Block-Chain laws in India & Regulatory Challenges

By Mahwesh Buland.
                                                    

Abstract:

We all know about crypto currency, it is just one of the application of block chain . There are numerous applications based on the block chain technology. It is one of the most dynamic and evolving next generation technology and it is helpful in almost all sectors. Starting from banking, health care, general administration and the list is not exhaustive. But when it comes to application considering the nature and utility of this technology, there is also a need of efficient regulation of the same in order to avoid any misuse of the same. Risks include jurisdictional challenges, privacy and data protection, cyber-attacks, tax regulations etc. But as of now , in India we don’t have any exclusive legal regulations for block chain technology, considering it’s increasing demand and application. It’s high time that we should develop an exclusive regulation for the management of Block Chain technology and to address the various underlying issues. Therefore, this paper aims at studying the various legal regulatory challenges with respect to block chain technology in India & how the same can be addressed.

Keyword: Block chain, Regulations, Privacy, Data protection, Loop-holes.

Introduction:

A Block chain is a digital, immutable, distributed ledger that chronologically records transactions in near real time.” All blocks are encrypted in a special way, so everyone can have access to all the information but only a user who owns a special cryptographic key is able to add a new record to a particular chain. As long as you remain the only person who knows the key, no one can manipulate your transactions. For example, we must have heard of the national digital card that PM announced, now here also we can use blockchain technology for keeping the digital medical record. So, every medical record of the patient will be a block which will have a label stating the date and time when the record was entered. The medical history is extremely important for diagnosis and treatment purposes, so neither the doctor nor the patient should be able to modify the records already made. Nevertheless, the doctor owns a private key that allows him to make new records, and the patient owns a public key that allows him to access the records anytime. This method makes the data both accessible and secure.But, in considering the potential benefits of block chain, we can’t ignore the associated risks and the need of regulation. As of now India in terms of legal regulation of Block chain technology is way behind and hardly there is any dedicated or direct legislation or regulations to regulate it. One of the most important thing that we need to understand is that we can’t apply the Information Technology Act & related rules to Block chain technology can’t be applied, it needs a separate rules and regulation for its smooth functioning and to prevent any misuse and also for grievance redressal in case of violations.

1. Block-Chain Laws In India & Regulatory Challenges

‘Block chain’ is one of the most advanced & important technological innovation having wide range of applications & benefits. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies. One of the examples of Block chain is crypto-currency. But, in considering the potential benefits of block chain, we can’t ignore the associated risks and how they can be managed. These risks include jurisdictional challenges, privacy and data protection, cyber-attacks, tax regulations etc. Coming to India, it has no dedicated law or regulation that governs the development; use and operation of block chain/distributed ledger technology. Recently, Supreme Court in March 2020 also quashed the circular issued by the Reserve Bank of India (RBI) on 6 April 2018 (Circular) that prohibited banks and financial institutions from dealing in, and providing services for facilitating dealing in, virtual currencies (Crypto currencies) such as Bit coin. With all this background, it’s important to look at the various challenges in terms of regulations of block chain technology in India and how it can be regulated smoothly without any legal repercussions.

2.  What is Block Chain Technology ?

A Block chain is a digital, immutable, distributed ledger that chronologically records transactions in near real time. The prerequisite for each subsequent transaction to be added to the ledger is the respective consensus of the network participants (called nodes), thereby creating a continuous mechanism of control regarding manipulation, errors, and data quality.” Basically, Block chain is a protocol for exchanging value over the internet without an intermediary.

2.1 Public & Private Block Chains:

Both public and private block chains have similarities in that they are both distributed networks secured using cryptography and consensus protocols, and they are both usually immutable. However, as the words ‘public’ and ‘private’ suggest, there is a significant distinction in terms of who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger. For example Bit Coin .

Whereas in a private block chain, only trusted and known participants are allowed to read or write on it. It could be used by a finite set of participants such as a consortium of financial institutions. Private block chains are usually just a distributed ledger and may not have the decentralization benefits of block chain as such.

2.2Benefits of Block Chain:

Block chain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030. The World Economic Forum (WEF) anticipates that 10% of the global GDP will be stored on blockchain by 2025 and lists blockchain as one of 7 technologies that are anticipated to revolutionize various aspects of our lives. Coming to its application it ranges from Banking Industry, Creation of Smart Contracts, and Market Securities & Derivatives. Like Nasdaq announced an enterprise-wide initiative to leverage blockchain technology. Its first use was to “offer efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities.”

NitiAyog also in its discussion paper on Block Chain Technology , has cited some major applications like using a blockchain to create a new system to manage land records. The second was using it for the pharmaceutical drugs supply chain, as it has the potential to improve transparency, efficiency and reliability of transactions in a heavily regulated pharmaceutical industry. Thus, we can say that Blockchain technology’s application & benefits are evolving considering the fact that it’s a dynamic technology. Hence, considering its benefits equal footage is also required to regulate it.

3. Challenges With Respect To Block Chain Technology in India

The most important challenge is that the government of India had not yet implemented a well-defined regulation for blockchain technology.NitiAayog’sin its recent Blockchain Strategy for India document identified some of the major challenges with regard to Block chain technology considering the Indian scenario, which are as follows:

  1. Networks completely regulated by governments can be decentralized and feature peer-to-peer exchange and, totally centralized systems can also be unregulated and operate beyond the bounds of law.
  2. Decentralized networks do not necessarily mean they aren’t regulated. Sectors of governmental intermediation where a state entity is involved just for ledger maintenance or collecting state dues but is not adding value to the transaction can be relooked to assess how government’s role can be redefined in those sectors.

