Posted on April 23, 2021
Authored by Ritika Acharya
The Indian cyptocurrency exchange, WazirX, recently launched India’s first blockchain-based marketplace for non-fungible tokens (“NFTs”). NFTs are crypto assets that reside on the Ethereum blockchain. Each NFT is entirely unique and inimitable. One NFT cannot be replaced with another and copies of it cannot be made after a purchase, making it an attractive one-of-a-kind trading card for buyers.
WazirX’s marketplace enables Indian creators to share their intellectual property by selling their digital assets in the form of NFTs. These assets can be practically any digital goods – a tweet, GIF, sticker, music, drawings, etc. The sale of an NFT transfers ownership of the NFT to the buyer, while the creator of the NFT retains their copyright in it (unless there is a contract to the contrary). The creator is also entitled to a royalty on each subsequent sale of the NFT.
WazirX mandates the exclusive use of cyptocurrencies to purchase NFTs on its platform. This poses a regulatory concern as cryptocurrency hangs in the grey zone in India. With the absence of a codified legal framework for cryptocurrency, there is a lack of clarity on what the legal status of crypto will look like in the near future.
In 2018, the Reserve Bank of India (“RBI”) had issued a circular (“Circular”) that prohibited banks and financial institutions from dealing in, and providing services for facilitating dealing in cryptocurrencies. However, in 2020, a three-judge bench of the Hon’ble Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India held the Circular to be a disproportionate regulatory action against the spirit of Article 19 of the Constitution of India.
Striking down the Circular, the court opined that cryptocurrencies should be regulated, not outrightly banned. Thus, at present, cryptocurrencies are not per se illegal in India but there are apprehensions that this may change soon. Reports are rife with speculation that the government is planning another move to ban cryptocurrencies. Also see our earlier article on India’s regulatory stance on cryptocurrency.
During the first Budget session of the Parliament in January 2021, the central government revealed that the inter-ministerial committee had suggested introducing a draft bill titled ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ (“Bill”). Taking a harsh stance against the crypto industry, the Bill proposed to criminalise the ownership, issuance, mining, trading, and transfer of cryptocurrencies. It reportedly gave investors six months to liquidate their holdings, failing which they would be penalized merely for being in possession of cryptocurrency.
As per the session list for Lok Sabha, the Bill aims to create a facilitative framework to enable the RBI to launch its own official digital currency. The RBI reiterated that it is exploring the possibility of creating and operationalizing a digital version of fiat currency in its Booklet on Payment Systems published on 25th January, 2021.
If the Bill were passed by the Parliament, it may render useless WazirX’s NFT marketplace in India because it would prohibit crypto-asset transactions. Although NFTs are not cryptocurrencies in themselves, they are crypto assets. WazirX requires its users to open a crypto wallet on its cryptocurrency exchange as a prerequisite for buying and selling NFTs. This wallet allows the user to send, receive and store cryptocurrency. It automates the sale process, thereby removing the risk of either party defaulting on the transaction.
With the Bill criminalizing the possession and use of cryptocurrencies, NFT marketplaces that use crypto to trade in NFTs may fail to sustain the resulting regulatory duress. The users of WazirX would have no choice but to liquidate their cryptocurrency holdings. As a result, every Indian investor who opened a wallet on WazirX would be forced to exit the exchange and every Indian creator would lose a source of revenue from the NFT marketplace.
There are few ways to avoid this outcome. First, WazirX could alter its business model to allow the sale of NFTs with fiat money instead of cryptocurrencies, to be compliant with the Bill. Second, the Bill could stipulate that cryptocurrency exchanges that have a virtual presence in India, allow NFT marketplaces to operate using only the RBI’s official digital currency as a legal tender.
The second approach does have a couple of limitations – that it hinges on the assumption that the RBI will indeed develop and launch its own digital currency before the Bill is enacted; and that those NFT marketplaces which do not have a physical presence in India, i.e. no registered office in India (like the SuperRare NFT marketplace which is headquartered in Delaware, United States), will be unlikely to submit to India’s extra-territorial jurisdiction.
A third approach is that the Bill could exempt all NFT marketplaces from the ban on crypto trading in consideration of the fact that NFT marketplaces trade NFTs, and not cryptocurrencies. NFT marketplaces are a matching portal to connect buyers and sellers. NFTs, unlike cryptocurrencies, do not act as a medium of exchange, they simply represent ownership of unique digital items. Exempting NFTs would also be in line with the Bill’s objective to “allow for certain exceptions to promote the underlying technology of cryptocurrency and its uses” as stated in the Bulletin titled ‘General Information relating to Parliamentary and other matters’ published by the Lok Sabha on 29th January, 2021.
Companies Act – A Saviour of Cryptos?
On the bright side, there is cause for hope that the Bill, which has not yet been tabled for discussion in the Parliament, will never see the light of day. Schedule III of the Companies Act, 2013 was amended on 24th March, 2021. The Ministry of Corporate Affairs has directed companies to disclose all crypto-related transactions in their annual financial statements under the category of digital assets.
The notification (“Notification”) states, “Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed:-
- profit or loss on transactions involving Crypto currency or Virtual Currency
- amount of currency held as at the reporting date,
- deposits or advances from any person for the purpose of trading or investing in Crypto Currency/ virtual currency.”
The amendment is a sign that India may not shut down all avenues for crypto trade or investments. While cryptocurrencies are largely an unregulated industry in India, this move marks the first step towards the government recognising the digital assets as part of law. This is a positive development as it signifies that the governmental approach to cryptocurrency is becoming less dismissive. The government is trying to ensure that Indian companies do not fall behind their foreign counterparts in the crypto market.
The Notification is binding on WazirX as it is a company incorporated under the name of ‘Zanmai Labs Private Limited’ on 12th December, 2017 with its registered office in Mumbai. WazirX will accordingly have to disclose the quantum of funds their investors have deposited with them over the last year for the purpose of trading in cryptocurrencies. This will also include the amount of cryptocurrency held by investors in the WazirX crypto wallets on their NFT marketplace. WazirX’s dealings will have enhanced transparency regarding how much money it makes through its trading activities. Such transparency is expected to increase investor confidence.
The Way Forward
The regulation of cryptocurrency as an investment asset class is a welcome relief for crypto exchanges as it is likely to increase institutional participations in the crypto space in the country and boost the institutional adoption of crypto assets. The government should also support crypto assets to encourage the growth of Indian NFT marketplaces in the country, enabling them to compete with global marketplaces like OpenSea, Nifty Gateway and Rarible, among others. However, the forthcoming regulatory framework should not hamper on the freedom of trade or result in an outright ban on cryptocurrencies.
*Ritika Acharya is a Researcher at IntellecTech Law who takes a keen interest in technology law. She is also a law student at Maharashtra National Law University (MNLU) Mumbai, with a passion for reading and writing.
 Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018 with Writ Petition (Civil) No.373 of 2018.
 As per the company master data available on the website of the Ministry of Corporate Affairs.