Core Technical Concepts / Synopsis of the Industry : Crypto Currency (as at Jan 2021, India)
1. Prior to understanding what cryptocurrency (“cryptos”) are it is imperative to know the underlying technology that powers these cryptos – Blockchain Technology or the Distributed Ledger Technology (DLT)
2. Blockchain or DLT is a mechanism of storage data records in a manner that there is no central authority that controls it. Thereby all the nodes in the systems are responsible for storing some part of the data, which is an ingenious way of saving of data since owing to no central authority, there is no chance of central level corruption or distortion of data records at the central level. Such a system of data records has been considered by tech experts as immutable, non editable, non corruptible on which various use cases can be built. Example – supply chain systems, voting systems, educational records. Such records can then be verified by using a public private key encryption similar to what is currently used in India for digital signatures.
3. The records on a blockchain are maintained publicly on an explorer which is visible to all. Thereby a public blockchain system is visible publicly, however for masking of transaction the transaction details or transactions parties data may be hashed by using an algorithm called SHA256, which is nothing but a mechanism to convert any data whatsoever to a alphanumeric code, which throws same result each time the same input is inserted. No two results are identical.
4. As a use case for transfer of value from person to another, blockchain can be used to create crypto currencies, which are technically not currency, however they can be used in the tech world for acknowledgement of certain work done. Example – If A (person or a computer) does some work for B, then instead of paying in INR or any fiat currency, a value in terms of a token may be given, which is generally of use within a certain ecosystem. Say a bank may charge all bank fees in a token called XYZ and bank customers have to buy XYZ to settle bank charges fees, however such XYZ may also be used in receiving some credit card cash backs. So the XYZ token is a valid “value” that can be used within the ecosystem of a bank and thereby derives some value based on volume of transactions. Such token is then a crypto token, since it is backed by mathematical algorithm that no two token can have same id number, yet each token is of same value, just like the Rupee note.
5. Cryptos or crypto tokens are of two types : Utility and Security. Security Tokens are such which give the users a partial ownership right and Utility tokens are such which give the users just an access to the ecosystem. In loose terms, security tokens are like shares of a company, whereas utility token may give non ownership rights to use or trade an asset.
6. In 2009 a white paper appeared in the tech circle which gave birth to such a token called – Bitcoin. Which is not backed by any asset however could be used a value transfer from one person to another and each transaction could be recorded publicly on a explorer (a public ledger) in a hashed manner.
7. People started trading and using these tokens, and over time the value increased. Primarily as a hedge tool / store of value / non fiat transactions over internet especially for techies. From 2009 till 2014 there was marginal growth in value. Till another crypto coin called Ethereum was launched by a Russian Canadian tech developer called Vitalik Buterin. Ethereum is like google play store or apple store, which provided infrastructural solutions for tech developers to build their own decentralized apps within Ethereum ecosystem. The concept was a massive hit and prices of Ethereum soared in a matter of months, making Vitalik one of the youngest millionaires of the world.
8. There were no legal regulations about how to trade and use these tokens till now. And most of such tokens that were build on Ethereum were either self governed or were not transparent. Many failed, many are still doing well. However this caught the eye of the government around the world and some of them acted to bring in some notifications. Like RBI in India stated (notification still available on their website) that dealing in crypto currencies ( they called it virtual currencies) are risky and users shall be responsible for their own loss. Similarly other countries like US UK China Australia issued similar notifications.
9. Use cases of cryptos – However each crypto coin is made is through a mathematical process called ‘mining’ which is a process where computers compete with each other and whoever solves the problem first is able to win a reward in way of a new token which is minted or created. Each new token is then added to the existing chain of blocks of such tokens, creating the blockchain. Wherein each next block has a reference of the previous block, so no random person can edit or add to the chain. Obviously the longest chain is also the most trustworthy chain and all transactions are recorded in a public ledger called explorer. Each coin like Bitcoin or Ethereum have their own explorer and they are publicly verifiable.
