In the News:

On December 18, 2023, the Government of India presented the draft of The Telecommunications Bill, 2023 in the Lok Sabha. This proposed legislation was aimed at replacing outdated laws such as the Indian Telegraph Act (1885), Indian Wireless Telegraphy Act (1933), and The Telegraph Wire (Unlawful Possession) Act, 1950. The introduction of the Telecom Bill, 2023 occurred almost a year after the conclusion of consultations for its 2022 counterpart. On the 24^th of December 2023, the bill received the assent of the President and has now been enacted into law.

Background:

The Indian telecommunications sector has historically been governed by three laws:
1. Indian Telegraph Act, 1885
2. Indian Wireless Telegraphy Act, 1933
3. Telegraph Wires (Unlawful Possession) Act, 1950

The Government of India has recognized the need for a modern legal framework and over the last few years, has been working towards bringing in structural changes to the current regulatory mechanisms in the sector. The recent repeal of the Telegraph Wires (Unlawful Possession) Act (1950) in December 2023 marked a significant development. The Telecom Regulatory Authority of India (TRAI) Act (1997) established TRAI as the regulator, and the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) was created to handle disputes. The central government retains the authority to issue licenses.

Despite the evolution of communication technology since the Indian Telegraph Act (1885) came into effect, which originally regulated telegraph services, the outdated legislation continued to govern the telecommunications landscape. Efforts were made in the past, such as introduction of the Communication Convergence Bill in 2001 and the draft Indian Telecommunications Bill, 2020. The latest initiative, The Telecommunications Act, 2023, aims to replace existing telegraph laws, and establish a contemporary regulatory framework for the dynamic telecommunications sector.

Main Features of the Telecommunications Bill, 2023:

Ø  Telecom related Authorization: Approval from the central government is mandatory for telecommunication services, network expansion, or radio equipment possession. Existing licenses are valid for their duration or up to five years.

Ø  Spectrum Allocation: Auctions are the usual method, except for specific purposes like national security and public broadcasting, where administrative allocation applies. The government can reassign frequency ranges, and spectrum sharing, trading, leasing, or surrendering is permitted.

Ø  Interception and Search Authority: The legislation allows the interception or blocking of messages for public safety, emergencies, and specific reasons like state security. Telecom services can be suspended, and temporary possession of telecom infrastructure is allowed in public emergencies.

Ø  Protection of Users from Spam calls: Measures for user safety include requirement of mandatory prior consent to be taken by companies from subscribers for specific messages, including advertising messages, establishing ‘Do Not Disturb’ registers, and enabling user reporting mechanisms for malware or undesired messages. Telecom providers must maintain an online grievance redressal system.

Ø  Right of Way: Entities installing telecom infrastructure can request fair and non-exclusive right of way over public or private property. It is an excellent provision that will smoothen the network roll out

Ø  TRAI Appointments: Amendments in the TRAI Act permit individuals with 30 years of experience for the Chairperson role and 25 years for members.

Ø  Widening the scope of USO Fund as Digital Bharat Nidhi: The bill, renames the Universal Service Obligation Fund as Digital Bharat Nidhi, broadening its scope to include telecom research and development.

Ø  Rationalizing amount of penalty for violation of authorization terms: The legislation defines various criminal and civil offences, specifying penalties for unauthorized telecom services, network access, or violation of terms.

Ø  Adjudication Process: An adjudicating officer, ranked joint secretary or above, will handle inquiries and issue orders for civil offences. Appeals can be made to the Designated Appeals Committee and further to TDSAT.

Ø  Innovation and Technology Focus: The bill emphasizes a dedication to fostering innovation and technological progress in the telecom sector.

Conclusion:

The Telecommunications Act, 2023, introduces a transformative paradigm for India's telecommunications sector, addressing outdated laws and adapting to contemporary challenges. The bill's forward-looking features, including streamlined spectrum allocation and enhanced user protection measures, signify a commitment to fostering innovation and efficiency. Despite commendable strides, the industry calls for further scrutiny and a more balanced regulatory framework mainly due to the retention of certain surveillance powers. As India embraces a dynamic telecom landscape, the act holds the potential to usher in a modern era marked by technological progress and regulatory resilience.

