[Any views expressed in the below are the personal views of the author and should not be considered as financial or speculative advice.]
Reading Time ~ approx 13 mins (estimate by niram)
On February 7th, 2022 CT (crypto twitter) was all about POLYGON (formerly matic network), infact not just CT but the mainstream media and other tech people were all praising & hailing three Indians who originally founded MATIC NETWORK (now Polygon).
Polygon announced its latest fundraise of $450 million through a private sale of its native MATIC token in a funding round led by Sequoia Capital India. Few weeks before the fund-raising announcement Vijay Shekhar Sharma of Paytm bowed Sandeep & team for their creation - Polygon, he also added that they are fighting a global fight with the likes of Solana (well, debatable due to different architecture of both the networks) but I was impressed by the energy of Vijay’s gesture and it shows us how polygon is an inspiration to so many entrepreneurs of our country. I am not trying to create any sort of contrast here (b/w Paytm & Polygon) but India factor of vernacular start-ups have always been a subject of debate domestically. Paytm which is now a publicly traded Indian entity is one of the most criticized company for its Chinese investors over time and time. Let’s have a look at Paytm’s shareholding:
Paytm is headquartered in India, employs more than 10,000+ Indian people, primarily serves Indian market, has multinational presence, pays Indian taxes. Then why the company is criticized for being non-Indian? I think the criticism is limited to social media platforms only, twitter leads the front for such irrational critics including its competitors. In 2016 when Paytm was aggressively criticized for its Chinese investors, the CEO Vijay Shekhar was quoted saying:
“We are as Indian as Maruti is...we are 'India story' in every sense whatsoever,”
"What matters to us is our customers, what matters to us is the law of land, regulator,"
💡 In February, 1981 the Government of India and Suzuki Motor Corporation, Japan incorporated Maruti as a joint venture. And now the latter owns equity of 56.2% in the Joint Venture.\
The India story of polygon
MATIC (before rebranding itself to polygon) started its operations in Bengaluru, the closed space where matic was incubated is called ‘Matic Haveli’ (mansion) by the inner circle of the ecosystem.
Besides Indian space, in 2018 the original founders (Jaynti, Sandeep & Anurag) registered an entity by the name of “MATIC-NETWORK INDIA LLP” at Registrar of Companies, Mumbai. So does local office, local founders & local entity make the perfect ingredients to label a startup Indian? Absolutely yes! but things can be very different in decentralized/tokenized business of internet, we will see how.
Metaverse effect: You can virtually visit MATIC HAVELI in decentraland (a decentralized digital real estate platform).
Let’s understand Tokenization First (for those who are unfamiliar)
In 2016, Coinbase, Coin Center, Union Square Ventures and Consensys together published a document titled A Securities Law Framework for Blockchain Tokens, old but still relevant today due to the regulatory uncertainty all over the world. The document starts as follows:
A blockchain token is a digital token created on a blockchain as part of a decentralized software protocol. There are many different types of blockchain tokens, each with varying characteristics and uses. Some blockchain tokens, like Bitcoin, function as a digital currency. Others can represent a right to tangible assets like gold or real estate.
Further, the token can be classified into two types: Fungible & Non-Fungible, then fungible can be further divided into two which can be either an utility or a security token. Utility tokens are very common, for example ethereum is an utility token. On the other hand, security tokens are similar to traditional securities. Personally I am not aware of any token which is a security, relevantly there is an ongoing case (SEC vesus Ripple) but that seems to be inclining in favor of the Ripple.
**💡 **MATIC is fungible upto 18 decimal places.
Unlike securities which are managed/monitored by state owned regulators, blockchain based coins/tokens are mostly independent of them. Although some geographic exceptions have been witnessed over time.
