Amruta S. Kadam
The Indian Learning
Indian Society of Artificial Intelligence and Law
Cryptoassets are digital or virtual assets that are of various types such as cryptocurrency, tokens, etc. They are software-generated units that rely on encryption and technology which is widely known as ‘Blockchain’. By enabling independent verification of fund transfers, Blockchain lets cryptocurrencies operate independently of central banks and financial institutions. A ‘Blockchain System’ as the name suggests consists of chains of blocks, each of which has a unique code called ‘hash’. It can store within itself thousands of transactions. In the past few years, this system has witnessed large popularity around the world due to its outstanding features. Cryptocurrency provides immunity from counterfeiters, protection against fraudulent behaviors (using its strong and complex encryption algorithms), and minimizes any kind of interference from central authorities which makes it one of the convenient ways of transaction. In simpler words, blocks are a collection of large amount data which are resistant to any kind of alteration. The abrupt rise in the value and the capricious nature of Cryptoassets has attracted interest from global regulators and governmental bodies from diverse jurisdictions.
Status Quo in India
With the history of Bitcoin scams and Silk valley frauds, we have witnessed various instances wherein multiple concerns are were raised over security issues, regulatory framework loopholes, crimes, etc. as an aftermath of using Cryptocurrency. The Government of India and the Reserve Bank of India collectively have indicated that they have not authorised or issued a regulation for any entity to deal with cryptocurrencies and hence, individuals have no legal protection in dealing with cryptocurrencies and would bear all the risks associated with it. Against this backdrop, it is critical for institutions in India to scrutinize over the potential benefits and risks associated with blockchain to reap the benefits of digital innovation.
In recent years, the adoption of DLT and blockchain systems has witnessed progress in both, public and private sectors. Although, most of the projects are still in the proof-of-concept phase. The public sector is emerging as a giant user of blockchain-based solutions. In the private sector, the banking and financial services industry is leading in the adoption of blockchain-based solutions. However, the more unregulated this system will remain the more it will pave way for frauds and corruption. The present article recommends certain reforms which could be brought within the existing policies to boost the use of virtual currency in India.
Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
Ever since the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019,” has been presented, India has shown no improvement in its regulatory structure on cryptocurrency and the bill drafted by an inter-ministerial committee headed by former Finance and Department of Economic Affairs (DEA) is still pending for approval. The Bill aims to discourage activities such as mining, holding, selling, trade, issuance, disposal, or use of cryptocurrency in India. Chapter 5 of the Bill provides for various activities concerning cryptocurrency which are to be prohibited followed by prescribed penalties in case of any offense committed. However, as complete as this bill looks, there is a need to fill the existing void and to make it more comprehensive and free from any ambiguity. Cryptoassets and Blockchain are dynamic. With change being their only constant, it becomes mandatory to enact such laws to keep up with their changing pace. Laws that acknowledge and help them to increase their potentials rather than curbing it for the sake of avoiding any wrongdoing.
One of the crucial reforms is Smart contracts. The first mention of Smart contracts dates back to 20 years ago when cryptographer Nick Szabo introduced the concept of ‘social contract’ in the following words “New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts "smart" because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. [ ]Smart Contract plays a key role in those transactions where the minimal interference intermediary service is expected. They also facilitate automation and promote agent neutrality by excluding human participation in transactions. Start-ups through smart contracts could issue tokens in the form of shares to raise capital in the form of tokens or coins from the share market. In the future, if cryptocurrency is considered as security then it may be brought under the supervision of the Securities and Exchange Board of India. Cryptocurrency could be used to raise capital from the public using an IPO. All the business transactions involving cryptocurrency have been declared illegal in India except by the approval given by the Reserve Bank of India gives. The offenses involving cryptocurrency shall be treated as banking fraud and at par and with the same provisions of existing civil and criminal laws which apply to bank frauds. In this case, the Reserve Bank of India may undertake administrative action in the form of suspending or revoking a license, restraint licensee to participate in the business, impose a penalty, recover money from the security deposit, conditional approval to do business, appoint RBI administrator as a caretaker or take any other appropriate recourse for the same.