The Alliance of Digital Indian Foundation (ADIF) is a policy think tank committed to fostering innovation and growth of digital startups in India. Stay informed on policy updates through a free subscription to ADIF blogs. Kindly share your feedback and comments with us at office@adif.in. Your insights are valuable to us

The Open Network for Digital Commerce (ONDC) is designed to address various challenges within the digital commerce ecosystem in India. Some of the key challenges that ONDC intends to solve include:

Fragmentation of E-commerce Ecosystem:

The Indian e-commerce landscape is fragmented, with various platforms operating independently. ONDC aims to create a unified and interoperable digital commerce network that facilitates seamless interactions between buyers, sellers, and service providers.

Example: Currently, a local artisan selling handmade products may find it challenging to reach a broader audience because they need to navigate multiple e-commerce platforms, each with its own set of rules and requirements. ONDC aims to streamline this process, providing a unified platform where sellers can efficiently manage their products and services.

Limited Participation of Small and Local Businesses:

Many small and local businesses face challenges in participating effectively in the digital economy. ONDC intends to empower these businesses by providing a platform where they can easily onboard, digitize their operations, and reach a broader consumer base.

Example: A small grocery store in a remote area may face difficulties in digitizing its inventory and joining online marketplaces. ONDC intends to empower such businesses by offering user-friendly tools for digital onboarding, inventory management, and order fulfilment, thereby expanding their reach.

Lack of Interoperability:

The absence of interoperability standards among different e-commerce platforms hinders a smooth and cohesive digital commerce experience for a consumer. ONDC aims to establish a standardized framework that allows different platforms to interoperate, fostering a more connected and efficient ecosystem.

Example: Currently, a consumer using one e-commerce platform may find it challenging to switch to another due to differences in interfaces and payment systems. ONDC seeks to establish a common set of standards, enabling users to seamlessly transition between platforms and enhancing the overall user experience.

Inadequate Digital Infrastructure for Commerce:

Some regions and sectors lack robust digital infrastructure for commerce, limiting the reach and accessibility of digital services. ONDC intends to bridge this gap by promoting the adoption of digital technologies and ensuring widespread access to digital commerce services across the country.

Example: In regions with limited internet connectivity, businesses struggle to adopt digital commerce practices. ONDC aims to address this by supporting the development of digital infrastructure, ensuring that businesses in even remote areas can participate in online commerce.

Data Privacy and Security Concerns:

Privacy and security concerns related to consumer data are significant challenges in the digital commerce space. ONDC seeks to address these concerns by implementing robust data protection measures and ensuring secure transactions within the network.

Example: Consumers may hesitate to share personal information online due to concerns about data breaches. ONDC aims to implement state-of-the-art security measures, assuring users that their data is protected, thereby fostering trust in digital transactions.

Limited Financial Inclusion:

Many individuals and businesses, especially in rural areas, face challenges in accessing financial services through digital channels. ONDC aims to promote financial inclusion by integrating features such as lending and embedded financing options, making digital commerce more accessible to a wider population.

Example: A small farmer in a rural area may lack access to formal financial services for purchasing agricultural inputs. ONDC plans to integrate financial inclusion features, allowing farmers to access credit or financing options directly through the platform.

Uneven Regional Distribution:

Digital commerce growth is often concentrated in specific urban areas, leading to regional imbalances. ONDC intends to promote even distribution by fostering the participation of businesses and consumers across various regions, including rural and semi-urban areas.

Example: Digital commerce growth may be concentrated in metropolitan cities, leaving out businesses and consumers in smaller towns. ONDC seeks to promote regional inclusivity, encouraging businesses from various regions to participate and serve a diverse customer base.

Complexity in Onboarding and Integration:

Small businesses often encounter complexities in onboarding and integrating with digital commerce platforms. ONDC seeks to simplify these processes, making it easier for businesses of all sizes to join the digital commerce network.

Example: A local retailer may find the onboarding process on existing e-commerce platforms complex and time-consuming. ONDC aims to simplify these processes, providing easy-to-use tools and resources for businesses to quickly integrate into the digital commerce network.

By addressing these challenges, ONDC aims to create a more inclusive, efficient, and interconnected digital commerce ecosystem that benefits businesses, consumers, and the overall economy in India.

On July 7, 2023, the Telecom Regulatory Authority of India (TRAI) unveiled a consultation document titled "Regulatory Mechanism for OTT Communication Services, and Selective Banning of OTT Services."