Blockchain networks thrives on internet so transportation of such tokens/coins is resistant of state censorship added with features like immutability (if decentralized). I started drafting this post before Russia’s attack on Ukraine and then I read that Bitcoin & other cryptos have been trading at premium due to banking restrictions, migration and other factors arising out of war. While reading the report I recalled the heard tales about the people (migrants) of Indo-Pak partition (partition of India into two States,1947) who sold off their assets at dirt cheap prices to non-migrants and I always wondered as a kid: what if there was a way to move their assets. (Although both the States rehabilitated the survivors)
Coming back to the original idea of this post, let’s read section (2)(h) of SECURITIES CONTRACTS ACT, 1956 of India:
(h) “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
9 [(ia) derivative;
Cryptocurrencies still remains in the gray zone of Indian regulatory landscape even after Finance Minister’s budget speech in Parliament which announced tax code for cryptocurrencies followed by the definition of virtual currencies & NFTs published in the official document of the Government. Indian crypto entrepreneurs, investors & other relevant people celebrated the day as if crypto was just made legal in India but few days later during the budget debate session, ‘Banning or not banning cryptocurrencies will come subsequently after consultations’ the Finance Minister said. Confused? but the tax announcement indicate that Indian Government is finally on board to welcome and regulate the virtual digital assets industry? Still remains a tough question to accurately answer in either direction without factoring in the past-events. [My thought: expect total clarity before July 2022]
The reason I brought SECURITIES CONTRACT ACT’s section here is because till the period there are no rules or the relevant act is not notified, the agencies often refers to existing laws in force. To understand how does this ACT is applicable on Matic is something which I can’t comment on.
MATIC’s original whitepaper was published around June, 2018 and it reads as follows:
“Matic Token is designed to be a utility token which functions as the unit of payment and settlement between participants who interact within the ecosystem on the Matic Network. Matic Token does not in any way represent any shareholding, participation, right, title, or interest in the Governing body, the Issuer, its affiliates, or any other company, enterprise or undertaking, nor will Matic Token entitle token holders to any promise of fees, dividends, revenue, profits or investment returns, and are not intended to constitute securities in Singapore or any relevant jurisdiction. Ownership of Matic Token carries no rights, express or implied, other than that which may be afforded by the Matic Network and/or any other third parties whom may use such Tokens.”
TLDR: Matic is an utility token and can be used as fuel to run your transactions on the Matic Network.
On digging further, I found out that there is one entity incorporated in Singapore by the name of “MATIC NETWORK PTE. LTD.” (not sure if it is related to Indian Entity/founders)
So assuming that MATIC has two or more entities, one is holding/parent which has headquarter in Singapore/elsewhere (for whatever corporate reasons) and an Indian entity for building, branding etc. This business structure (Singapore & India) is not strange at all in Indian corporate landscape. However, I need more data to understand Polygon’s corporate structure.
Let’s draw a sequence here:
MATIC-NETWORK INDIA LLP : Incorporated on 05 June, 2018.
MATIC NETWORK PTE. LTD : Incorporated on 27 July, 2018.
So Indian entity of Matic Network is the creator of $matic token? Possible but less likely because the token was created on 20 April, 2019.
How did the foundation or the founders (Indian Residents back then) distributed initial supply of MATIC? (among themselves and the entities)
There is no information on the web that suggests Matic Foundation is incorporated in any part of the world, it is also possible that the founders labeled the wallet as Matic Foundation. The labeled address still holds 441,334,591.38 tokens worth over 600 million USD.
In April, 2019 MATIC FOUNDATION raised $5,000,000 by selling 19% of the total token supply on binance launchpad (Initial Exchange Offer). They have raised $6,50,000 prior to this IEO.
On-chain data validates the transfer of supply from the Foundation to Binance.
image-IEO
In the **image-IEO **if you notice the country mentioned is India, does that mean that the Foundation is an Indian entity? Not sure, it can also be an address that is used for governing the funds by the founders/stakeholders as multi-signatories. In a report published by Economic Times dated Feb 20, 2022, co-founder of polygon Sandeep was quoted as saying:
“We foresaw this uncertainty quite some time back. We set up all our entities abroad, and don’t have much crypto exposure in India.” [referring to Indian Regulatory Uncertainty]
As per the report Polygon has shifted majority of its operations from Bengaluru to Dubai, the US, as well as other crypto-friendly destinations.
“The company’s founders are not in India. We anyway didn’t sell directly to India.”
“It’s a sad reality.”
They would have indirectly sold to Indians because India was not among 49 countries that were restricted by Binance for the MATIC IEO. In 2020, most of the Indian Exchanges listed MATIC. But direct selling to Indians is not the relevant point here. I am curious to know about the funds that were raised from binance’s matic-IEO, how much of them were converted to FIAT & transferred to the bank accounts of MATIC-INDIA? And if the funds were transferred directly to the Indian entity (in FIAT) then how were they reported to Ministry of Corporate Affairs, RBI or other relevant agencies for compliance? While reading the Economic Times report, I found out that Polygon Network has entities in British Virgin Islands, Switzerland, Serbia and United States. So counting India & Singapore in, does Polygon have six entities for corporate functions?
