ICO And Its Legal Framework – The Real Atmanirbhar Bharat Package The MSMEs And Startups Are Actually Looking For: By Aayush Arora, Advocate

 ICO And Its Legal Framework – The Real Atmanirbhar Bharat Package The MSMEs And Startups Are Actually Looking For

What Is An Initial Coin Offering (ICO) And How Does It Facilitate The MSME?

An MSME especially at its start-up and survival stage requires adequate working capital and funds to keep it afloat. The same is done predominantly by way of seeking loans from financial institutions[1] usually by collateral financing from institutions such as Public Banks or NBFCs such loans are meant to be returned with compounding interests in a timely manner on default of which the lending institutions start exploring their legal options adding on burden of legal expenses in defending such proceedings initiated by the former leading to further cash burn.

Other sources of raising capital for the MSME in India is by way of angel investor who might not just hold equity in the business but may also hold a dominant position enough to dictate terms about operations of the business. Money lenders, support from close relatives and money raised by mortgaging family/ancestral property are other sources which includes high risk. This means no matter how rare and genius the startup idea is, the rules remain the same.

Initial Coin Offering compels the entry of meritocracy into this game. An Initial Coin Offering is a way of public funding to raise money for the enterprise by virtually generating tokens (Crypto Currency of its own) and offering them in public for purchase. This VC (Virtual Currency) generated by the startup will not sell by itself. Like a prospectus is issued by a company before its IPO, the MSME or a startup before its ICO is supposed to release a Whitepaper for its potential investor to assess enterprise’s business plan. A whitepaper outlines what the project is all about, purpose the project will address on completion, total number of tokens that will be issued and the number founders will keep, the duration expected of the ICO campaign and the mode of accepting payments[2]. The tokens offered can be utility tokens, security tokens or hybrid tokens.

 

Creating An Ecosystem For The Crypto Regime To Thrive In India

                                                                                         I.            Defining Nature And Scope Of Digital Currency

Lack of legislations limited the courts to interpret VC in light existing legislative frameworks and to settle the equities arising out of a matter, courts across the globe identified virtual currency differently ranging from it being a property[3] to a non-traditional currency[4] to payment instrument[5] to even a commodity[6] and sometimes money funds. In India too the Supreme Court did not settle the nature and nor were the petitioners consistent with their argument though they opened their case by stating virtual currency to be a tradeable commodity/digital goods.

The first task is to proffer a definite status to VCs as it is impossible to set effective rules for the game without identifying the nature of the protagonist.

                                                                                                                        II.            Setting Up A Regulatory Body

The best that the RBI could do was to notify circulars which though did not directly ban VCEs (As the RBI admitted of it being beyond its domain) but ordered the institutions under its mandate by relevant laws to cut ties with entities dealing with the later to effectively suffocate the VC business. But that too was set aside by the Hon’ble Supreme Court[7] making it clear that the RBI does not get to dictate constructive terms to regulate VC ecosystem. SEBI can intervene into transactions only when it involves securities as defined by the Securities Contracts (Regulation) Act, 1956[8]. Intervention of CBDT can be sought when transactions are related to sale and purchase of taxable goods/commodities and Enforcement Directorate can come into the picture only when actual money laundering takes place[9] as opposed to the mere apprehension contended by the RBI that VCEs facilitate the potential for money laundering.

Where does the buck stop? The responsibility needs to be set to prevent overlapping of subject-matter jurisdictions between various law enforcement agencies and to foster consolidated, scientific and effective compliance The same body be also responsible for investigation cum prosecution in case a violation/offence is made out.

The same can be done by either extending the scope of an existing law enforcement agency, or by establishing an exclusive regulatory body in this regard. For example in USA the SEC is though not an absolute regulator of the VCs published a framework for its market participants to make an assessment whether the digital asset is sold as an investment contract, which makes it a security thus brings such a transaction within the jurisdiction of the SEC.

                                                                                                           III.            Drafting Best Practice Procedures

Enterprises following best practices guidelines will inspire more confidence in the investors leaving aside the enterprises operating in grave violation of the guidelines which will lead the market to self-regulate.[10]

                            IV.            Time Has Come For The Reserve Bank Of India To Embrace The Indispensable.

The Supreme Court might have set aside the circulars issued by the RBI on grounds of proportionality but gave a thumping judgment in favor of the RBI and reinstated that it is a body independent of the Central Government with a mandate to operate financial, currency and credit system of the country to its advantage, therefore the VCEs might not thrive without the blessing of India’s Central Bank.

Indian Banking Institutions are not oblivious to the potential of VCs and the technological advancement that comes with it. One of the leading projects in India is building collaborative ecosystem and finance network within consortium of banks by using blockchain technology which is an innovation cum financial solution that developed on the advent of the cryptocurrency the leading example of which is Infosys Finacle executing its project ‘India Trade Connect’ with seven leading banks.[11]

Virtual Currencies and ICOs have gigantic potential to absorb international investment without deploying excessive public money on setting up brick and mortar infrastructures, special economic zones, global summits etc to lure Foreign Direct Investments.

The Indian youth sitting in front of its laptop with a decent idea is more than enough to attract international investment especially at the time when India’s competitor China has closed its doors by banning cryptocurrency.

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[1]Charan Singh and Kishinchand Poornima Wasdani, 2016, Finance for Micro, Small, and Medium-Sized Enterprises in India: Sources and Challenges, ADBI Working Paper Series 581, Asian Development Bank Institute.

[2] The payment can either be accepted in fiat currency like Indian Rupees or by a much more established Cryptocurrency like Bitcoin.

[3] B2C2 Ltd v. Quine PteLtd { (2019 SGHC [1] 3 }

[4] SEC v. TrendonShavers [Case No 4:12–Cv–416 (August 6, 2013)}

[5] State of Florida v Mitchell Abner Espinoza {264 So. 3d 1055 (2019)}

[6] BFXNA Inc, d/b/aBITIFINIEX {CFTC Docket No 16-19 Dated 02-06-2016} and Commodity FuturesTrading Commission v. My Big Coin Pay, Inc. et al (18-cv-10077-RWZ dated26-09-2018) and Commodity Futures Trading v Patrick Mcdonnell {18-cv-361 dated03-06-2018}

[7] Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCC OnLine SC 275, decided on 04.03.2020

[8]  Section 2(h), Prevention of Money Lanundering Act, 2002

[9] Section 3, Prevention of Money Laundering Act 2002

[10] The Monetary Authority of Singapore (MAS) has drafted and published A Guide to Digital Token Offerings, which was last updated on November 30, 2018.

[11] File:///C:/Users/91981/Downloads/Universal-Banking-Solution-brochure-2018.pdf