Although crowdfunding in India is at a nascent stage, with only 15 notable crowdfunding platforms (CFPs), the concept holds immense potential for the country’s startup ecosystem.
By Apekshita Alkesh/Applied Economics and Management, Cornell University
Although crowdfunding in India is at a nascent stage, with only 15 notable crowdfunding platforms (CFPs), the concept holds immense potential for the country’s startup ecosystem. People can utilise these platforms to raise money for projects and also to gauge public response, viability and popularity of the product. However, the notion of a regulated online CFP, especially with all the computer jargon accompanying it, is often unfamiliar to potential investors. This makes it imperative for them to understand the benefits of blockchain and AI within a CFP and how CFPs will change P2P (Peer-to-Peer) lending and investing, and also guarantee the security of their investments.
India’s history with fundraising has witnessed unfortunate incidents such as NSEL and CIS scams, which have made it evident that a regulatory vacuum in financial matters is a bad idea, and can lead to money laundering, terror financing and other perilous racketeering. Hence, India must bring these online platforms under a stringent framework to legitimise the activity as well as aid capital formation. Both NITI Aayog and DEA can work towards this as an alternate markets division within the SEBI, and that would be the easiest, strongest and least disruptive way of creating a regulatory framework, and can address problems of high interest rates, misuse of funds, exaggerated return figures and high default rates that are typically found in a P2P lending market.
It is also imperative to consider ways to reduce the risk of low-income households getting sucked into Ponzi schemes. Since the government does not possess the right to tell people what to do with their money, it would not be practical to set a lower limit on income people are allowed to invest. If people want to invest in a certain project through CFP because they believe the returns they receive are worth it, the government must take measures to inform them of all the potential risks. Often, people invest in risky ventures through CFPs, because marketing material is misleading.
These potential risks can be mitigated through measures such as partnering with private companies, and employing technologies like blockchain. Private partnership can allow new project issuers to ensure viability of the project, enough collection of funds and technical assistance. This strategy has been adopted by CFPs such as Kickstarter and Indiegogo. CFPs can also employ AI or blockchain to create an inbuilt mechanism where people’s investments are protected.
There exist a number of blockchain applications as proof of concepts of real world, and a rising future of its vast applications is almost a given. Blockchain’s method of storing data provides a huge advantage for its usage in a CFP, as it provides a non-destructive way of tracking data over time. Besides, it is decentralised and distributed over a large network of computer systems, and hence reduces the possibility of data tampering. Before a block can be added to the chain, there is a cryptographic puzzle that is solved, and then shared with the network called “proof of work.” Because of these verification processes, each record is trustworthy.
Blockchain allows one to one trade, but at scale. Instead of a company or intermediaries supervising transactions, it creates a software code. Each computer will have a node that runs the same software, and ensures that each transaction is secure. This will provide a greater level of security to people who invest in new ventures or projects on the regulated CFP. This system of financial transactions has been adopted in many financial organisations that trade cryptocurrency and other assets online. Using blockchain, it can be verified if a person is legitimate seller or producer of the item, since there are identity structures that can be cryptographically signed.
Since blockchain’s mechanism creates a consensus between distributed parties, there is almost zero chance of a breach of security to corrupt existing data. This application of blockchain in CFP will ensure that all transactions are encrypted, and there is no chance of fraud.
A World Bank report states crowdfunding has emerged as a multi-billion dollar global industry, and is expected have a volume of $300 billion by 2030. Given India’s enormous penetration in mobile telephony, increasing internet penetration in rural areas and the enormous spread of social media, the crowdfunding scenario looks highly promising.