While we talk about India’s aspect, it is important to redress the grievances on an international level as well. Since one of the unique features of Cryptocurrency and Blockchain is that it cannot be construed to any particular territory, therefore there needs to be an international guideline to regulate it and this could be achieved through different conventions, conferences, or any such deliberations between countries. This will bring uniformity to the system, will make it easy to encounter the existing flaws, and promote a stable economy. If such a change takes place, it will eventually create a suitable atmosphere for healthy competition amongst the nations. This is important as it is well known that there is no bigger lubricant than a competition to produce innovations in the system. Policies for collaborations between private and public entities could be seen in a more magnifying space to enlarge the scope of Cryptoassets and the Blockchain. Such provisions can support us to build a more efficient and advanced system that has the potential to decrease the chances of corruption. The right amount of autonomy in both hands can make wonders, therefore in the light of the current recession faced by the country Cryptoassets may become fruitful in uplifting the falling economy.
It is interesting to know how some countries around the world are perceiving the idea of Cryptoassets and Blockchain. This is because even though the technology has been in the existence for a long time, it is still in its budding age. Therefore, taking inspiration from other countries would be beneficial in forming a stable innovation ecosystem and regulation over Cryptoassets and Blockchain. Some of the examples are as follows:
A. In Canada, cryptocurrencies are administered under money laundering and terrorist financing laws. Trading of digital currencies on an open exchange is permitted, however, the revenue generated from these cryptocurrencies is subject to income tax. They can also be utilized for buying and selling goods and services.
B. In Japan the use of Cryptocurrencies as a payment system is permitted. Cryptocurrency transactions are regulated and registered under the Financial Services Authority of Japan.
C. In New York, the use of cryptocurrency as a payment mechanism is permissible and subject to licensing requirements. All the licensees are required to comply with anti-money laundering, anti-fraud, cybersecurity, and information security-related regulations.
D. Several Asian countries such as China, Thailand, Indonesia, and Taiwan forbid the use of cryptocurrency. Many others, while permitting the use of cryptocurrencies, have issued warnings about their high risk.
Over the period, Blockchain and Cryptoassets have contributed largely among various industrial avenues including the financial sector. Initially, the system was understood by only computer scientists and some enthusiasts but now with its advancement, it is being used by many people in their respective sectors. Many central banks in collaboration with various other institutions have undertaken projects to study and research on Cryptoassets and the Blockchain to explore its potentials. So far, most of these projects have been experimental to explore the viability of conducting inter-bank settlements, settlement of digital assets and tokens, and cross-border payments across DLT (Distributed Ledger Technology) platforms with functionalities of the existing system. However, companies haven’t expressed their intent in employing this system dominantly. Even in the case of CBDC, the Riksbank, inter alia, has stated that DLT in its present forms is immature to be used for the implementation of e-krona. Nevertheless, such projects because of their consequential benefits add to the strengths of the central banks and regulators in guiding the development of DLT-based financial market infrastructure. This also enables the central banks in providing productive guidance to start-ups and institutions as they embark on the adoption of new technologies for providing effective and efficient solutions to business problems. On the other hand, in India, increasing support from the Reserve Bank of India to emerging technologies via regulatory sandbox and different schemes can lead the way for the new economy embedded with the latest technology-centric growth.
1. Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019
2. NIKAM, Rahul J. Model Draft Regulation on Cryptocurrency in India. Hasanuddin Law Review . August 2018. Vol. 4, no. 2.
3. SMITH, Sean Stein. Blockchain Beyond Crypto– Key Factors For Policymakers To Consider [online]. 21 October 2020. [Accessed 23 October 2020]. Available from: https://www-forbes-com.cdn.ampproject.org/c/s/www.forbes.com/sites/seansteinsmith/2020/10/21/blockchain-beyond-crypto-key-factors-for-policymakers-to-consider/amp