Definition of OTT

In India's regulatory landscape, the term "Over-the-Top (OTT) services" is contentious and lacks a universally accepted definition, causing confusion for potential regulation. However, TRAI has referred to definitions from international bodies, describing OTT services as those provided over the internet or on top of existing data networks.

The definition employed by TRAI in its Consultation Paper on Regulatory Framework for Over-The-Top (OTT) Communication Services dated November 12, 2018, is as follows:

"OTT communication services (e.g., VoIP) offer real-time person-to-person telecommunication services that utilize the network infrastructure of the telecommunication service provider and compete with them.”

Further, the definition utilized by the Department of Telecommunications (DoT) committee on Net Neutrality is as follows:

"These services (e.g., VoIP) provide real-time person-to-person telecommunication services. These services are like the telecommunication services provided by licensed telecom service providers (TSPs) but are delivered to users as applications carried over the internet using the network infrastructure of TSPs. Essentially, OTT communication services compete with the services provided by TSPs, operating on the infrastructure established by TSPs."

It is important to note that OTT services encompass various categories like Communication Services, Media and Entertainment Services, Gaming Services, Cloud services, and more. These definitions underline the technical distinctions between OTT service providers and Telecommunication Service Providers (TSPs).

Distinction between TSPs and OTTs

Telecom Service Providers (TSPs) and Over-The-Top (OTT) services represent two distinct components within the telecommunications landscape, each playing unique roles with interdependencies.

TSPs serve as the backbone of the telecommunications infrastructure, providing internet access and managing the network layer, including critical resources like spectrum. OTT services, on the other hand, operate exclusively in the application layer, offering various services over the open internet without the need for spectrum or direct network access.

Attempting to subject TSPs and OTT services to the same licensing framework is problematic due to their fundamentally different functions and dependencies. TSPs primarily offer data transmission and internet connectivity, acting as gatekeepers of the internet, while OTT services are oriented towards content creation, application development, and data generation, relying on TSPs' foundational infrastructure for user access.

Moreover, TSPs hold exclusive rights, including spectrum allocation, numbering resources, and rights of way, justified by their significant investments in network infrastructure, whereas OTT services lack such privileges and predominantly operate within the application layer. Recognizing these distinctions is essential to create a regulatory framework that effectively addresses the complexities of the telecommunications ecosystem.

Current Regulatory Framework of OTTs

The present regulatory framework governing OTT (Over-The-Top) service providers is established under the Information Technology Act of 2000. This framework includes various rules and regulations, such as the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules of 2011, the Information Technology (Procedure and Safeguards for Interception, Monitoring and Decryption of Information) Rules of 2009, the Information Technology (Procedure and Safeguards for Blocking for Access of Information by Public) Rules of 2009, the Information Technology (the Indian Computer Emergency Response Team and Manner of Performing Functions and Duties) Rules of 2013, CERT-In Directions issued in April 2022, and the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules of 2021. These regulations encompass critical aspects, such as data privacy, security practices, information interception, monitoring, decryption, public access blocking, cybersecurity, intermediary guidelines, and digital media ethics.

Moreover, OTT Communication Services, which include messaging through voice, video, or text between terminals, are already regulated under the Indian Telegraph Act, 1885, and fall under the Unified License (UL). Consequently, any service provider primarily offering such services, including OTT providers, should comply with the Act and UL regulations.

Recent legislative developments, such as the Consumer Protection Act of 2019 and the Consumer Protection (E-commerce) Rules of 2020, have also contributed to the regulatory landscape concerning OTT services. The upcoming enactment of the Digital Personal Data Protection Act in 2023, along with the proposed Digital India Act, will further strengthen this regulatory framework.

The rationale for refraining from introducing supplementary regulations, notably in the form of telecommunications licensing, stems from the comprehensiveness of the existing framework. The introduction of such additional regulations could result in unnecessary redundancy, create uncertainty in the business environment, and potentially impede innovation and economic progress.

It is essential to recognize that traditional justifications for licensing, which primarily involve managing limited resources, do not apply to OTTs. OTTs function as internet-based applications independently of resource constraints. Concerns related to competition, consumer protection, and data privacy can effectively be addressed through existing sector-specific laws and regulatory bodies.

The Competition Commission of India (CCI) shares the perspective that crafting a separate regulatory framework for OTTs is redundant and could hinder technological advancement. Therefore, it advocates for avoiding excessive regulation in this domain.

