IMGL Magazine April 2022

NFTs and virtual digital assets

prohibiting the secondary sale of NFTs or restricting the sale of NFTs to in-house / designated NFT platforms only. Gaming laws In India each state government has the power to regulate the activities of gaming and gambling within its territorial boundaries. Most state gaming laws prohibit and criminalize the offering of ‘games of chance’ for stakes while exempting ‘games of skill’. These laws become applicable when a game requires an input of ‘money or money’s worth’ to win a prize. Therefore, if a game available to players in India involves cryptocurrency transactions, the developer must ensure that the game is not construed as a “game of chance” under the state gaming laws. As an illustration, a spin-the-wheel game requiring an entry fee in the form of a crypto deposit to award the winner with an NFT will be classified as a game of chance and prohibited under Indian gaming laws. Advertising and marketing regulations In addition to the Consumer Protection Act 2019 prohibiting misleading advertisements 4 , the Indian self- regulatory body for advertisements, the Advertising Standards Council of India (“ASCI”), has issued ‘Guidelines for Promotion of Virtual Digital Assets and Linked Services’ (“VDA Guidelines”). As per these VDA Guidelines persons who commission, create, place, or publish advertisements of games containing VDAs must issue an express disclaimer that VDAs are at present unregulated, risky and there may not be any legal recourse for any loss suffered from such transactions. Further, such persons must ensure that these advertisements do not refer to VDAs as ‘currency’, ‘security’ or ‘depositories’. The VDA Guidelines also require that VDAs are not advertised as a solution to any monetary or personality problems the user may be suffering from. The VDA Guidelines are in addition to ASCI’s ‘Guidelines on Advertisements for Online Real-Money Gaming’ which, inter alia, require that advertisements carry warnings to players that real-money games carry a financial risk, can be addictive and must be played responsibly. There is also

an onus not to depict the game as an alternate income opportunity or an alternate employment option. Regulations related to cryptocurrency transactions Regulation of cryptocurrency has a chequered past in India. In 2018, the Reserve Bank of India (“RBI”) issued a circular 5 prohibiting all RBI regulated entities from dealing in or providing facilities for dealing in or settling virtual currencies (including cryptocurrency). The 2018 circular was eventually set aside by the Supreme Court of India in March 2020 6 . In December 2021, the government sought to introduce the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ ("Bill") before the Parliament., The reported purpose of the Bill is to prohibit all private cryptocurrencies in India; the exception being promotion of the underlying blockchain technology of cryptocurrency and its uses 7 . However, the Bill is yet to be tabled before the Parliament to become a law and the text is not yet available to the public. Given the uncertainty regarding the legality of cryptocurrencies in India, game operators and developers will benefit from keeping abreast of all the policy changes from time to time. Taxation and foreign exchange laws Transacting in virtual digital assets is not devoid of tax implications in India. Entities that own and operate a platform for facilitating purchase and sale of game-related NFTs and charge a commission on such transactions are also likely required to pay Goods and Service Tax as per the extant regulations. From a business perspective, game developers should also be aware of the impact India’s taxation and foreign exchange regime has on players transacting in VDAs. The Finance Bill, 2022 has imposed 30 percent tax on income arising from transfer of VDAs. This is in addition to a one percent TDS payable in case of a transfer of VDAs over a certain threshold.

4 Section 2(28) of the Consumer Protection Act, 2019 – misleading advertisement means “(i) falsely describes such product or service; or (ii) gives a false guarantee to or is likely to mislead the consumers as to the nature, substance, quantity or quality of such product or service; or (iii) conveys an express or implied representation which, if made by the manufacturer or seller or service provider thereof, would constitute an unfair trade practice; or (iv) deliberately conceals important information.” 5 RBI Circular on ‘Prohibition on dealing in Virtual Currencies (VCs)’ dated 6th April 2018, available at: ?Id=11243&fn=2&Mode=0 6 Internet and Mobile Association of India vs. Reserve Bank of India (2020 SCC Online SC 275) 7 Lok Sabha Bulletin Part II, 23rd November 2021, available at:

IMGL Magazine • April 2022 • 53

Made with FlippingBook flipbook maker