In their ten years of existence, crypto-assets (also known as cryptocurrencies or virtual currencies) have confounded governments around the world. Bitcoin was the first and has been followed by over 5000 other crypto-assets. But, because Bitcoin was started by a pseudonymous creator and is not controlled by any single entity, it is in many senses still the most confounding.
Is it money? A Security? A commodity? A payment system? Courts and government agencies globally have provided different answers.
The key is not to analyse the legal aspects of crypto-assets in a vacuum but to be clear about the context in which a question arises. Are we analysing a tax statute, a securities law, or a constitutional issue? Are we analysing Bitcoin or a more centralised crypto-asset, like many of the tokens that came out of Initial Coin Offerings?
It is only of late that global thinking is beginning to appreciate these nuances. A broad consensus is emerging that regulation should be function-based and not overtly influenced by the underlying technology.
In other words, the mere prefix 'crypto' doesn't have much legal meaning; regulators should pierce the veil and look to the nature of an activity.
Often, the existing law has an answer. The approach of jurisdictions like the U.S., U.K. and Singapore towards judging whether to apply securities law to crypto-asset activity is a good example. These jurisdictions analyse case-by-case whether a given crypto-asset is a 'security', based on long-standing legal principles, such as whether there is an investment in a common enterprise and an expectation of profit solely from the efforts of others.
They have found that while Bitcoin is not a security, many other crypto-assets are, and therefore can only be traded on regulated securities exchanges. Wherever crypto-assets raise genuinely new issues, such as consumer protection and money laundering, new regulations should be crafted.
Several jurisdictions have done this too, a prime example being the E.U.'s expansion of its anti-money-laundering law to specifically cover crypto-asset intermediaries.
The G20, the Financial Action Task Force, the Financial Stability Board, and the OECD are some of the international organisations having informed discussions along these lines.
The recent Indian inter-ministerial committee report too (which went as far as to recommend an outright ban on crypto-asset activity) recognised that global standard-setting bodies would drive the way forward and that a standing committee in India should accordingly re-visit the issues in its report.
But, as yet, we haven't come across a proposal for a formal international treaty on any aspect of crypto-asset regulation. We believe this is an idea worth considering. While each national government would have different policy interests, it would seem reasonable for most governments to agree on minimum consumer protection, anti-money-laundering, tax compliance, and market integrity standards.
The G20 has in fact identified these as the issues raised by crypto-assets and has committed to monitoring them, which could make the G20 a possible forum for initiating discussions on a potential treaty. The E.U. anti-money-laundering directive is already an example that multi-lateral co-operation on this aspect is feasible.
While some existing treaties may already extend by interpretation to crypto-assets (e.g., co-operation in criminal law and tax matters), new provisions can be introduced for consumer protection, anti-money-laundering, and market integrity with specific application to crypto-assets.
For instance, countries could be required to license and regulate crypto-asset businesses and prohibit market practices like insider trading and "pump and dump" schemes. A treaty is also an opportunity to bring some much-needed uniformity on the taxonomy of crypto-assets and crypto-asset activity.
Over the years, countries have always found that it makes sense to reach international agreement on cross-border phenomena. Prominent examples include the multi-lateral treaties on air, space, and the sea; the clarification of intellectual property rights on the Internet; the prevention of transnational organised crime; and co-operation on tax matters, including the recent multi-lateral instrument on anti-avoidance.
A crypto-asset network has participants across the world. A transfer of value occurs across borders with minimal friction. The blockchain allows for decentralised autonomous organisations (or 'DAOs') i.e., something akin to a multi-jurisdictional company.
Even trading exchanges can be purely online, decentralised and 'locationless'. All of these innovations bring both benefits (such as cost-savings and financial inclusion) and risks (such as law enforcement evasion).
The goal of regulation should be to preserve the former and mitigate the latter. But without certainty on other countries' approaches, there seems to be a temptation to take excessive measures like prohibiting the activity itself.
In India, the Supreme Court has reserved judgment on the question of whether the RBI validly prohibited crypto-asset transactions from being carried out through banking channels.
On the larger issue of the legality of the activity itself, the inter-ministerial committee's recommendation of an outright ban is pending consideration of the government.
In our view, a prohibition would be excessive, since less invasive alternatives are available, as shown by many other countries. A binding multi-lateral agreement will bring comfort to authorities to view crypto-assets with less suspicion.
As former IMF Managing Director Christine Lagarde said, "A judicious look at crypto-assets should lead us to neither crypto-condemnation nor crypto-euphoria. ...[P]olicymakers should keep an open mind and work toward an even-handed regulatory framework that minimises risks while allowing the creative process to bear fruit."
(The authors are lawyers at Nishith Desai Associates. While the firm represented the Internet and Mobile Association of India in the Supreme Court case on the RBI circular, this piece is not intended to comment on the merits of that case.)