In conclusion, the current regulatory framework governing OTT services is comprehensive and adaptable to evolving requirements. Proposing additional regulations like those applied to telecommunications is not justified in this context and may lead to redundancy, ambiguity, and obstacles to innovation. Existing legislation and regulatory bodies are well-equipped to address pertinent concerns related to accountability, competition, consumer protection, and data privacy within the dynamic realm of OTT services.

Viewpoints of Various Stakeholders involved

Telecom Service Providers (TSPs):

Telecom Service Providers (TSPs) present a compelling argument for the implementation of licensing and network usage fees. Their primary points include:

Infrastructure Investment: TSPs have made substantial investments in building and maintaining the telecommunications infrastructure. Licensing fees can help recover these significant capital expenditures. TSPs argue that the licensing fees are essential for ensuring the continued development and maintenance of robust network infrastructure, including the expansion of networks to underserved areas.

Spectrum Costs: Acquiring spectrum licenses is a costly endeavour for TSPs. Licensing fees serve as a means for the government to allocate this limited and valuable resource while generating revenue to support various government initiatives and services.

Fair Competition: TSPs believe that licensing fees create a level playing field in the telecommunications industry. By imposing fees on all players, including Over-The-Top (OTT) services, fairness is ensured as everyone contributes to the costs of regulation, oversight, and infrastructure development.

Quality of Service: Licensing fees can be linked to network quality and performance standards. TSPs argue that by implementing fees tied to network usage, they are incentivized to maintain and enhance the quality of their services, resulting in better experiences for consumers.

Regulatory Framework: Licensing fees are integral to the regulatory framework that ensures compliance with industry standards and consumer protection measures. They enable regulatory authorities to enforce rules and regulations, fostering trust in the telecommunications sector.

Network Expansion: TSPs argue that revenue generated through licensing and network usage fees can be reinvested in expanding and improving network coverage, especially in rural and remote areas, thereby bridging the digital divide and providing connectivity to underserved populations.

In summary, TSPs advocate for licensing and network usage fees as essential components of a fair and sustainable telecommunications ecosystem. These fees serve various purposes, including infrastructure development, spectrum management, regulatory compliance, and revenue generation for public welfare, ultimately contributing to the growth and accessibility of telecommunications services.

Over-The-Top (OTT) service providers:

OTT service providers present a range of arguments against the imposition of licensing and network usage fees. Their primary points include:

Innovation and Competition: OTTs argue that imposing fees on their services could stifle innovation and competition in the digital space. They contend that their ability to offer new and diverse services has led to a more competitive and dynamic market, benefiting consumers with a wider range of choices.

No Dependency on Network Infrastructure: Unlike Telecom Service Providers (TSPs), OTTs do not own or operate physical network infrastructure. They argue that they rely on existing internet infrastructure provided by TSPs and do not create additional strain on the network. Therefore, they believe it is unfair to impose the same fees on them as on TSPs.

User Choice: OTTs emphasize that their services are chosen by users who willingly download and use their applications. Users often opt for OTT services due to their flexibility, convenience, and often lower costs compared to traditional telecom services. Imposing fees on OTTs could limit users' choices and preferences.

Consumer Benefits: OTTs argue that their services have led to lower costs for consumers, especially in the case of international calls and messaging. Imposing fees on OTTs could result in increased costs for users, reducing the affordability and accessibility of digital communication.

Overlapping Regulation: OTTs point out that they are already subject to various regulations, including data privacy laws and content regulations. They contend that imposing additional fees on top of existing regulations could create a complex and burdensome regulatory environment.

Economic Growth: OTTs argue that their services have contributed to economic growth by providing opportunities for small businesses and entrepreneurs to reach a global audience. Imposing fees could hinder these opportunities and economic benefits.

User Data Protection: OTTs often highlight their commitment to user data protection and privacy. They argue that additional fees could divert resources away from important privacy and security measures.

In summary, OTTs advocate against licensing and network usage fees, emphasizing their role in fostering innovation, competition, and consumer choice. They argue that such fees could hinder their ability to provide affordable and diverse services while creating regulatory complexities in an already well-regulated industry.

Detrimental Impact on Startups:

The imposition of licensing and network usage fees on startups in the digital space can have several detrimental impacts:

Financial Strain: Startups typically operate with limited financial resources, and imposing fees can create a significant financial burden. These fees can divert funds away from product development, marketing, and expansion efforts, potentially hindering a startup's growth prospects.

