Digital assets have been around for a while now but only recently in the last few years, they have caught an eye. The digital assets were there since 2009 when the bitcoin came into the picture, It got a sudden boom in the year 2016 which went on till 2018, and then there was a decrement and negative market conditions for the crypto industry which was known as ‘the first crypto winter’. Most people still are unaware of what are digital assets and crypto-currencies are only a part of it. Digital assets are a very vast term under which many other things fall with crypto. Digital assets have recently been given a legal definition by The Finance Bill 2022. As per section 2 clause 47A of the Income Tax Act, 1961, VDA’s are “any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically(b) a non-fungible token or any other token of similar nature, by whatever name called; (c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify”.
Today the world revolves around only one thing and that is data. Data has become the utmost essential thing and as the world is technologically advancing, the data with it is also becoming complex and more valuable. Furthermore, as technology is advancing rapidly the laws are unable to keep pace with it and due to that, grey areas are coming up frequently. Digital assets as we know are a very broad area, due to which many laws are getting affected like corporate, tax, security, contract laws, etc.
TYPES OF DIGITAL ASSETS.
There are various types of Digital Assets and they also contain various sub-categories. Starting with –
- Intrinsic Digital Assets – Intrinsic digital assets are those which have value in themselves.“Intrinsic value refers to some fundamental, objective value contained in an object, asset, or financial contract”. Some important examples can be Blockchain data, transactional data, Central bank digital currency, commercial data, digital evidence, IoT data, medical records, software codes, etc. The need to understand this is that data is king in the upcoming era.
- Derivative Digital Assets –These are assets that as the name suggests derive their value from something. To simplify the object or asset on its own does not hold any value but is backed by something of value for example- fiat currency is a paper and does not hold any value of its own but is backed by the government (on the rupee note it is written – I PROMISE TO PAY THE BEARER THE AMOUNT OF _ RUPEES). Intellectual property also falls under this category. Sustainability certificates are also derivative assets for example carbon credits. Lastly, wrapped tokens ( wrapped tokens are linked to the value of an original asset and used on defi platforms), can represent arts and collectables, commodities, debt instruments, equity & stocks, and many more.
- Metadata – As earlier mentioned that even though the data is very valuable and can be an asset, similarly data of data will also fall under the digital asset class. Metadata can be defined as “data that provides information about other data”. Let’s say you have a word document that contains information of value, this will fall under intrinsic digital asset as the document itself carries value. But the data of the document ( by data here it means the date of the document, authors name, date modified, file size) also hold value and will fall under metadata. Creator, technical data, licenses, etc. will all fall under this head.
DIFFERENT AREAS OF LAW WILL BE IMPACTED BY DIGITAL ASSETS IN THE FUTURE.
The digital asset is not a new concept but due to rapid advancement of technology and the pace at which it is being adopted raises concerns from a legal point of view. In this fast-evolving world, the laws need to be upgraded to match the requirements of technological developments. The boom in the cyber & digital sector has opened many gates for the sector but at the same time has created legal ramifications. Some of the major areas of law that would be impacted are –
- Contract Law – The first and foremost is the contract law which would be impacted as basically everything in law is based on contracts or require contracts as their foundation. Contracts would be essential for the digital assets regulatory and legal domain. New types of contracts would be required for novel innovations. When smart contracts were first introduced to the world, it was something that the law never encountered and the cases were filed and most of it was grey area legally. If we see from a legal standpoint, smart contracts are not contracts at all as per the definition of traditional contracts according to the Indian Contract Act, 1872. Currently, it would require a lot of work to fit new technologies into law.
- Security Law – One of the most important areas which are connected with digital assets is security law. This is because of the surge of cryptocurrencies in the market, since the boom in the crypto market, every person has started investing money into coins and tokens which has led to money flowing out of the common man to uncharted territory. As per SCRA (Securities Contracts (Regulation) Act,1956), cryptocurrencies do not fall under the ambit of the definition of securities. Cryptocurrencies as security do not fall within the definition as per the Howey test also which was established in the case of SEC v. Howey. Due to the controversial nature of crypto securities law would play a major part in the future.
- Corporate Law – The most basic but essential of any company is the law governing it. The regulatory framework and compliance with laws made by the government are equally required as any other. It will be difficult for lawyers and legal counsels as well because it would be a new domain for them also, crypto companies or new companies in the tokenization sector will have a different set of regulations which need to be adhered to. The new technology will be bringing challenges to government, companies & lawyers as well.
- Intellectual Property Laws – In the Digital world everything will need protection from being copied or used illegally. Tokens, crypto’s, commodity tokens, buying land in the metaverse, etc. will require IP protection. Other than that new types of challenges are being faced in this field like the US copyright office rejecting the request for art made by artificial intelligence.
- Taxation Laws –Taxation on digital assets whether it is crypto or an NFT has been very challenging as to under which category to put and to levy tax. The Indian government has levied a flat 30 % tax on crypto gains and 1 % TDS. The government has made even a separate column when filing the ITR for VDAs. Other than these many digital assets are still not clear where they will fall for taxation purposes.
- Other Laws – Other laws which would be dealing with digital assets would be property law, fintech law, regulatory and compliance, criminal law, and licenses.
The digital asset industry has been growing at an immense rate in the last few years with cryptocurrencies shooting at an all-time high and concepts like NFTs, blockchain encryption, tokenization, AI/ML, etc. are evolving to another level. The need for advanced laws is getting more and more important too, because even if the technological advancements are happening but there is no law to govern or no proper supervision the people won’t be able to reap the fruits of these advancements. Technology has always been a boon to humanity but at the same time, unsupervised technology has created havoc. Firstly, the Information Technology Act, 2000 needs to be evolved immediately, Secondly, the government has been doing its best to control the new and dynamic changes but it is time to be proactive rather than reactive to situations. India is in process of making a Central Bank Digital Currency which will be a government that will be a digital twin of the Indian rupee, this is a great initiative taken by the government as it could have vast potential in terms of scalability and a step towards a digital economy. The final aspect would be that in the upcoming cyber era, data is the king, be it transactional data, blockchain data, metadata, or basic image data. Value of the data is the foremost thing, if data is the king, then analyzing and using the data correctly would still be the Ace.
Author(s) Name: Rishabh Sharma (Centre for legal studies GIBS ( IP University))