The crypto asset and cryptocurrency sphere is the one that presents many opportunities for digital transformation in India. Around the globe, crypto assets, including cryptocurrencies, have received significant regulatory attention to harness their tremendous economic potential as well as to adopt appropriate risk-mitigation strategies.
Investments in crypto assets have also witnessed exponential growth, with growing recognition by established financial institutions around the globe, thereby crypto assets morphing from a digital payment method to an asset class for investment.
Globally, the pace at which the internet is accessible and the easy availability of digital devices has caused a spur in new and innovative forms of financial payments. For instance, online payments and UPI payments have become quite common and frequent in today’s world, making payments possible with a tap of a button. Specifically, the introduction of digital currency has allowed for faster, reliable, and practical financial transactions.Available exclusively in electronic form, digital currencies and crypto assets have been facilitated by the innovation of blockchain-based decentralized ledger technology, which promises to offer secured peer-to-peer transactions. In addition to this, it also provides auditable and transparent transfer of assets.
Timeline and Legal Position in India
In India, the regulators have been hesitant to regulate cryptocurrencies. The RBI had previously highlighted the risks associated with transacting in cryptocurrency. On April 5, 2018, RBI issued a ‘Statement on Developmental and Regulatory Policies’ which directed the entities regulated by RBI:
(a) to not deal with or provide services to any individual or business entities dealing with or settling virtual currencies; and
(b) to exit the relationship, if they already have one, with such individuals/business entities, dealing with or settling virtual currencies.
Subsequently, RBI issued a Circular dated April 6, 2018 (“RBI Circular“) directing the entities regulated by RBI:
(a) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies; and
(b) to exit the relationship with such persons or entities if they were already providing such services to them.
In 2019, a bill was introduced in the Parliament titled ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’, which intended to ban the cryptocurrencies in the country.
In March 2020, the Hon’ble Supreme Court of India, in the landmark case ofInternet and Mobile Association of India v. Reserve Bank of India, struck down the RBI Circular, which essentially tried to ban cryptocurrencies. The RBI Circular was struck down on the grounds of being disproportionate in nature. The apex court, in this case, held that any restraint or regulation must be exercised with proportionality and responsibility. It was further held that any restraint must be backed by adequate empirical evidence, which set the stage for cryptocurrency regulation.
Therefore, in 2021, a new bill, ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021′ (“2021 Cryptocurrency Bill”), was introduced. However, this is not yet available in the public domain. It is pertinent to note that in this bill, the words’ banning of’ was conspicuously omitted, indicating that there would be a regulation and not an outright ban, i.e., a soft-touch approach for the regulation of crypto or private currencies.
As per a Lok Sabha Bulletin, the purpose of the 2021 Cryptocurrency Bill is as follows:
(a) the creation of an official digital currency to be issued by the RBI;
(b) the prohibition of all private cryptocurrencies in India, and
(c) the creation of exceptions to promote the underlying technology of cryptocurrency and its uses.
Taxation and Cryptocurrency
However, the union budget for the financial year 2022-2023 has given clarity concerning the taxation on levy of income tax on the crypto assets, including cryptocurrencies. From April 1, 2022, onwards, a30 percent income tax has been levied on profit from cryptocurrency transactions in the same manner as it treats winnings from horse races or other speculative transactions. Over and above this tax, cess, and surcharges will also be levied on such transactions.
In addition to this, 1 percent TDS is also proposed to be levied on the payments towards virtual currencies beyond INR 10,000 in a year and taxation of such gifts in the hands of the recipient. The threshold limit for tax deducted at source is INR 50,000 a year for specified persons, including individuals/ HUFs who must get their accounts audited under the Indian Income-tax act.
Security and Covenant monitoring using Distributed Ledger Technology
Attention is invited to a Circular issued by SEBI dated August 13, 2021, titled ‘Security and Covenant monitoring using Distributed Ledger Technology’. SEBI had constituted a working group comprising its officials, depositories, stock exchanges, and the Trustees Association of India to strengthen the process of security creation and the monitoring of securities. Based on the recommendations of this working group, SEBI announced the development of a platform for security and covenant monitoring systems to be hosted by depositories. Using DLT, the platform will record security creation, asset cover and covenants, credit rating information, and interest and redemption payments and monitor these periodically. SEBI requires depositories to put in place adequate safeguards to ensure data integrity and security and share information with other depositories to ensure compatibility of systems.
Classification of Cryptocurrency
Section 2 (h) of the Securities Contract Regulation Act, 1956 defines security as
(h) “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate…”
It is argued that it can be considered a security under the ‘other marketable security”. However, to be classified as a security, it should be in or of any incorporated company or other body corporate. Therefore, cryptocurrency cannot be classified as a security due to its decentralized nature. Further, cryptocurrency is based on blockchain technology; therefore, it is almost impossible to determine its origin.
