Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

Despite remaining silent on the applicability of investment laws to cryptoassets, the Securities Exchange Board of India (SEBI) has played a vital role in finalising the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies. As stated above, the draft legislation tabled before Parliament, explicitly bans any person from dealing in cryptoassets (agnostic of any specific attribute of such cryptoasset), including among other things as a means for investment. In light of the blanket ban on the use of cryptoassets, regulators have not sought to identify any attributes that would distinguish its various use cases, including as a security. (See also ‘Legal framework’.)

Investor classification

How are investors in cryptoassets classified and treated differently?

Investors in cryptoassets are not classified or treated differently. (See also ‘Regulatory threshold’.)

Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

At present, there are no rules or restrictions on the conduct of and investment in ICOs. While the facets of an ICO remain untested in an Indian legal context, in the event that funds are collected to obtain a ‘coin’ (ie, a representation of value or right) to be redeemed in the future, such collection of funds, being unregulated, could contravene the Banning of Unregulated Deposit Schemes Act 2019. Such a contravention could result in imprisonment and a financial penalty. The Inter-ministerial Committee Report and Draft Bill on Virtual Currencies explicitly prohibits the use of cryptocurrency as a medium of exchange, store of value or unit of account or use as a means to raise funds. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

Irrespective of the nature of offerings, including a security token offering, a collection of funds for such a scheme could be deemed as an unregulated deposit and result in imprisonment and financial penalties under the Banning of Unregulated Deposit Schemes Act 2019. In light of the present legislative climate, it seems unlikely that the SEBI would equate a security token to a security, in light of its role in drafting the proposed legislation banning cryptocurrency, including its use to raise funds or in financial transactions or investment schemes. (See also ‘Legal framework’, ‘Regulatory threshold’ and ‘Investor classification’.)

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

Stablecoins are akin to a hybrid cryptocurrency, created as a reaction to the unreliable nature of most cryptocurrencies, specifically bitcoin, the valuation of which is largely based on speculation. Unlike cryptocurrency, the value of stablecoins is based on an underlying asset, including fiat currencies. Irrespective of the underlying value therein, the issue of and investment in stablecoins would potentially be prohibited under the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies and its definition of ‘cryptocurrency’. (See also ‘Security token offerings’.)

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

The principle behind an airdrop is to increase demand and the value associated with cryptoassets by distributing the same to investors for free. Increasingly, cryptocurrency has been dispensed to the wallet addresses of potentially aware or unaware investors, which are deemed owners of said assets once they are aware of the airdrop. Indian regulators and legislatures have not yet examined the transfer of cryptoassets; however, under the current legislative scenario, when an investor becomes aware of having cryptoassets (ie, it is their deemed owner), they would be subject to the proposed ban to holding or possessing cryptoassets. An airdrop could therefore inadvertently lead to the potential holder becoming liable for penalties, including imprisonment.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

Given the legislative proposal to equate any activity involving cryptoassets with illegal activity, the advertising or marketing of cryptoassets could fall foul of generally accepted advertising standards as well as applicable criminal laws depending on the nature of loss suffered by viewers of such advertising. Such a violation could thereby lead to pecuniary penalties and imprisonment.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

Such activity could potentially be deemed illegal; however, at present, there are no regulations governing investors trading in initial offerings of cryptoassets. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

Crowdfunding is in essence the collection or pooling of funds through small financial contributions from multiple individuals for a specific project, venture or social cause. While crowdfunding is not regulated per se, a subset of crowdfunding (ie, peer-to-peer lending of fiat currency by regulated entities) is a permitted legal activity regulated by the Reserve Bank of India. Given that an offering of cryptoassets is a collection of fiat currencies for a potentially illegal activity (ie, ‘dealing in cryptocurrency’), such an offering could fall foul of the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies and accordingly be deemed illegal.

Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

At present, there are no regulations applicable to cryptoasset transfer agents and share registrars. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

Any party that attempts to or knowingly assists in any process or activity connected with the proceeds of a crime, including its concealment, possession, acquisition or use will be guilty of money laundering.

Although offering cryptoassets is not an offence at present, given the draft proposal tabled before Parliament it is likely that any party participating in an offering of cryptoassets would fall foul of anti-money laundering laws. Any party found guilty of such an offence may face imprisonment and a fine. In order to prevent money laundering activities, regulated entities (eg, banks, stock exchanges, financial institutions or parties carrying out designated business) must undertake know-your-customer (KYC) checks. KYC obligations include the collection of personal details such as an individual’s personal account number and unique identification number.

A key concern for businesses offering cryptoassets is the likelihood that they will act as a vehicle for money laundering activities in India. As a result, such businesses undertake extensive KYC checks despite not being legally mandated to do so.

Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

As a member of the Financial Action Task Force, India has set up the Financial Intelligence Unit – India (FIU-IND) to be its central national agency responsible for receiving, processing, analysing and disseminating information relating to suspicious financial transactions. 

Pursuant to anti-money laundering legislation, reporting entities must provide information regarding cash transactions exceeding permitted values, suspicious transactions and cross-border transactions exceeding specified thresholds. In the event that a regulated entity (eg, a bank, financial institution or stock exchange) receives information regarding the suspicious transaction of cash that breaches prescribed thresholds, the FIU-IND may take appropriate action (including criminal proceedings) against the parties involved in such transaction irrespective of whether it concerns cryptoassets.

Law stated date

Correct on

Give the date on which the above content is accurate.

15 November 2019.