Virtual Digital Assets (VDAs): “Securities” or not?

[By Dhvani Shah]

The author is a student of Gujarat National Law University.


  • Introduction

An estimated USD 15 billion is floating around in India’s crypto-asset sector. Indian IPs accounted for 5% of worldwide crypto asset exchange traffic from January 2018 to December 2020, indicating a large crypto community. Recent research suggests that approximately 6 million people, or roughly 0.5% of India’s total population, are active in the crypto space. India’s crypto asset sector is expanding at an unprecedented rate. It is home to an estimated 15 million Virtual Digital Assets (VDA) investors and 350 crypto-based startups. Over the next 18-27 months, such enterprises plan to invest over USD 6.7 billion. It is estimated that Indians have invested roughly USD 10 billion into VDAs.

The Reserve Bank of India (RBI) and the government seem against regulating the crypto market in 2014; the RBI issued a caveat to the public against the risks of trading in virtual assets and its violation of the then-existing foreign exchange laws in the country. The tussle between RBI and regulation of the crypto asset market has been long-standing for over 9 years and has been precisely discussed in the Representation before the Government of India.

  • What constitutes Virtual Digital Assets (VDAs)

Virtual Digital Assets (VDA) have been finally defined in the Finance Act, 2022 with the introduction of clause 47A to Section 2 of the Income Tax Act, 1961. The Indian Supreme Court, in the decision of Internet and Mobile Association of India v. RBI[1]relied on the definition of ‘virtual currency (VC)’ as per the FATF Report which described VCs as a digital unit that can be traded and serves as “(1) a medium of exchange, (2) a unit of account, and (3) a store of value in the digital economy, but is not a government-issued legal tender.” The Court also deciphered the definition of VCs by various courts in different jurisdictions to mean property, commodity, or payment method. Interestingly, the Hon’ble Court also deduced that VDAs can be treated as an ‘intangible property’ or ‘good’.

(For this blog, VDAs, crypto assets, and crypto-currency are used interchangeably).

The VDA market requires regulation as banning its trading could do more harm than good as buying and selling of crypto can be treated as an occupation, and a blanket ban on its trading can invoke the fundamental right to freedom of trade and profession.[2] The government is also on the path to introducing Central Banking Digital Currency (CBDC) which would again make regulation of the crypto market necessary before its introduction into the Indian economy.

For instance, the Enforcement Directorate, India’s principal body for investigating money laundering offences and violation of foreign exchange laws, has issued notices to WazirX, a cryptocurrency exchange for suspected breach of the Foreign Exchange Management Act, 1999 (FEMA). It is challenging for crypto asset service providers to navigate regulatory frameworks without guidance from authorities on how FEMA or other laws may affect their industry. Regulatory stability plays a crucial role in fostering consumer confidence in a market and in order to increase people’s confidence in the financial system, strict regulation is required.

  • What constitutes Securities

Now that we’ve seen the ‘what’ and ‘why’ let’s dive into the placing of VDAs in the existing legal framework.

          (i) VDAs as ‘Security’

Securities are tradeable financial instruments with monetary value issued to raise capital. The Securities Contract Regulation Act, 1956 (SCRA) under Section 2(h) defines “securities” to be inclusive of marketable securities in an incorporated company, government securities, and any such instrument notified by the Central Government as securities.[3] This definition is wide in its ambit as the government can notify and expand ‘securities’ to cover other additional instruments. ‘Marketability is an important characteristic of securities[4] and should mean something that is capable of being bought and sold in the market regardless of the market size and has high liquidity and ease of transferability.[5] While this ease of transferability is a characteristic restricted to securities of a publicly listed company, VDAs also possess this feature of ease of transferability.

To dissect the quality of ‘marketability’ in VDAs, these assets are capable of being freely bought and sold in the market through crypto-exchange platforms like Wazir X, CoinDCX, ZebPay, etc. that aid investors in trading in the crypto market. However, these crypto-platforms, due to lack of any guidelines on the regulatory framework, operate cluelessly and often in the fear of violation of any law they might be unaware of to be complied with. While an average VDA transaction could take anywhere between 10 minutes to an hour, start-ups like Polygon in the crypto space are trying to develop platforms to expedite the transfer process. Ease of liquidity indicates the demand for an instrument in the market i.e., a readily available buyer or seller which brings stability to the market. VDAs can be converted to the fiat currency of a nation. Some crypto assets are more liquid than others which depends on their trade-ability. While the VDA market might be less liquid than other instruments right now, it is a rapidly booming sector with great potential for liquidity in the future. The VDAs can thus be deemed to be marketable security.

The other roadblock in the existing definition of ‘securities’ to include VDA is that it is issued by an incorporated company ruling out a major chunk of the crypto assets. This is because crypto assets are created via minting anonymously and hence, even if a company mints crypto, the original issuer of the minted crypto-asset would be unidentified leaving it out of the ambit of the company. Crypto-currency exchanges like ZebPay have been incorporated with the Registrar of Companies (ROC) as private companies offering IT and Software services. Attempts to have a new company incorporated in India for the express purpose of operating as a cryptocurrency exchange have been denied by the ROC. Before rejecting an incorporation application, in a few cases, the ROC has provided notice to the applicant requesting an undertaking that the applicant would not deal with cryptocurrencies like Bitcoin and will obtain a prior no objection from the RBI.