Therefore, cryptocurrency can be classified either as a
(a) ‘money/currency’ or
(b) ‘payment system‘ under the Payment and Settlement Systems Act, 2007 (“PSSA“) since cryptocurrency transactions include payment obligations/ instructions.
In line with this classification, the users and traders of cryptocurrencies may be deemed to carry on an activity falling within the purview of the RBI.
Drawing Parallels from the US
The United States Securities and Exchange Commission has also indicated thatBitcoin and Ethereum are not securities due to their decentralized nature, which is a hallmark of blockchain applications.
However, regulators around the world have eyes on an ongoing case in the United States District Court, New York, in the matter ofSecurities and Exchange Commission v. Ripple Labs and Ors. One of the underlying issues, in this case is whether the XRP is an “investment contract” under the U.S. securities laws, thus making it subject to registration requirements under the Securities Act of 1933.
XRP is the native cryptocurrency of Ripple Labs Inc. (“Ripple“), a cryptocurrency payment system created by Ripple Labs Inc. XRP is its ‘digital asset built for global payments‘; therefore, Ripple plans to use it for money transfers, which are usually conducted by the banking system. XRP would allow users to send money at a meager cost, attracting the potential interest of retail customers and banks alike. A fundamental value proposition of Ripple is its minuscule transaction costs while offering transaction finality ofunder five seconds. SEC claims that XRP is a security and that Ripple had to comply with the registration requirements.
The final decision in this matter will give a clearer view of the jurisdiction of regulators in this particular domain.
Use of Blockchain in the Energy Sector
Blockchain is a method of quickly validating transactions and record-keeping for large quantities of data. Within the energy sector,several opportunities for blockchain technology have been proposed. Blockchain technology can be used in the energy sector for multiple things such as record keeping, smart contracts, and ownership records.
Through blockchain technology, data can be shared accurately and quickly within the energy system. Therefore, blockchain technology offers an efficient manner in which massive data can be transferred transparently, securely, and in a tamper resistance manner.
Smart Contracts, Blockchain and Energy Sector
Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. They are typically used to automate the execution of an agreement so that all participants can be immediately sure of the outcome without an intermediary’s involvement.
So quite fascinatingly, smart contracts turnlegal obligations into a code, with automated processes, thereby self-verifying and guarantying security in every step of the process. Additionally, smart contracts can ensure thatelectricity is requested, for example, when prices fall below a price threshold or when green electricity or local power is available.
So, smart contracts have the potential to provide a highly automated and yet secure way to buy and sell electricity. Particularly in countries that do not yet have energy trading systems, new markets could be created, and far-reaching investments could be made.
Cryptocurrency Mining and the Energy Sector
The mining of cryptocurrency is an energy-intensive procedure. The mining of cryptocurrency requires a substantial amount of energy to operate the devices for computation and calculations, which is required to maintain the blockchain and thermally regulate the devices for optimal operation. Therefore, the energy consumption involved in mining cryptocurrencies is a crucial concern. In addition to this, another topic of debate on the mining of cryptocurrency is the carbon footprint that it leaves in the ecosystem.
According to the Cambridge Centre for Alternative Finance, Bitcoin’s electricity consumption is approximately 110 terawatt-hours per year, i.e.,0.55% of the global electricity production. However, a significant portion of the energy involved in mining may be from non-renewable sources.
The intense and extreme power usage involved in the mining of cryptocurrencies may cause grid reliability and equipment problems that cannot handle increased loads. To handle the increased load, new infrastructure and servicing are required, which requires significant investment.
Since the market is volatile and unregulated, miners are reluctant to commit to long-term obligations.
Regulation of Miners
Mining, in a way, is akin to a software development activity generating value in the form of a newly generated virtual currency. At present, no law in India mainly regulates the activity of virtual currency or cryptocurrency mining.
Therefore, entirely domestic mining as an activity should only be subject to laws of general application. While there isno judicial precedent on this issue, FEMA and its regulations may be relevant where the block reward is sent to a virtual wallet address in India and subsequently transferred abroad to a foreign wallet.
However, an arrangement where an Indian entity only provides the physical mining infrastructure, and the newly generated virtual currency is availed directly by a wallet address that is held by a non-resident entity abroad should not attract the export and import-relatedlegal obligations under FEMA. In such a situation, the virtual currency was never held in India, and thus there isno transfer of a virtual currency from India to a foreign country.
Amidst the hazy and unregulated arena for cryptocurrencies, it is difficult to conclude about the cryptocurrencies in the energy industry. However, it will be an exciting unfolding of how regulation of cryptocurrencies will finally happen in Indian jurisdiction.
About the Authors
Ms. Shubhi Maheshwari is an Associate with the Financial Regulatory Practice at Cyril Amarchand Mangaldas, Mumbai. She pursued her B.L.S. LL.B. from Government Law College, Mumbai.
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Preferred Method of Citation
Shubhi Maheshwari, “Future of Cryptocurrency in the Energy Sector in India” (IJPIEL, 6 June 2022)