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How SEBI Views Metaverse Funds Will Shape The Future Of India’s Web3 Startups

How SEBI Views Metaverse Funds Will Shape The Future Of India’s Web3 Startups

Last year, Invesco Mutual Fund’s crypto-based ETF Funds of Fund scheme was shut down by SEBI, citing the absence of a regulatory framework for crypto

Right now, Navi has introduced an ETF FoF scheme focused on metaverse, while Aditya Birla has introduced a similar scheme for blockchain and VDAs

While the authorities had been antagonistic towards crypto, there is no such sentiment for the metaverse

The metaverse is one of the recent technologies that have captured the world’s imagination. Coming under the web3 phenomenon, it has become as much of a trend in the world as in the Indian startup ecosystem; with tens, if not hundreds of startups popping up working under the metaverse umbrella.

As a consequence, these startups are competing with each other over aspects such as applications and technologies, but most importantly, funding.

The answer here is the metaverse funds. These are funds that invest in metaverse-focused startups, and right now, India has seen three of these offerings, focusing on investments in the metaverse, blockchain and IoT.

One of such examples we can see is in Navi Technologies. The IPO-bound fintech startup had set up a metaverse-based Fund of Funds scheme, the Navi Metaverse ETF Fund Of Fund (FoF) recently.

Along with this, Aditya Birla’s blockchain and virtual digital assets (VDAs) ETF FoF will be investing in the units of global ETFs focused on startups working on blockchain.

However, these funds might face regulatory challenges with SEBI if they do not conform to the guidelines that have been laid down by the sector regulator.

The Antagonistic Environment In India Towards Crypto

Last year, Invesco Mutual Fund proposed the Invesco CoinShares Global Blockchain ETF FoF, which was focused on crypto investments.

However, Invesco had to withdraw the fund offer, since India’s crypto regulatory framework is still a work in progress. Back then, the company had said that a launch would be premature, and notably, the government has grown more hostile than ever towards crypto.

Along with that, in December, SEBI advised mutual funds against any fund offerings on crypto.

An argument can be made that since RBI and the government of India have been antagonistic towards cryptocurrencies and other VDAs, SEBI decided to choose not to bring Invesco’s undertaking forward.

RBI has been tremendously opposed to the idea of cryptocurrency, and its recent statements have been scathing.

In February, T Rabi Sankar, Deputy Governor, RBI, said that cryptocurrencies are akin to Ponzi schemes or even worse and these should be reason enough to treat them with caution, adding that this should be reason enough to keep them away from the formal financial system.

Before that, Shaktikanta Das, the RBI Governor, cautioned investors on the risks posed by private cryptocurrencies in India. He said, “Private cryptocurrencies are a threat to macroeconomic and financial stability and investors, who are investing at their own risk, should keep risks in mind.”

In its Financial Stability Report for December 2021, the central bank further said that long term concerns over cryptocurrencies relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution.

Since the time Invesco announced its plans for a crypto-based ETF FoF scheme, India has started work on a regulatory framework for crypto, starting with introducing the 30% crypto tax, and the 1% TDS on all crypto transactions above INR 10,000.

Therefore, metaverse, itself being a relatively new technology, can also be perceived as not being stable enough to warrant investments to the tune of billions of dollars. The metaverse is currently very much in its experimental phase and looks nothing like the lofty promises the industry has been making. 

However, India’s largest companies have shown trust in the potential of the metaverse, with Infosys, TCL, and Tech Mahindra working on their metaverses, launched earlier this year.

Is A Run-In With SEBI Possible?

There are two reasons why SEBI would be bothered by an ETF FoF scheme to promote metaverse. First, the scheme violates some or all of the aspects of the SEBI (Mutual Funds)

Regulations, 1996, SEBI (Mutual Funds) (Amendment) Regulations, 2014, and guidelines that it issues from time to time.

Two, the investment in any single ETF exceeds the $1 Bn-mark.

In the documents submitted by Navi to SEBI for its metaverse-focused ETF FoF scheme, the company claims to be following all the guidelines laid down by SEBI, along with the regulations decided by the SEBI (Mutual Funds) Regulations, 1996. The due diligence papers claim the same.

“The Scheme will not invest in debt instruments with special features as stated in the SEBI circular dated March 10, 2021,” the documents submitted by Navi AMC read.

Also, Navi has mentioned that it is following the Regulation 28 (4) of the SEBI (Mutual Funds) (Amendment) Regulations, 2014, which dictates the investment Navi itself can make in the scheme, which is limited to INR 50 Lakhs, or 1%, whichever is lower.

Further, Navi has no plans to invest more than $300 Mn in a single ETF/mutual fund, as is confirmed by the documents it has filed. “The Scheme shall invest in overseas ETFs subject to a maximum of US $300 million per Mutual Fund, within the overall industry limit of US $ 1 Bn,” Navi’s documents read.

What’s more, the metaverse is a very new phenomenon and is still under the larger internet economy, therefore, the governments across the world have not felt a need to regularise it. Though in future that is going to happen, for now, there is no reason for the government to regularise it, and hence, there is no reason for either Navi or SEBI to put a stop to it.

Right now, Navi, along with Aditya Birla, can operate within the regulations laid down by SEBI, and avoid run-ins with the regulator over metaverse funds.

What Is A Metaverse?

A metaverse is a network of 3D virtual worlds, aimed at delivering real-life experiences in the virtual world. Since Facebook rebranded itself into Meta, many IT companies around the world have since dipped their toes into the metaverse.

The metaverse has been touted to be a great market opportunity; per a report by Goldman Sachs, the total market opportunity could be as high as $12.46 Tn globally over the next two decades. Therefore, it is pretty clear why the Indian tech giants are all about it.

Large tech platforms such as Meta and Google, which have benefitted from the rise of mobile apps, now have shifted their focus towards AR as the next computing platform. Since the success of mobile and web apps in Web 2.0 is already apparent, these tech companies will look to emulate the same success with the metaverse.

In the basic sense, the Metaverse forms a part of the larger web 3.0, which has been touted as the next generation of internet applications.

The internet right now uses web 2.0, but with web 3.0, the interactions will become more immersive, with AR and the metaverse as the new OS for all the web applications.

Therefore, the metaverse, while being a part of a bigger whole, will still be one of the most influential aspects of the web 3.0 ecosystem.

“Internet traffic is already 80% video and has been growing at a 30% CAGR. Our team projects that even modest metaverse usage could drive a further 37% CAGR in the next decade to 20 times current data usage,” Credit Suisse said of the internet usage in India.

Recently, multiple metaverse-focused tech startups in India have seen funding and attention flow in. Telugu actor Rana Daggubati is venturing into the space with startup Ikonz; the actor is an investor in the startup.

Last month, Ikonz raised seed funding in a round co-led by Village Global and Woodstock, along with participation from Polygon Studios, the NFT and the gaming vertical of Polygon. Village Global is backed by renowned names in the tech world such as Bill Gates, Jeff Bezos, Mark Zuckerberg, Eric Schmidt, and Reid Hoffman. 

Rana Daggubati is not the only celebrity taking an interest in the metaverse; Punjabi pop singer Daler Mehndi last month bought a property in Metaverse for an undisclosed amount, calling it ‘Balle Balle Land’.

Along with this, fitness technology startup, GOQii Inc., raised $10 Mn in an extended Series C equity round from Animoca Brands to launch its health metaverse.

Also, digital collectables-focussed startup FanCraze raised $100 Mn in a funding round. The raised capital would be used to fund the expansion of the startup’s metaverse across the cricket landscape for current and emerging partners.

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