10. Challenges to the government – By 2017 / 18 Government realized that people are able to exchange values or transfer value from one country to another by circumventing FEMA laws. In addition the biggest criticism of Cryptos is that they are not backed by any underlying asset, though in theory the value of the 'mining' cost is the underlying value. the Example – a person in Dubai is able to pay a person in HK in Bitcoins which is validly recorded over the explorer however it circumvents the Foreign exchange laws and there was no clarity on taxation as well. China then took initiative and realized that Chinese are able to ‘mine’ cryptos and sell it off in global market for gains. The government initially encouraged it but later when the people were not traceable they banned ‘mining’. Business slowly shifted to Hong Kong and from there to offshore countries like Malta / Estonia. Malta president rather welcomed crypto entities to their country but with a change in government things changed. He had promised regulation licenses but post the change in government not much has happened on ground. Estonia also offered such registration but there was not much from the government thereafter.
11. In India, in 2017 / 18 we observed the existing law and realized that there was no clear law that supported or opposed the use of cryptos. We then wrote 5 Right to Information application to know more about the government stance on the same. We have copies of RTI to MCA, Tax Department, GST Department, SEBI, RBI. Only RBi replied and stated that virtual currencies are not currencies and no one can issue currency other than government, however interestingly they stated that FEMA laws don’t apply to cryptos as such (though we personally beg to differ). SEBI also later replied that they did form internal committees, even claimed to send person abroad to Japan etc, to know more about such technology, but upon another query about the results of such committee meetings or foreign trips they stated that they cannot reveal / not liable for disclosure under RTI Act.
12. By 2018, which most global countries were already developing laws to understand such technology, with restrictions though especially pertaining to Security laws compliance and Foreign exchange Controls, however there was no outright ban on use of cryptos except in smaller nations like Nepal / Ghana etc . US SEC stated that other than security tokens can be issued however US citizens cant apply in Crypto based fund raising events called ICO ( equivalent to IPO. ICO means initial coin offering, where a crypto entity issues it coins to public against value, just like IPO but on self governing principle).
13. World Economic Forum came up with explainer videos. So did BBC.
14. By 2018, the crypto world was booming. ICOs were issued by any Tom and Harry. Crypto Exchanges ( a place where crypto coins can be traded or exchanged against each other) reached billion dollar valuation however most of the cryptos companies were either self governed or operating from tax haven jurisdictions like Cayman Islands.
15. However in India, in 2018 RBI issued a ring fencing notification, stating that cryptos could not be converted into INR and vice versa, that brought the Industry to its knees. Since only those who already had cryptos were able to deal with each other and no new person could buy cryptos using his legitimately earned INR.
16. This was challenged in the Supreme Court and on Mar 04, 2020, the Hon Supreme Court passed a judgement to re allow crypto to fiat currency trading and directed RBI to issue such orders. Post which the Crypto Exchanges were able to re operate, getting more and more users. However the RBI has till date not come up with any manner or mechanism (as at Jan 2021) about how to allow crypto buying and selling in India. Ordinarily banks don’t allow customer to open their accounts if they are dealing in cryptos. Banks say that they have not been updated by RBI about the same and Supreme Court judgement doesn’t apply to them directly.
17. In the Supreme Court judgement as stated above in Mar 2020, arguments were advanced on basis of Art 19(1)(g) of Constitution and judgement is primarily based on that, however reference to about 50 other countries of the world were provided about developments in this industry around the world.
18. Currently, globally, Wyoming (US) has most advance Crypto laws, they consider crypto as “property” and apply property laws to it, which is a State subject. They have also amended their existing property laws to accommodate cryptos as valid asset class. UK also allows registration and use of Cryptos, however bigger banks there also refrain from it. Australia has come up with an Austrac Licence for the same. Singapore since 2020 is now allowing crypto exchanges to get registered as long as all token registered on the exchange are utility token as confirmed by a Singaporean lawyer. 40 other countries are either non negative or positive for crypto industry.
19. In India, the government in now proposing to bring a bill – The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which states – to create a facilitative framework for the creation of official digital currency to be issued by RBI. The bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exemptions to promote the underlying technology of cryptocurrency and its users.
20. The same needs to be challenged again at the Supreme Court on the basis of :
a. Article 19(1)(g)
b. Disregard to Supreme court judgement dated Mar 4, 2020.
c. Developments in other countries.
21. Key Data reference points :
a. Supreme Court judgement :
https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf
b. RBI Crypto notifications
https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=2474
c. BBC Crypto Video on Youtube
Team, Blockchain Lawyer