Blockchain Demystified: A Comprehensive Guide to Understanding Blockchain Technology (Part 5)
CRYPTOASSETS
An asset is “an entity that functions as stores of value. Ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them or using them, over a period of time.”[1] Cryptoassets are cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored, or traded electronically.[2] Crypto-assets commonly include, but are not limited to, blockchain companies, cryptocurrencies, cryptocurrency funds, the Initial Coin Offerings (“ICO(s)”). In simple words, anything which holds value in digital form can be called cryptoasset. Often, people confuse cryptoassets with cryptocurrencies. But they need to understand that the cryptocurrencies are just a type of cryptoassets and hence, all cryptocurrencies are cryptoassets, but all cryptoassets are not cryptocurrencies. An exhaustive list of Cryptoassets constitute seven ingredients as follows:
1. Cryptocurrencies
2. Platform tokens
3. Utility tokens
4. Security tokens
5. Natural asset tokens
6. Cryptocollectibles
7. crypto-fiat currencies[3]
[1] Organisation for Economic Co-Operation and Development [2] fca.org.uk/firms/cryptoassets#:~:text=Cryptoassets%20are%20cryptographically%20secured%20digital,transferred%2C%20stored%20or%20traded%20electronically. [3] Blockchain Revolution:INSEAD
SMART CONTRACTS
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the execution of credible transactions without third parties. Nick Szabo used the term ‘Smart Contract’ in 1997. Smart Contracts are like traditional Contracts in the real world. The main difference between the two is that Smart Contracts are entirely digital. Simply put, Smart Contract is a type of program which is stored inside of a blockchain. Let us understand Smart Contracts with the following example:
Smart contracts are a series of instructions, which work on the basis of the IFTTT logic, aka the IF-THIS-THEN-THAT logic. If the first set of instructions is done, then execute the next function and after that the next and keep on repeating until you reach the end of the contract. The best way to understand that is by imagining a vending machine. Every step that you take acts like a trigger for the next step to execute itself. It is kind of like the domino effect.
So, let’s examine the steps that you will take while interacting with the vending machine:
Step 1: You give the vending machine some money.
Step 2: You punch in the button corresponding to the item that you want.
Step 3: The item comes out, and you collect it. Now look at all those steps and think about it.
Will any of the steps work if the previous one wasn’t executed? Every one of those steps is directly related to the previous step. There is one more factor to think about, and it is an integral part of smart contracts. You see, in your entire interaction with the vending machine, you (the requestor) were solely working with the machine (the provider). There were absolutely no third parties involved. Smart contracts on a blockchain, which execute automatically, will transfer title to goods and money, remove the need for banks to provide documents, such as letters of credit. What this does is it entirely cuts out all the unnecessary middlemen and their fees. It also helps in creating an ecosystem that doesn’t require any trust in any particular party.
Let us take another example to understand a Smart Contract. Let us suppose that X and Y want to bet on a game of cricket, and it is a match between India and Pakistan. X bets Rs.1000 on India and Y bets Rs. 1000 on Pakistan. If, say, India wins, and X goes to Y and asks for his winnings, and it is a regular contract, Y could always reply, “What winnings?”.
And provided that he can go into the Court for the enforcement of the Court, he will have actually to go there to sue Y for breaching the contract. But suppose, through smart contracts, we digitally enter the said contract. As soon as the cricket match ends, the outcome is determined through an oracle [1]and said the contract is automatically enforced. There is no need for a third party or the Court, and the contract is automatically executed.
These contracts are implemented using the platforms known as Ethereum, which is made up of two elements, i.e., Currency and Contracts. The currency is like the token that we bought in the vending machine.
For a better understanding of Smart Contracts, one must understand the difference between Smart Contracts and Traditional Contracts. The term ‘traditional contracts’ simply refers to the most basic form of a contract. In which the parties agree on the terms of their contract, keeping in mind the intention and the final goal of the whole transaction. These contracts provide a very flexible approach to the parties about the amendment of their contract. This is undoubtedly not the case with Smart Contracts. Traditional contracts can be in written form (hard copy) or electronic form as well.
The fundamental differences between the two are mentioned below:
[1] http://blockchainhub.net/blockchain-oracles/
CRYPTOCURRENCIES AS LEGAL TENDER IN INDIA
The word “currency” is defined in Section 2(h) of the Foreign Exchange Management Act, 1999 (hereinafter, “FEMA”) to include “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.”
Nothing prevents RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999. After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer.
In the November of 2017, the Inter- Regulatory Working Group on Fintech and Digital Banking[1], set up by RBI, pursuant to a decision taken by the Financial Stability and Development Council Sub-Committee way back in April 2016, submitted a report. This report, in paragraph 2.1.3.2, dealt with Digital Currencies. It defined ‘digital currencies’ to mean digital representations of value, issued by private developers and denominated in their own unit of account. The Report also stated that “digital currencies are not necessarily attached to a fiat currency but are accepted by natural or legal persons as a means of exchange.” The Government of India, Ministry of Finance also issued a statement on 29-12-2017 cautioning the users, holders and traders of VCs that they are not recognized as legal tender and that the investors should avoid participating in them.[2]
The expression “currency notes” is also defined in Section 2(i) of FEMA to mean and include cash in the form of coins and bank notes. Again, FEMA defines “Indian currency” under Section 2(q) to mean currency which is expressed or drawn in Indian rupees, but which would not include special bank notes and special one rupee notes issued under Section 28A of the RBI Act. In IMAI vs RBI[3], RBI has taken a stand in paragraph 24 of its counter-affidavit that VCs do not fit into the definition of the expression “currency” under Section 2(h) of FEMA. This position had also been iterated in Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies[4][5]in point 2.3 of the report. The Court also held that different regulatory bodies might see the cryptocurrencies through different prisms.
Till date, this position has not been shifted and hence, it can be concluded that the cryptocurrencies are not legal tender in the eyes of law in India.
[1] https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/WGFR68AA1890D7334D8F8F72CC2399A27F4A.PDF [2] https://pib.gov.in/PressReleseDetail.aspx?PRID=1514568 [3] Writ Petition (Civil) No.528 of 2018 [4]https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf
By Siddharth Dalmia
The StartUp Sherpa
+91-9971799250
dalmiasiddharth1994@gmail.com
