(Kalindhi Bhatia & Prashant Daga)
The 2008 financial crisis was largely attributed to misconduct by banks, and created a shift in public opinion about how banks are viewed in the global financial market. It is perhaps to be expected that, in the very same year, Virtual Currencies (“VCs”) were introduced; one of their stated aims is to eliminate intermediaries like banks and other financial institutions. Fourteen years on, VCs can no longer be ignored and the fight to frame the next evolution of the financial system is entering an interesting stage.
Cryptocurrencies, and other virtual assets like non-fungible tokens (“NFTs”), give rise to novel legal issues, that cannot be fully addressed by current legal paradigms. No Government or regulator issues or backs VCs, and they are a fully private enterprise. The transfer of crypto happens privately, through a peer-to-peer method, thereby eliminating the need for banks and other financial institutions. Similarly, NFTs are privately generated and their value is not regulated or monitored.
Here is a roundup of the unresolved issues that digital assets face in India today.
Regulate or Ban: The Indian Government and its financial regulator’s distaste for VC’s is evident; just see the plethora of statements and cautions they have rolled out since 2020. But despite all this verbiage, there has not been any straightforward ban on VC’s for the past 8 years. The closest we came to this was the RBI’s 2018 missive to banks to withhold banking services from VCs; this was struck down by the Supreme Court in 2020. In 2021, again, talk of the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” sparked off fears of a ban. The Finance Act, 2022 raised some hopes with a tax on digital assets like VCs, but any green shoots were quashed by familiar statements from the RBI.
Doubts over Legal Status: As per reported statistics, India is among the top 10 countries in terms of crypto-adoption[1] but due to the lack of clarity on crypto’s legality, there is no consensus on whether compliance with Indian laws (e.g., foreign exchange, KYC obligations, etc) is necessary. The basic question, of course, is on the status of VCs – are they legal tender, or commodities, consumer products, or payment instruments, or something else entirely? In 2018, the Supreme Court, while setting aside the RBI’s 2018 circular[2], refrained from opining on the legality of cryptocurrencies and left it to the legislature. In July, 2021, this question was raised before a Delhi Metropolitan Magistrate Court in Hitesh Bhatia v. Mr. Kumar Vivekanand[3]. The court held that ‘while crypto is not a legal tender, all transactions have to be compliant with general laws such as the Foreign Exchange Management Act, 1999’. Apart from this, Indian courts have not yet weighted in on the legal status of VCs.
Advertisements: Another interesting aspect to take note of is the advertising of crypto assets. There has been a surge of advertisements relating to crypto-exchanges on social media platforms, leading to public discourse on whether an activity not specifically classified as ‘legal’ can be allowed to be advertised. Indian consumer protection laws bar misleading advertisements, not to mention the possibility of laws prohibiting fraud (for promising gains falsely); media and platforms are also susceptible to an ‘abetment’ charge for these matters. Fuel to the fire came in November 2021, when the Indian government raised concerns over misleading advertisements that promised huge gains from cryptocurrencies[4]. The government also informed that they are working on drafting necessary regulations for advertisements of crypto and stated that pending the new regulations, the Self-Regulating Code issued by the Advertising Standards Council of India shall have to be complied with.
Uncertainty on other digital assets: The other high profile use-case of the underlying technology is the growth of NFTs. The differentiating factor between NFTs and crypto is that each NFT is unique, whereas cryptocurrencies are identical (same as fiat currencies). Since each NFT has a distinctive value and cannot be exchanged for an identical NFT, it has been embraced by the entertainment industry to provide exclusive pieces of artists, tokenised formats of iconic occurrences (for e.g., a sportsperson’s revered performance). As NFTs stem from the blockchain technology, they are likely to be categorized as digital assets. Even so, the intellectual property status of NFTs remains uncertain, and their underlying value and protection as legal assets will again test current IP laws – this will most likely happen when a court is called on to rule on the status of NFTs.
The Finance Bill, 2022, also clarified that NFTs are included under the definition of virtual digital assets and shall be taxable in the manner prescribed. Though there are no regulations on NFTs thus far, it is expected that the 2021 bill will address NFTs.
What should businesses do?
The 2022 budget has provided some modicum of comfort by confirming the applicable tax rates on VCs – this moves the needle a little towards ‘regulate’ in the regulate vs. ban debate. However, the legality of crypto remains in the dark; clarifications should come in the form of legislation, but this may take some more time. Similar evolution of legal concepts for NFTs may require court intervention, in the future.
In the interim, while there is no prohibition on trading cryptocurrencies (or NFTs), exchanges and investors should undertake appropriate due diligence exercises prior to entering this space.
First published on Legal500.com.
[2] Internet & Mobile Association of India vs RBI (2020 SCC online SC 275).
[3] Case No. 3207 of 2020, dated July 01, 2021.