business development at Drivezy, the company followed regulations laid by the Securities Exchange Commission (SEC) in the US while offering its first ICO in October 2017.

Drivezy did not offer its ICO in India and China because it was unsure about laws regarding cryptocurrencies in these countries, Sengupta said during an interview. “It was one of our Japanese investors who suggested ICO, since we are into peer-to-peer car rental business, and ICOs are increasingly becoming a convenient method to fund different kinds of projects," he added.

According to a blockchain start-up founder, who asked not be named, many countries apart from India are regulatory friendly when it comes to ICOs. The start-up which is based in Bengaluru decided to list in Singapore to raise its first ICO.

The person cited above added that although there aren’t any specific regulations against ICOs in India, more and more companies are listing their ICOs in foreign markets since there is no clarity from regulators, and small companies usually do not want to deal with legal complications.

Ajeet Khurana, head of the blockchain and cryptocurrency committee, IAMAI, said that in the past, several start-ups based out of India have also registered their businesses in the US and other countries due to high taxation, including tax brackets like angel tax. The same trend is inching in among Indian start-ups offering ICOs, he added.

“This will force the biggest and the most genuine players in the blockchain space (in India) to move overseas, because then they won’t be able to pull off their business without proper regulations in place," said Khurana.

While presenting the Union Budget 2018, finance minister Arun Jaitley said cryptocurrencies are not legal tender in India. But he added that the government would explore the underlying technology behind blockchain to apply it to payment systems.

Recently, private banks in India have also started to crack down on trading in cryptocurrencies. HDFC Bank sent out a warning alert to its customers early this week, stating that it has blocked users from purchasing bitcoins and other cryptocoins.

India isn’t the only country that has hit roadblocks with cryptocurrencies. Chinese regulators also imposed a ban on ICOs and cryptocurrency exchanges in September 2017, which led to a huge drop in value of cryptocurrencies like Bitcoin, Ethereum, Ripple and others in September 2017.

Countries like the US, on the other hand, have classified ICOs under the “securities" category which treats ICO offerings as a legal financial instrument to raise money.

However, it’s not just regulators, investors also have hit a roadblock with ICOs. A partner from a Bengaluru-based VC fund, who spoke on the condition of anonymity, said that he recently turned down a portfolio company’s plan to raise an ICO since the company itself couldn’t explain risks involved.

“We are still evaluating the risk factor of ICOs, and until we can match up what an ICO can offer in comparison to a public offering, we cannot come to a final conclusion, and it will surely take time," the person cited above added.

Manish Singhal, founding partner of early-stage VC firm Pi Ventures, said there are two key risk factors to be considered while investing into an ICO—the varying value of the cryptocurrencies and the palpable risk of in investing in start-ups.

“When I’m investing through rupees or in US dollars, then I have a currency exchange risk, and then have a start-up risk. Now, suppose the (crypto) currency is varying wildly between $50 and $100 daily, then I’m not sure whether you are betting on the start-up or on the currency," said Singhal.

Another reason why VCs and regulators view ICOs negatively is that several ICOs have turned to scam people off their money. CNBC reported in November last year that Confido, a cryptocurrency start-up that raised $375,000 through an ICO and disappeared with the money without fulfilling any investor obligations.

According to Mohit Mamoria, chief executive officer of Authorito Capital, a “crypto fund" which invests in blockchain companies, more than 90% of the ICOs in the global market, can be equated to a scam, since companies are increasingly looking at ICOs just as a fund-raising instrument.

“I have seen companies spending up to $2 million dollars for marketing the ICO so that they can raise $30 million from the ICO they plan to offer. It sounds like a good formula, but this is not the way to build a company, just spending money on marketing to raise money," said Mamoria.

He added that regulations from any government authority will take a lot of time since it’s difficult to understand the economics of an ICO. “So what I believe is it has to be self-regulated for some time. This means the company offering the ICO should be able to show transparency in what is being offered and its obligations to investors," said Mamoria, in an interview.

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