Raising funds for a business is a laborious task, especially for beginners like startups. This job becomes even more difficult in countries like India where the inclination is more towards saving than investment. These startups do not have goodwill and collaterals which incapacitate them from raising funds through equity and debt. Hence, they are only left with the option of crowdfunding. Initial Coin Offering [“ICO”] among all forms of crowdfunding is growing with a much faster pace.
ICO is one of the methods of fund-raising where a company sells a determined number of digital tokens to the public at large against fiat currencies like ether, coins etc. In other words, it is the raising of funds through bitcoins. The process for ICO involves a company issuing tokens to the investors in exchange for bitcoins offered to the company. These tokens are nothing but an additional cryptocurrency specifically issued for this ICO. An investor invests with an expectation that these tokens will give good returns to the future. Throughout this research, we will discuss the problems in the ICO and will look for their respective solutions.
The dilemma of legality or illegality
As discussed above, ICO is completely based upon bitcoins. However, in India the position of bitcoin is itself in question. RBI does not recognise bitcoins in India. It even prohibited the banks from providing financial services to the entities dealing in bitcoins. However, something which is not recognisedas legaldoes not make it illegal. A close analysis of this order will show that transactions involving the financial institutions in the exchange of bitcoins will be stopped. But that does not mean that a bitcoin itself cannot be used as a means of exchange in transactions. Furthermore, this ban on bitcoin has pushed the stakeholders of bitcoin to opt for P2P lending.Here, P2P lending is a mechanism where the holder of the bitcoin lends his bitcoins to another entity in return for regular payment of interest along with the principal amount.[i]
This debate of legal and illegal has created confusion in the mind of the investors as well as the companies.Due to this uncertainty, the Indian companies are fleeing to such countries where transactions in bitcoins are legally recognised, thereby causing a loss to the economy.
RBI v. SEBI: Who is the regulator of Bitcoins
There is a question regarding bitcoin which is lingering till date and still unanswered. The puzzle is whether bitcoin is a legal tender (currency) or is it a security. The determination of this question is essential as this will ultimate decide as to who has the jurisdiction on bitcoins between RBI and SEBI.
Section 22 of the RBI Act provides that the reserve bank has the exclusive right to issue bank notes in India.[ii] Moreover, section 26 of the above act provides that any series of bank notescan be discontinued on the recommendations of the central board i.e. the board of RBI.[iii]
On the other hand, the jurisprudence on security lies in the Securities Contract Regulation Act, 1956 [“SCRA”].Section 2(h) of SCRA provides that securities include shares, scrips, bonds, debentures, debenture stocks or other marketable securities. A prima facie reading will show that there is no mention of bitcoins in this list. However, a closer look will suggest that the term ‘other marketable securities’ may include bitcoins. Here the whole case depends upon the term ‘marketable’.
In context of a particular thing, it is considered as marketable if it is capable of being bought and sold in a market.[iv]Bitcoinsare considered to be one of the most favoured mechanisms of exchange which are freely bought and sold. Further, there are specific bitcoin exchanges in India where the bitcoins are traded such as WazirX, Bitbns etc. The SEBI has the power to regulate the stock exchanges. According to section 2(j) of SCRA, a stock exchange is a body corporate which assists, regulates and controls the buying, selling and dealing in securities. If bitcoins are considered as securities, then the exchanges where they are being traded has to be considered as the stock exchange.
After deliberating upon bitcoins, it is very much clear that bitcoins can be brought under the ambit of both RBI and SEBI. But the sad story is that both the regulators are very much reluctant to take up the responsibility for checking the bitcoins. A petition has been filed in the apex court for deciding the future of the bitcoins in India on May 8, 2018. The petition was filed against the decision of RBI to stop the banking and other financial activities provided by banks to the entities dealing in cryptocurrency in India.[v]As per the recent update, the RBI has filed its response stating that it has not banned cryptocurrency in India but only directed entities regulated by it to provide the banking services as there is a huge risk involved in these.All the interested parties are required to submit their stand on the bitcoins including the RBI and SEBI. Hoping that this will issue will also fixate the responsibility once and for all.
