Author– Brinda Jayasimha

   3rd Year BA LLB 

Blockchain technology and cryptocurrencies have received more hype and regulatory attention than perhaps any other emerging technology in recent times. It has the potential to replace paper money with digital currencies providing a decentralized and secured environment. There are both private blockchains, where access to the network is permissioned, and public blockchains, where access is open. Initial Coin Offering (ICOs) in blockchain technology was used as a medium to raise funds by start-ups which also increased the growth of digital currencies. The growth of blockchain technology is rapidly increasing and this will benefit all developing countries. This paper aims to highlight the importance of blockchain technology and raising of funds through ICOs. This paper also focusses on the comparison with certain international laws and the manner in which it can be incorporated in Indian legislations which would benefit the Indian start-ups to trade in this technology. Initial Coin Offering in blockchain technology was used as a medium to raise funds by start-ups which also increased the growth of digital currencies.

Blockchain or distributed ledger technologies is synonymous with cryptographic forms of money, such as Ethereum and Bitcoin, yet digital currency is only one of a huge number of utilizations of blockchain innovation, and there are various enterprises, for example, monetary administrations and transportation, that will likewise profit by this developing innovation. The blockchain biological system attempts to manufacture a decentralized, disintermediated, and appropriated innovation[1]. This compatibility between the plan of the innovation, its endeavoured method of improvement, and its expressed objectives is the most grounded contention for paying attention to blockchain innovation. It clarifies why, regardless of the entirety of the potential traps, the assignment of evaluating the social, financial and political effect of the innovation ought to be taken up by specialists. Blockchain is an interesting test of how governments cope with emerging paradigms, as it is a challenge to traditional mindsets and systems across the board[2].

 After the release of the original bitcoin white paper[3]in the past 8 years, a new paradigm of decentralised computing has emerged that applies blockchain technology beyond currency and it has in fact not only revolutionised the technology industry but also the whole world. Like man-made brain power, blockchain technology also has the potential to alter parts of the financial or monetary industry for instance the fintech. One such zone is organized account where blockchain innovation can be used to lessen adjusting and detailing costs, make information the board efficiencies, and increment exchange straightforwardness all through the securitization procedure from resource start to optional market exchanging.

Blockchain’s key qualiti
es present difficulties to the existing lawful and administrative system. It is included of carefully recorded information in “obstructs” or “blocks” that are connected together in sequential request in a way that makes the information hard to change once recorded, without the change of every single consequent square and agreement of a larger part of the system. Every node on the system by and large contains a total duplicate of the whole record, from the main square made—the beginning square—to the latest one.

Each square contains a hash (a fixed length alphanumeric string produced from a string of content) pointer as a connect to a past square, a timestamp, and exchange information. By its inclination, disseminated record innovation takes into consideration exchanges and information to be recorded and shared over a conveyed system of members without the requirement for a confided in middle person. The first example of blockchain (bitcoin) was to empower distributed exchanges without the prerequisite for, or cost of, a focal gathering or a central party. Blockchain also has various other characteristic features such as the transacted data is authenticated and visible and the data is protected from public view. One of its significant contribution that business industry can use to raise capital is known as Initial Coin Offering (ICOs).
A strategy for fundraising and a hybrid between crowdfunding and the traditional issues of shares is known as Initial coin offering (ICOs). This method of raising funds by blockchain technology and cryptocurrency provides platform to increase the amount of capital through sale of cryptocurrencies such as Bitcoin or Ethereum in the form of tokens. Rather than raising this capital by issuing shares in their company, they issue pre-mined digital and transferrable protocol tokens (tokens).[4] ICO’s have several significant advantages over traditional methods of fund raising and has the potential to transform business entities in capital raising in the financial markets. A second major difference to traditional fundraising mechanisms is that ICOs do not involve fiat currency. In the first half of 2017, technology start-ups raised the equivalent of over 1.2 billion USD using this funding method.[5]

The capital isn’t brought up in fiat cash, yet in advanced money, for example, Bitcoin. As a by-product of contributing, financial specialists don’t get legitimately perceived possession rights. Or maybe, they gain control rights over computerized tokens which are relied upon or vowed to have utility on the system being created. These are openly transferrable on auxiliary markets. The blockchain genuinely removes the need for intermediaries and enables funds to be securely transferred in a peer to peer manner.