Yes, Sandeep validates it to the Economic Times: “*India is one of the **six decentralized entities *that are building Polygon. The Indian government needs to understand that in this market when somebody is building a digital-only product that is going to be sold to global users and is fully on blockchain, they will simply move out”.
In my head I am still trying to understand Sandeep’s expression - India is one of the six decentralized entities.
A multinational company is a corporate organization that owns and controls the production of goods or services in at least one country other than its home country. :Wikipedia
So Polygon is a multinational company building decentralized network to scale Ethereum. If one or more entities shuts down due to regulatory issues then they may still have atleast one entity left for corporate functions such as funding, legal contracts, salaries & other corporate things that I am not aware of, so this idea of decentralized entities makes sense to me!
**💡 **Do read the blog published by Polygon about State of Governance: Decentralization.
**🤯 How would you define Decentralized entities? **Do write me if you can and read on Decentralization & Subnational Regional Economics.
The Factors (towards no banning)
On 24th March, 2021 the Ministry of Corporate Affairs amended Schedule III of Companies Act. The minister stated that “in order to bring in greater transparency in reporting of financial statements, the Ministry of Corporate Affairs (MCA) vide notification dated 24.03.2021 has amended the Schedule III to the Companies Act, 2013 effective from 01st April, 2021 to mandate various disclosures by companies in their financial statements”.
Before officially defining the virtual digital assets and in the absence of any regulatory clarity (the pre-budget period), the amendments were as follows:
Details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed:-
profit or loss on transactions involving Crypto currency or Virtual Currency
amount of currency held as at the reporting date,
deposits or advances from any person for the purpose of trading or investing in Crypto Currency/virtual currency.
I am not a legal/tax expert but I think the **amendment lacks **some points as follows:
What if the company has created its own cryptocurrency/token (fungible like matic or NFTs)? /designed for profit only like Shiba Inu type meme coins.
For the point no.2 (amount of currency held as at the reporting date) does the Government want full disclosure on whereabouts of the funds? /what if an entity bought crypto assets and staked/lend to earn more tokens.
I could not find any information on the respective dates of incorporation of other four entities of polygon. I am still interested in knowing about the Foundation’s legal existence as juridical person in any part of the world.
There are several interesting problems for taxmen to look out for in this decentralized business of internet:-
How did polygon founders distributed initial total supply of MATIC token among themselves, the entities, the foundation etc.?
How does the government view this mode of fund-raising?
How does the tax officials calculate pnl from token mints? Because trading for profit & creation of token to raise capital are totally different.
Before leaving India as permanent residents, what was their (the founders) personal holdings in MATIC?
I don’t think the Indian entity was given any rights in creation of the matic token. But did Singapore Entity distributed Matic tokens to the founders? Even if the Indian entity is responsible then this policy has been in effect only from April 01, 2021. The due date for financial disclosure is 31st March, 2022, so it will be really interesting to read the filings by relevant companies.
Now, I am looking out for:
Mode of acquisition of MATIC tokens by Sequoia Capital India Advisors Private Limited.
Mode of acquisition of MATIC tokens by Unacademy (Sorting Hat Technologies Private Limited).
How they both paid to buy the tokens: in FIAT or in CRYPTO?
To whom they paid: any of the ENTITIES or the FOUNDATION or the FOUNDERS or the BROKERS?
Will Sequoia and other investors gets a board seat in any or all of the entities? Read on SAFTE (Simple Agreement for Future Tokens on Equity).
Not just MATIC, but a lot of Indian teams are building decentralized business of internet with a native token. Watching this space evolve with regulatory affairs will be something that I will try to keep an eye on. Governments all over the world tries to attract foreign investment to their respective States, because such investments provides job opportunities and revenues to their people. Sometimes policies are designed to meet the special requests of the foreign investors.
Polygon is now a remote workplace and its direct employees are from different nations where India tops the list.
Source : LinkedIn
India gets the major share of the jobs from polygon, which state will get to earn the major revenues in taxes? We will know soon!
Finishing my post by sharing this beautiful image from Tamil Nadu.
Credits : @neilshroff (twitter)
Disclosure: I do not have exposure in any of the mentioned entities/tokens.
Note: To report any discrepancy in the post, please connect with me on twitter.