[The Viewpoint] Regulation of virtual digital assets in India

The recent global boom in crypto investments and exponential growth in technology has resulted in popularity of virtual assets. The lack of regulation in this sector poses a lucrative, but risky opportunity for investors.

At present, India has several crypto platforms, including CoinDCX, WazirX, Kuber, etc.

This article will discuss how crypto is currently being regulated in India. So far, laws have only been applicable to taxation for revenue earned from crypto trading and guidelines have been issued for advertisements. Before any further laws can be issued, the government has to clarify the status of crypto under the law, following which sector-specific questions can be addressed.

Virtual digital assets

The Finance Bill, 2022 introduced the definition of ‘virtual digital assets’ (VDAs) under Section 2(47A) of the Income Tax Act, 1963 as:

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions 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 can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify.

To put it simply, a virtual digital asset is any information, code, number or token generated through cryptographic means or otherwise, which can be transferred, stored or traded electronically. This definition is very broad and there were initial concerns that all kinds of digital assets, including vouchers and tokens on digital gaming applications, would also be included. But due to the infinite potential that virtual digital assets hold, and the rate at which they are growing, it is better to have a wider definition than a narrower one.

Developments in India

Initially, when cryptocurrency started entering the Indian market in 2013, the Reserve Bank of India (RBI) was quick to caution owners of virtual currencies about their risk. In a press release dated December 24, 2013, the RBI stated that virtual currencies have not been authorized by any central bank or monetary authority, and there were no approvals or registrations for the same. It further stated that since all transactions are happening in an electronic medium, there may be a chance of hacking, malware, etc.

In 2017, the RBI issued another press release stating that no crypto platforms have been granted license or authorisation to conduct such financial activities from the RBI. Following this press release, two petitions were filed before the Supreme Court, which were disposed of. In the course of these proceedings, the RBI, upon direction by the Supreme Court, stated that its stance towards crypto is not positive.

In 2018, the RBI released another circular directing all banking and financial institutions to not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies. The circular was struck down by the Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India.

In its judgment, the Supreme Court observed that cryptocurrencies are a digital representation of value that is capable of functioning as a medium of exchange, unit of account, or store of value. It was noted that cryptocurrencies can perform all functions of real money, though not legal tender. The RBI circular did not pass the test of proportionality, as it was unable to prove damage to its entities, if any, which warranted such drastic measures. The RBI could have adopted other alternative measures that were less damaging, the Court had held.

Following the Supreme Court judgment, there was not much development towards regulation of virtual currencies, or crypto. However, the Union Ministry of Corporate Affairs has mandated all companies to disclose all transactions in cryptocurrencies or virtual currencies in their balance sheets, with effect from April 1, 2021.

Present scenario

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was flagged for introduction by the Indian Parliament in January 2021. In order to promote the underlying technology of cryptocurrencies, this particular Bill seeks to outlaw all "private" cryptocurrencies in India with a few exceptions. It also aims to provide a framework that will make it easier to create an official digital currency - a central bank digital currency that will be issued by the RBI. However, no progress has been made since the introduction of the Crypto Bill, and the same remains pending for consideration by Parliament.

As it currently stands, the legislature has only passed laws pertaining to taxation of virtual digital assets. The Advertising Standards Council of India, a self-regulating body, has also released guidelines for advertisements on VDAs in order to ensure that consumers are not tricked into making risky financial investments.

Taxation

The insertion of VDAs in the Income Tax Act following the Finance Bill, 2022 was a significant step forward to begin regulation of crypto in India. Under the Bill, 30% tax will be levied on capital gains from cryptocurrency transactions, and TDS of 1% will be levied on the transfer of VDAs if the value of transactions exceeds ₹10,000 in a year.

In order to provide further clarification, the Central Board of Direct Taxes (CBDT) recently released a notification dated June 30, 2022, excluding specific assets from the ambit of VDAs, specifically Non-Fungible Tokens (NFTs) as well as -

i. Gift card or vouchers;

ii. Mileage points, reward points or loyalty cards;

iii. Subscription to websites or platforms or application

Another notification released on the same day clarified that NFTs shall not include a non-fungible token whose transfer results in transfer of ownership of an underlying tangible asset, if such transfer is legally enforceable.

Advertising guidelines

The Advertising Standards Council of India (ASCI) released its Guidelines in relation to Virtual Digital Assets (VDAs) on February 23, 2022. These covered the aspect of advertisements of all VDAs, including cryptocurrency and NFTs. As per the guidelines, all advertisements in all mediums have to include a disclaimer stating:

“Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.”

This is to ensure that consumers are aware of the financial risks involved as well as the absence of a formal legal framework to regulate the investment model.

On May 16, 2022, the Securities and Exchange Board of India (SEBI) answered queries posed by the Parliamentary Standing Committee on Finance regarding VDAs and their promotion/advertisements. SEBI suggested that ‘prominent public figures, including celebrities, sportsmen’ should not endorse crypto products and the advertisement disclosure should also talk about possible violation of laws such as the Consumer Protection Act’. SEBI further opined that prominent public figures should be held responsible for making such endorsements in possible violation of the Consumer Protection Act or any other law, which include FEMA, BUDS Act, PMLA, etc. However, it is important to note that the opinion expressed by SEBI was preliminary in nature and not binding on crypto platforms and/or crypto investors.

It is important to bear in mind that these crypto investments do not always pay off. For example, Salman Khan endorsed GARI coin, a crypto currency which recently crashed by more than 80% after one investor dumped almost $2 million worth of GARI. The market is considered extremely volatile because of the lack of restrictions, which is why advertising guidelines are stringent to ensure that consumers are aware of the significant financial risks involved in such products.

Conclusion

VDAs pose several other legal concerns spanning securities law, property law and intellectual property law, amongst others. However, we are still waiting to see how the Indian government plans on navigating crypto. Hopefully, following the enactment of the Crypto Bill as a formal law, the said investment mechanism may be regularized within the legal framework in place. The market as it currently stands is extremely volatile because it is reliant purely on the forces of demand and supply. This poses several risks for investors, who also have no recourse available under law as of now.

Madhu Gadodia is Deputy Managing Partner, Sujoy Mukherji is Manager and Tarini Kulkarni is Trainee Associate at Naik Naik & Co.