The entity or person wishing to increase his capital or reserves and the person who is open to buy token or coin, which is a virtual cash or a cryptographic cash as an end result of computerized cash for instance bitcoin or ether or fiat currency. Such coins or tokens are kept on blockchain technology through smart contracts or splendid concession to a past blockchain. Start-ups are attracted to this new technology as it can bypass the time consuming and expensive process associated with a regulated offer to the public. The generation or production of white paper is during the procedure of issuing of ICOs on open gatherings and with a fundamental innovation and key terms overseeing the transaction of buying and selling of the tokens or coins. Sale of tokens is generally issued on a pre-announced date that permits the investors to purchase the token. Once the payment of token is completed the transaction is recorded on the smart contract.

Although ICOs have gained momentum in raising capital and has provided a favourable environment for many start-ups it has also emerged as a risk factor in protecting the rights of investors from scamsters who are exploiting with this technology. Hence the need for effective regulation with the implementation of this new technology is necessary.

Financial supervisory agencies welcome blockchain as a transparent ledger that will help oversee securities trading and settlements due to the “practical impossibility of a single national regulator collecting data of sufficient quality to recreate the highly complex, global swaps trading portfolios of all market participants[6]. Transactions that occur on blockchain are through exchange of tokens. While many countries have still laid a ban on ICOs, some countries such as Japan and United States have given its designation and accepted it as a legal tender under the regulatory financial markets. In united states Bitcoin has been allowed to trade ICOs under the Securities and Exchange Commission under the administrative ambit of protections laws and also has assigned as a product under the Commodity Futures Trading Commission.Bitcoin is also considered as assessable property and treated like stocks and shares as it can be held for resale as per the Internal Revenue Service (IRS) agency.

The protection guidelines of Singapore have stated that the tokens or coins issued under ICOs will be protected under the securities laws and if not the need to work on implementation of laws would continue. In Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) has explained that the Swiss monetary market laws and guidelines won’t be relevant of course to all ICOs and a choice right now be taken dependent upon the situation[7]. And the directing element would be the monetary capacity and motivation behind the tokens just as whether they are tradeable or transferable at the hour of issuance itself. The European Union is also expanding its laws on anti-money laundering and other financial risks to regulate the trading of digital currencies.

The Apex Bank of India has been raising its issues over the use of digital or non-fiat currencies such as Bitcoin and has laid a ban on trading of such digital currencies. The Government has also been adopting a moderate strategy expressing that digital currencies or non-fiat cryptographic forms of money are not lawful cash or authorized controlled in any way in the nation and are much the same as Ponzi plans. This worry over Bitcoins (and other non-fiat digital currencies) radiates to a great extent in view of the decentralized and unregulated framework that Bitcoin works (or rather flourishes) in, and whose valuation is resolved fundamentally on an interest supply premise as against other settling factors. In order to restrict all illegal deposit trading activities.The Banning of Unregulated Deposit Schemes Bill, 2018 (Bill) was introduced in the Lok Sabha (lower house of Parliament). The term “deposit” has been defined in the Bill to mean “the receipt of money, by way of advance or loan or in any other form, to be returned, whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, by any Deposit Taker, with or without any benefit in the form of interest, bonus, profit or in any other form[8].  
The bill also imposes strict punishment for anyone who is promoting or indulging in such trading activities.

Securities Law and Taxation Laws in India are growing ahead and are areas of concern for investors and shareholders. The need to reconsider the concept of cryptocurrencies arises here in order to prevent fraud and illegal activities. The trading on such digital currencies if legalised and regulated by an authority such scams and illegal trading will not occur in the market. Even though the Government of India has laid down several restrictions in order to prevent such trading the Securities Exchange Board of India (SEBI) along with the Reserve Bank of India (RBI) has issued several guidelines and is deliberating upon a regulatory regime to governing of such cryptocurrencies and ICOs. SEBI’s regulation may apply if the coins fall under the Securities Contract (Regulation) Act 1956 definition of “securities”. The term “securities” mentioned in section 2 (h) is defined by SCRA as:
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;
a.     derivative;
b.      units or any other instrument issued by any collective investment scheme to the investors in such schemes;
c.     Security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
d.     Units or any other such instrument issued to the investors under any mutual fund scheme;
ii.              Government securities;
iii.            such other instruments as may be declared by the Central Government to be securities;
iv.             rights or interest in securities[9].

