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Virtual Digital Assets in India: Legal Analysis
Introduction
With the advent of virtual digital assets (VDA) and blockchain technology, financial services across the world have begin to reshape and is disrupting multiple areas like digital payments, investment management and asset management. Lately, VDA have peaked a lot of attention across the world owning to its effectiveness as an alternate to investment and payment option.
VDAs are based on blockchain or other distributed ledger technologies. Blockchain is a manner of storage of data in a decentralised manner such that no one person (or group) can exercise absolute control over the data. The term ‘blockchain' refers to the manner in which new packets of data (called blocks) when added are linked to the last added block of data, thus forming a chain of data blocks linked chronologically. A key feature of blockchain technology is the manner in which data blocks are verified and added. This occurs through a network of computers working in parallel, without any one computer regulating the blockchain or exercising superior control over the management or storage of the data or the verification processes. Data once added to a blockchain cannot be deleted, modified or tampered with, thus a blockchain forms an accurate and reliable chronologically arranged record of all data that has been added to the blockchain. As a result, even if there is any human error in the data being added, the added data cannot be edited to rectify the mistake; only a new block may be added to acknowledge and address the error.
Type Of VDAs:
(i) One type of VDA is cryptocurrencies where a finite set of ‘currency' units, referred to as coins, are used as an electronic cash system. This may have an inherent value or may be linked to an underlying asset. Satoshi Nakamoto was the first person to unveil cryptocurrencies in the world by introducing Bitcoin which is by far one of the most popular cryptocurrencies. As on date, there are over 10,000 cryptocurrencies that have been launched, hoping to mimic the popularity and value appreciation of Bitcoin.
(ii) Non Fungible Tokens (NFTs) are another type of VDA, where tokens, which are similar to coins, can be bought and sold in a digital form. Unlike cryptocurrencies where the coins are homogenous, NFTs are non-fungible, i.e., non-interchangeable by nature such that each token is unique and has a value that is distinct from other tokens. NFTs are linked to one or more underlying assets such as artwork or real estate, which gives it its value.
One of the main difference between the above two VDAs are that cryptocurrencies are fungible that is interchangeable and homogeneous in nature, for instance one Bitcoin is equal to another Bitcoin however on the other hand NFTs as the name suggest are non-fungible and are not equal and homogeneous to each other. Each NFTs are unique, distinct and are valued differently depending upon their perceived value and demand.
Dawn of Virtual Digital Assets in India
The inception of VDAs has begun in India in the year 2013, when various crypto investment peaked up in India including Zebpay, Pocket Bits, Coinsecure, Koinex, and Unocoin that began springing up and Reserve Bank of India (RBI) issuing a circular, warning users of the potential security-related risks pertaining to the use of virtual currencies in 2013. Soon thereafter VDAs have grown at a tremendous pace with the substantial increase in the volumes of trading and with the Bitcoin hitting an all-time high.
After the issuance of a circular restraining banks, NBFCs and payment system providers from dealing with virtual currencies and providing services to virtual currency exchanges by RBI. This was a heavy blow to crypto exchanges and trading volumes fell by 99%.
This massive set back resulted in filing of a writ petition in the Supreme Court of India in the case of Internet and Mobile Association of India V. Reserve Bank of India, WP No.528 of 2018 wherein an order to lift the aforesaid ban imposed by RBI from supporting crypto transactions was passed and further re-emphasized the need for a statutory framework for the regulation of VDAs and highlighted that consumer protection is a key concern in this regard.
In regard to advertisements for VDA, a petition was filed before the Hon'ble Delhi High Court in July 2021 (Aayush Shukla & Anr Vs. Ms Wazir X & Ors W.P.(C) 6496/2021), wherein concerns were raised on the improper and unstandardized use of disclaimers in crypto advertisements. In this ongoing case, notices have been issued to leading crypto exchanges i.e. WazirX, CoinDCX and CoinSwitch Kuber along with SEBI and the Department of Information and Broadcasting to sought guidelines to be framed against VDA advertising on televisions without adequate standardized disclaimers.