3.1Legal & Regulatory Challenges:

RBI has issued several cautionary advisories some of the points highlighted by RBI circulars are:

  1. Payment of virtual currencies takes place on a peer-to-peer basis, without regulation by an authorised central agency, customers may have no recourse in case of problems or disputes.
  2. The absence of information of counterparties in peer-to-peer anonymous/pseudonymous systems could subject them to unintentional breaches of laws relating to anti-money laundering and counter-terrorist financing.

Apart from the above general challenges , if we consider some of the major legal challenges with respect to regulation of Block Chain technologies are as follows:

i. Inefficient Information Technology Laws & Issue of Cyber Security:

Existing laws, including the requirements under the IT Act and the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011, will govern blockchain activity since the blockchain is an Internet-based system. But these requirements do not easily fit with the nature of the blockchain, if we refer to the Information Technology Act, 2000 and rules framed thereunder (including the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (‘SPDI Rules’) not only provide legal recognition and protection for transactions carried out through electronic data interchange and other means of electronic communication, but also contain provisions which are aimed at safeguarding electronic data, information and records, and preventing unauthorised or unlawful use of a computer system.

While compliance with the requirements stipulated under the IT Act and the rules framed thereunder (including the SPDI Rules) could pose practical challenges in implementation, due to the decentralised nature blockchain technology (as there is usually no controlling ‘body corporate’ to hold accountable for adherence to the data privacy and cyber security framework).

ii. Jurisdictional Issues:

As the nodes of a decentralized ledger can span multiple locations around the world, it is often difficult to establish which jurisdictions’ laws and regulations apply to a given application. There is a risk that transactions performed by an organization could fall under every jurisdiction in which a node in the blockchain network is situated, resulting in an overwhelming number of laws and regulations that might apply to transactions in a blockchain based system. In a public blockchain system it will be important to consider what law might apply to transactions and consider appropriate risk management that should apply.

iii. Tax Law Related Issues:

Under the Income Tax Act, a crypto currency may be treated as a capital asset in the hands of the holder of crypto currency. Therefore, any profit or gain arising from the transfer of crypto currency may be treated as a capital gain in the hands of the transferor and taxed accordingly. However, if the transferor is in the business of trading in crypto currencies, income realised from trading in such crypto currencies may be taxed as profits and gains of a business or profession at the normal income tax (or corporate tax) rate., But, at present, the GST Act includes no specific category for crypto currencies.

iv. Issue of Smart Contracts:

Smart Contracts which is also one of the major promising benefit of Block Chain technology, at the same time it raises few important questions like, whether these digital contracts “contracts” as seen by the law and is in line with the existing contract law? Can they be enforced and parties are held responsible in the same way as traditional contracts? What if the code underlying these digital contracts is hacked? Thus,in the absence of specific guidelines or policies that outlines the regulatory framework for smart contracts, it also possess a major challenge.

v. Issue of Accountability:

In a public blockchain system, by contrast, there is no one easily held accountable in the same way as a search engine. In a private blockchain system, where there is clear ownership and responsibility, regulators might expect those running the system to be accountable for data added to the system by all the network users. Thus, the issue of accountability in terms of public block chain system will also be something needs to be taken care of.

 

 

 

Conclusion

With all the above major challenges , ranging from data protection, sharing, privacy, accountability, adoption.  The road ahead doesn’t seems to be easy with regard to the regulation of block chain technology in India and apart from that even a single regulatory rules or piece of legislation won’t be sufficient & efficient in regulating the overall block chain technology as the technology in itself has various applications & features and each of it requires a separate set of rules specific to its application. One thing that needs to be considered while framing the regulations is that it’s should not be too restrictive rather it should focus on being investor & user friendly without ignoring the major safety & legal requirements.

End Notes

1. Draft Discussion Paper Blockchain: The India Strategy, NitiAyog , January 2020 (Available at:https://niti.gov.in/sites/default/files/2020-01/Blockchain_The_India_Strategy_Part_I.pdf)

2. The Blockchain, Industry Applications and Legal Perspectives,Nishith Desai Associates November 2018( Available at: http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/The_Blockchain.pdf)

3. John Salmon and Gordon Myers, Blockchain and Associated Legal Issues for Emerging Markets, International Finance Centre Note ,January 2019, World Bank .(Available at:https://www.ifc.org/wps/wcm/connect/da7da0dd-2068-4728-b846-7cffcd1fd24a/EMCompass-Note-63-Blockchain-and-Legal-Issues-in-Emerging-Markets.pdf?MOD=AJPERES&CVID=mxocw9F)

4.RachitBahl and RohanBagai, India: Blockchain Comparative Guide , Mondaq Blog, 15 May 2020 ( Available at: https://www.mondaq.com/india/technology/935294/blockchain-comparative-guide)

5.Blockchain technology in India Opportunities and challenges , Deloitte Report , April, 2017

(Available at: https://www2.deloitte.com/content/dam/Deloitte/in/Documents/strategy/in-strategy-innovation-blockchain-technology-india-opportunities-challenges-noexp.pdf)

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