The above definition states that there is an underlying asset in those instruments or securities. Although not all coin offerings are followed by an underlying asset, such asset coin gives the issuing entity a debt or equity claim.  As per the definition they can fall under “other marketable securities”. One of the distinctive characteristic features of ‘securities’ is that it must be transferable as per the Supreme Court of India in the landmark case of Bhagwati Developers Pvt Ltd vs Peerless General Finance & Investment Co. Ltd[10] stated that marketable securities means it must be freely transferrable. It was also held in the case of Sahara India Real Estate Corporation Ltd vs Securities and Exchange Board of India[11]wherein the Court held that a marketable security will clearly fall under the ambit of section 2(h) of SCRA and that marketable means “capable of being sold” and “transferable”. Thus, SEBI can have jurisdiction over these coins offered through trading of ICOs.
The definition “securities” as per the Securities Contract (Regulation) Act 1956 is not inclusive when compared to the definition of the United States. This shows the legal backdrop in the legislation. As per the definition of the United States law securities is defined as an “investment in a common venture premised on a reasonable expectation of profits to be derived from entrepreneurial or managerial efforts of others” (SEC vs W.J. Howey Co) [12]. The definition of “person” also includes unincorporated organisation under section 2 of Securities Act, 1933. Thus, securities can also be issued by unincorporated entities in the United States. The United States Securities Exchange Commission also recognises the concept of DAO. DAO refers to Decentralized Autonomous Organisation is an organisation borne out of encoded computer rules that is transparent controlled by shareholders and executed on a blockchain protocol. India could also implement such concepts as currently the concept of DAO does not fall under the definition of securities as it does not recognise the issue of tokens by unincorporated entities.

The French Government in April 2016, passed an order regulating ‘mini bonds’ a type of corporate debt facilitating crowdfunding. This order explicitly allows mini-bonds to be issued and transferred using the blockchain, despite certain adapted procedures and safeguards. Also, the U.K. government in February 2017, granted the blockchain-based finance start-up 
Tramonex a small Electronic Money Institution (EMI) registration[13].

The registration of EMI is for people who issue “electronic money” and such value is computerized and stored electronically[14]. These various approaches from the U.K and French governments can also be looked into and adapted as a form of guidelines in order to ensure protection and safeguard from financial terrorism and to protect the interest of both the investor and the seller during the online transaction of the digital currencies. In India currently there is no law or regulation to regulate blockchain technology. A committee was setup in April 2017, Ministry of Finance, to be chaired by the Special Secretary (Economic Affairs) and representatives from various Central government departments, to examine the regulation of virtual currencies[15]. Nevertheless, the formation of this committee was also not helpful as the government has still not yet enacted legislations governing blockchain technology.
According to the recent report by the innovation fund of Santander Bank predicts cost-savings of USD 15 to 20 billion by 2022, as a result of blockchain technology reducing financial infrastructure costs[16]. The finance services industry is one of the sectors which has given a significant attention to blockchain technology. Virtual money standards have surprised the world across purviews and it is significant for India’s controllers to concoct a dynamic administrative system that ensures clients just as different partners. The dread of facing illegal tax avoidance and fear among the finance industry the controllers definitely need to protect and also encourage the development of this technology through inventive measures. In terms of India where we have seen increased interest in the cryptocurrency industry and ICO activity adoption of blockchain technology for securitization will require a significant concerted effort by the lawmakers and the regulatory bodies.

The motive of blockchain is not only trading and for raising of capital, it also acts as a protector to the investors if regulated efficiently and aims to decrease the transaction cost and time.

The guidelines by the Switzerland headquarter ICO-driven projects may also attract the Indian entrepreneurs and if this route is pursued, the Indian laws on securities will have to be closely analysed. ICOs is one of the interesting and innovative way of raising of funds. By developing such an innovation would help start-ups to take an initiative also promotes goals for development of the country. The regulators in India need to look at this issue otherwise instances would occur where the entrepreneurs in India may choose foreign jurisdictions in order to protect their entities and investor rights during trading of this technology.
Many Indian start-ups have opted for issuing overseas ICOs for instance WandX, an Indian based start-up issued ICOs in Singapore and raised funds with the help of a Singapore based entity[17]. India’s capital markets regulator, Securities and Exchange Board of India (SEBI), has been examining this issue ostensibly from a coin offering perspective, recent media reports also indicate that the Income Tax Department has found that there are 600,000 active cryptocurrency traders in 9 cryptocurrency exchanges across the country and crypto- currency worth USD 2.8 billion has been traded on these exchanges and that such gains may be taxed as income from capital assets[18].