Thus, VDAs, although marketable, are not issued by a corporate body restricting their applicability in the existing definition of ‘securities’ under the SCRA.

          (ii) VDAs as ‘Commodity’

An alternative to VDAs being treated as ‘securities’ is treating them as ‘commodities. While there is no express definition of commodity under any statute in India, the SCRA defines “good” as “every kind of movable property other than actionable claims, money, and securities.”[6] Both tangible and intangible property could be included within the definition of “good”.[7] A “good” has to satisfy three criteria (i) utility (ii) capability of being bought and sold (iii) can be transferred, delivered, stored, and owned.[8] For the purposes of SCRA, cryptocurrency meets the concept of “good” because it is a transferable set of codes used with blockchain technology. In accordance with Section 2(bc) of the SCRA, contracts for the delivery of certain items announced by the Centre that are not ready for delivery contracts are commodity derivatives.[9] VDAs could be added to the commodity derivatives market on stock exchanges if the Central Government so chooses to issue a notification under this provision.

A SEBI FAQ notes that registered commodities must meet specific requirements, such as high demand and supply, standardization and gradation, appropriate volatility, etc. Although FAQs are not legally enforceable, they do suggest that current legislation under the SCRA does not foresee digital assets as a commodity for the purposes of commodities derivative markets. Therefore, it may be impossible to bring all crypto assets inside the purview of the SCRA unless a new class of commodities is developed, such as digital asset commodities.

  • The Legal Implication of Treating VDAs as Securities

If after overcoming these challenges VDA is treated as ‘securities’ then it will fall under the regulatory ambit of SEBI, and SEBI will become the primary body for the regulation of VDAs and the market stakeholders. The crypto exchanges will have to be registered under the SCRA and make an application before the Central Government after which the government will accept/reject the application after conducting its own assessment. SEBI will have the power to issue directions and amend the bye-laws of such recognized crypto exchanges. The crypto exchanges will also have to be in compliance with the KYC, and AML/CFT requirements for protecting the investors. SEBI will have to bring much-needed clarity on the treatment of VDAs and the various compliances required to be adhered to by the crypto exchanges as well as the market participants. SEBI would also widen its ambit of adjudicatory powers as any disputes arising out of the crypto asset market will have to be resolved by it. This in itself is a mammoth task as it requires highly qualified and skilled professionals owing to the nature of crypto transactions and the lack of manpower in SEBI. Thus, the role of SEBI will increase massively if crypto assets are treated as ‘securities’ in the Indian legal context.

  • Recommendations

Defining VDAs: While VDAs are defined under the Finance Act, 2002 it covers their meaning for taxation purposes; the treatment of VDAs in the trading market remains to be seen. With the government’s anti-crypto stance this classification of crypto assets seems distant presently. But as analyzed above, crypto could be treated as ‘securities’ or ‘commodities’ by making a few amendments in the SCRA and can serve as a temporary cure until a well-planned law is rolled out.

Legislative and Regulatory Guidance: The regulation of miners/issuers, crypto-exchanges, etc., is dependent on the statutory and regulatory guidance provided by the Government. A delay in regulation exposes the investors in the market to high risk. Regulation would also increase investor confidence in the market.

Education of Investors: An unregulated market is highly volatile and may pertain complicated technological risks for the investors. The education of investors on the operation of this market and the risk degree associated with it could provide protection to the investor.

Separate arm in SEBI: Crypto assets is a niche field with the intersection of technology and finance. It requires complex problem solving by individual’s adept with technology as well as the nitty-gritty of finance. A separate wing in SEBI for operating the crypto-market could be beneficial for all the market participants.

  • Conclusion

One thing is for certain: the cryptocurrency market is here to stay. Despite not explicitly confirming its existence, the government has indicated approval by imposing a tax on VDAs. Even while the government stands to gain from this unregulated, high-risk industry, it does not want to go to the trouble of regulating it, claiming things like money laundering and terrorism financing as justifications. Even the advertisement of VDAs is being restricted to include caveats of market volatility and them being not treated as securities in India. In light of the above, VDAs should be treated as securities until a permanent law is developed or the Indian jurisprudence is capable enough to throw light on its nature. This can be possible merely through a government notification notifying VDAs as marketable security. Obviously, the SEBI has to be prepared to tackle the humongous challenges that come along with it. The fear of regulation cannot stop the growth of the crypto-market and non-regulation is more dangerous than a nascent regulation.


[1] Internet and Mobile Association of India v RBI 2020 SCC OnLine SC 275.

[2] ibid.

[3]Securities Contract Regulation Act 1956, s 2(h).

[4] Bhagwati Developers Private Limited v Peerless General Finance & Investment Company Limited [2013] 179 Comp Cas 421 (SC).

[5] PCSI Industries v Securities and Exchange Board of India (Securities Appellate Tribunal, 5 October 2001).

[6]Securities Contract Regulation Act 1956, s 2(bb).

[7] Tata Consultancy Services v State of Andhra Pradesh (2005) 1 SCC 308 (SC).

[8] ibid.

[9]Securities Contract Regulation Act 1956, s 2(bc).


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