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced to bring a sense of clarity and uniformity as to how the cryptocurrency exchanges would take place and prevent any misapplication, exploitation or abuse of virtual currency.
Although the above-stated Bill is yet to see the light of the day, owing to such exhaustive virtual transactions, the Government has provided some lucidity on taxation of transactions in VDAS by announcing the Union Budget 2022 wherein a 30 per cent tax on income from VDAs was proposed. The Finance Bill further defines VDA in the newly-inserted clause (47A) under Section 2 of the Income Tax Act, 1961 as any information or code or number or token (not being Indian currency or foreign currency):
generated through cryptographic means or otherwise;
providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value;
functioning as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and
which can be transferred, stored or traded electronically.
The government has also proposed a Tax Deduction at Source (TDS) on payment made in relation to the transfer of VDAs at 1 per cent. Further, gifting of such VDAs is also suggested to be taxed at the hands of the beneficiary.
In this regard further the voluntary self-regulatory organization of the advertising industry in India- the Advertising Standards Council of India (ASCI) has recently issued a 12-point guideline for protection of the interests of the consumers/investors from the imminent dangers arising from such forms of trading and investment, and from the misleading and credulous advertisements which often use celebrities to attract and lure gullible customers without fully disclosing the risks involved. These guidelines is now applicable to all advertisements released or published on or after April 01, 2022, including the earlier advertisements from April 15, 2022.
The Guidelines are to be applied across all advertisements for VDAs (whose definition is identical to the definition under Income-Tax Act) released on or after 1st April, 2022. Further, non-compliant advertisements must be removed from circulation on or before 15th April, 2022. Going forward, all advertisements must carry the disclaimer:
"Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions."
Conditions for presenting the aforementioned disclaimer have also been put forward - in print/online/audio/video formats. The Guidelines are to be read with the ASCI Code which inter alia specifies the font, color-contrast, positioning and speed which is to be applied across all advertisement formats. Conditions on marketing via social media posts and stories have also been provided for.
Due to the opacity, novelty and lack of information currently characterizing the industry, ASCI with the aim to prevent companies from giving unverified assurances to consumers has further outlined guidelines in this regard. Data associated with risks or past performance presented in a biased, misleading manner and for periods under 12 months is not permitted to be marketed. Products shall only be marketed on clear, factual and current information with no promise of future profits.
The comparison to other asset classes and the use of words associated to regulated products like "currency", "securities", "custodian" and "depositories" is also not permitted. This raises the question on whether this provisionally ends the ongoing debate of classifying VDAs as securities, thus ruling it out of the regulatory scope of SEBI. However, it must be noted that ASCI is a self-regulatory body and this may not amount to any governmental position on the same.
The Guidelines also include conditions for prominent personalities who are promoting VDA products. They are responsible for performing due diligence on the content being promoted.
These guidelines were a welcoming move that has been largely accepted and could be an important reference point for the government while proceeding further and regulating VDA product advertisements in the country.
Conclusion
While the Government of India continues to not recognise cryptocurrencies as legal tender, the Finance Bill appreciates the possible applications of the underlying blockchain technology and has announced India's very own Central Bank regulated Currency (CBDC), which will act as the digital counterpart of the Indian Rupee. As the RBI would be the regulator for such digital currency, it departs from the decentralised manner in which other cryptocurrencies presently operate.
As on date, different countries have taken the initiative to launch CBDCs including Nigeria, the Bahamas and 7 east Caribbean countries. Early adoption of CBDCs by such developing countries points to an attempt by their governments to promote financial inclusion of its unbanked citizens, and to promote cross-border payments that could indirectly facilitate investments into their countries. Presently, developed countries such as Canada and Australia are at various stages of research, development, and testing of CBDCs, presumably also driven by the cost effectiveness of such a payment system, given that the management and distribution of physical cash across large territories can prove to be quite expensive.
As the VDA landscape is growing at a tremendous pace around the world, slowly and steadily the world has started accepting the detrimental effect that an unregulated VDA sector could cause to their economy and hence started adopting regulations and provisions accordingly to protect their economy and consumers from any risky outcome that can come from such investment.
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