Killing the Trade: The WTO Role
In the abovementioned paragraphs we have discussed the problems which the Indian bitcoin trading is facing. However, the woes do not end here. Here, the author will discuss the third problem which the government might facedue to the two problems discussed above. Whether bitcoin is legal or not; whether RBI has jurisdiction or not; we are not certain. But one thing is for sure that trading in bitcoin is in fact taking place.
When it comes to trade, the first thing that strikes the mind is the World Trade Organization [“WTO”] and its activism in regulating the free trade. The regulations of the WTO are considered as the hard law.Article 2.2 of the Marrakesh Agreement expressly providesthat law made by the WTO is binding on its member nations.An important question which is required to be addressed here is the regulation of the bitcoins by the WTO. Currently, the deliberations are going on within WTO to bring the bitcoins under its jurisdiction. However, when the already existing rules of the WTO are referred, they suggest that ongoing situations in India regarding bitcoins may invite the WTO action.
Prima facie, it seems that the restrictions which the RBI has imposed do not affect the trade interests of any country adversely but this is actually not the case. However, the author does not agree to this. The imposing of these restrictions is nothing more than the qualitative restrictions [“QRs”]. Article 11 of GATT 1994 prohibits the use of the QRs by the member nations both for import and export purposes. QRs are considered to be all government sponsored actions that act as restrictions on trade other than ordinary custom duties and charges on imports and exports.[vi]In context of bitcoins in India, the move of RBI will fall under the ambit ofQRs.There is a consensus on elimination of QRs as they are not transparent as they are difficult to identify.[vii] However, in certain circumstancesthey are allowed; provided theyfall within the exceptions like general exceptions, security exceptions etc. Moreover, they are required to be notified to the WTO. But in the present case, no such initiative of notification has been taken so far.
After analysing the problems around bitcoins, at the end of the day there is a sigh of relief as well. In abovementioned paragraphs, we have seen that regulatory authorities are not in favour of bitcoins. The reason may be that they are not backed by any kind of security due to which there is always a chance of their highly inflated price getting crashed. However, considering the popularity which the bitcoins enjoy among the investors, the government is planning to introduce its own secured bitcoins.[viii]
Hoping that this would clear all ambiguities around bitcoins.
[i]HiralThanawala, Should you invest in Bitcoins, crowd funding, P2P lending?,https://economictimes.indiatimes.com/wealth/invest/should-you-invest-in-bitcoins-crowd-funding-p2p-lending/articleshow/58656091.cms.
[ii] Section 22, Reserve Bank of India Act, 1934, https://indiankanoon.org/doc/1807993/.
[iii] Section 26, Reserve Bank of India Act, 1934, https://indiankanoon.org/doc/1581187/.
[iv]Bhagwati Developers Private Limited v. Peerless General Finance and Investment Company Limited &Anr., (2013) 9 SCC 584.
[v]Nilesh Christopher, 11 Individuals move Supreme Court against RBI circular that blocked banking services for bitcoin businesses,https://economictimes.indiatimes.com/n ews/politics-and -nation/eleven-individuals-approach-supreme-court-challenging-rbi-circular-blocking-banking-se rvices-for-bitcoin-businesses/articleshow/64141463.cms?from=mdr.
[vi]YuliyaChernykh, Non-tariff barriers, UiO: Faculty of Law University of Oslo, https://www.uio.no/studier/emner/ jus/jus/JUS5850/h16/tekster/non-tariff-barriers.pdf.
[vii]Turkey-Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, https://www.wto.org/english/t ratop_e/dispu_e/34abr_e.pdf.
[viii]Kamalika Ghosh and Nupur Anand, After strangling bitcoin, India may launch its own cryptocurrency, https://qz.com/india/1418897/after-strangling-bitcoin-india-may-launch-its-own-cryptocurrency/.
ABOUT THE AUTHOR(S)
Aditya Jain is a 4th year law student at National Law University Jhodhpur.
Saket Agarwal is a 4th year law student at National Law University Jhodhpur.
In Content Picture Credit: The Statesman