The current legal framework in India is not in par with other countries. The need to expand the definition of “securities” under the Securities Contract (Regulation) Act 1956 in order to account for new ways in which entities are issuing securities to raise funds. Further, for the blockchain technology to be traded efficiently and without any jurisdiction problems the lawmakers will have to consider how their jurisdictions’ technology laws apply[19]. A global approach to ensuring the harmony of international rules appears to be best. Associations such as the Digital Commerce Chamber and the Digital Currency and Ledger Defence Coalition have wide involvement, and are likely to play a significant role. Countries like United States apply the rule of federal securities laws to trading of ICOs. This method may be challenging for start-ups to regulate with the legal and financial resources.

 The Sandbox approach is one of the effective and encouraging methods in which the regulators are relaxed the start-ups or trading companies is allowed to experiment in the market with certain conditions. This kind of method is very popular in the United Kingdom and Singapore. This approach facilitates the usage of ICOs by small businesses to raise the much-needed funds and allows the regulator to keep a track on the activities of the issuer. Most of the countries have mandated for some form of data localization or border control in order to have control on jurisdictions. This technology of data servers keeps a check on the flow of data outside the border. For instance, the data flow between UK and Russia.The lawmakers in India need to consider all these approaches before implementation and adopt one which suits best for our nation, otherwise the number of illegal trading activities will increase in near future and Indian entrepreneurs may start choosing foreign jurisdiction for trading of Blockchain. The government of India in a very ambiguous manner is interested in the fintech industry and also has given regulatory terms and conditions but in the case of Blockchain technology it is still a hope to be flourished in the future.

Across the globe, cryptocurrency attracts concerns of money laundering and tax evasion. Thus, instead of being reactive to the negative aspects of this technology the government of India and the regulators need to consider the importance of this technology in order to enact legislations and set up a regulatory environment. This would not only benefit the investors but also the whole market environment by providing a legal backing and also ensures a legally safe environment for securities or the trading of blockchain technology.

Concerning the introduction of blockchain which appears once in several generations, the chance to develop the technical environment of securities settlement in harmony with law has arisen. Only in a regulated environment investor would like to trade if there is no legal protection and only technically sound technology most of the regulated banks and huge investment firms will not come forward. Thus, it is in the hands of the legislators to make final efforts to enact laws and regulate the financial services market which would also benefit the economy to develop and set standards as other nations or this could be a major drawback when the whole world is moving forward in application and trading of this technology.

[1] Miren B Aparicio, “Big Data: Mitigating Financial Crime Risk”, Atlantic Council (2017).

[2]  Tanvi Ratna, ‘Blockchain Regulation in the United States: Evaluating the overall approach to virtual asset regulation’, New America (2019).
[3] Satoshi Nakamoto, “Bitcoin: A Peer-To-Peer Electronic Cash System”, Bitcoin (2008).
[4] “Instamine vs Premine” The Merkle (online ed, 18 April 2017).
[5] Ryan Brown “Start-ups raise record $1.27 billion selling Bitcoin and other cryptocoins” CNBC (online ed, New Jersey, 18 July 2017).
[6] Supra 1
[7] Sharanya Ranga, Laxmi Joshi and Probal Bose,” Cryptocurrencies in India: Only Cryptic And no Currency”, Advaya Legal (2018).
[8] (last accessed 25th February 2020).
[9] (Last accessed 25th February 2020).
[10] (2013) 9 SCC 584.
[11] (2012) 10 SCC 603.
[12] 328 U.S. 293, 301 (1946).
[13] (Last accessed on 25th February 2020)
[14] (Last accessed on 25th February 2020)
[15]  (Last accessed on 25th February 2020)
[16]; (Last accessed on 25th February 2020)
[17] currency-ico/articleshow/61938744.cms.  (Last accessed on 25th February 2020)
[18] (Last accessed on 25th February 2020)
[19] (Last accessed on 25th February 2020)
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