Entry Barriers: Licensing and usage fees can act as entry barriers for new startups, making it more difficult for innovative companies to enter the market. This reduces competition and can result in a less dynamic and innovative digital ecosystem.

Innovation Inhibition: Startups are often at the forefront of technological innovation. The imposition of fees can discourage experimentation and the development of new services and solutions, as startups may be less willing to take risks due to increased operating costs.

Reduced User Choice: Startups often introduce novel and disruptive services that expand consumer choices. Fees can limit the ability of startups to offer cost-effective alternatives to traditional services, reducing the diversity of options available to consumers.

Unfair Competitive Landscape: Established players with deeper pockets may find it easier to absorb the costs associated with licensing and usage fees. This can create an uneven playing field, where startups face a competitive disadvantage against larger, well-funded competitors.

Market Concentration: The financial burden of fees can force startups to seek acquisition or partnership with larger companies, potentially leading to market consolidation. This concentration of power can reduce competition and innovation.

Dampened Entrepreneurial Spirit: Fees can discourage entrepreneurship, as potential founders may perceive the digital space as less accessible and more costly to enter. This can result in a loss of talent and ideas in the startup ecosystem.

Global Competitiveness: If startups in one region face significant fees, they may be less competitive on a global scale. This can limit the ability of a country or region to foster a thriving digital economy and participate in the global digital marketplace.

Thus, licensing and network usage fees can pose substantial challenges to startups, hindering their growth, innovation, and competitiveness. Policymakers often need to strike a balance between regulating the digital space and fostering an environment conducive to the development and success of startups.

ADIF’s view:

ADIF's thoughtful perspective on the regulation of Over-The-Top (OTT) services underscores the need for a balanced and nuanced approach that respects the dynamics of data consumption, recognizes operational disparities between Telecom Service Providers (TSPs) and OTT services, and upholds the crucial principles of net neutrality. Their vision for a digital India envisions an environment where innovation thrives, accessibility is ensured, and all stakeholders benefit, promoting a dynamic and equitable digital future.

Recent Development

Indian cryptocurrency traders are grappling with a new challenge as Income Tax Return (ITR) forms now require disclosure of virtual digital assets (VDAs). This inclusion has left traders unsure about whether to reveal their crypto holdings abroad to tax authorities, particularly if their VDAs are on offshore exchanges like Binance. The lack of clear policy guidelines further complicates matters, necessitating a unified approach to regulate the cryptocurrency sector, as highlighted in the Economic Survey, 2023.

Prior to examining the regulatory frameworks of cryptocurrencies in India and other prominent nations, it is imperative to gain a comprehensive understanding of the fundamental aspects of cryptocurrency.

What is Cryptocurrency

Satoshi Nakamoto introduced the first cryptocurrency namely Bitcoin in 2009. A cryptocurrency is a type of digital currency based on cryptography, which ensures anonymity and security. It operates as a decentralized medium of exchange without the need for central banks, relying on blockchain technology. Transactions are recorded in a public ledger, and digital wallets are used for storing cryptocurrency. The system allows peer-to-peer payments from anywhere, with payments existing as digital entries in an online database rather than physical money exchanged in the real world.

Market Share of Cryptocurrency

India has emerged as the world's second-largest cryptocurrency market, following the United States, according to the 2021 Global Crypto Adoption Index. The report highlights a significant increase in cryptocurrency adoption in India in 2020, with the total value of cryptocurrency received by Indian users surging by over 600% to reach $40 billion. India's share of global cryptocurrency activity also saw a notable 12% rise during the same period, driven by a young and tech-savvy population, growing adoption by small and medium-sized businesses, and the government's favorable approach to cryptocurrency regulations.

Diverse Applications of Cryptocurrencies

Cryptocurrencies have diverse applications in the modern digital landscape:

• They serve as a means for digital payments, allowing users to make online purchases, conduct transactions, and perform swift cross-border money transfers.

• Many individuals also perceive cryptocurrencies as investment opportunities, hoping to gain returns through value fluctuations.

• Cryptocurrencies play a significant role in decentralized finance (DeFi), enabling users to engage in lending, borrowing, and earning interest without relying on traditional financial intermediaries.

• Facilitate fundraising for projects and startups through methods like Initial Coin Offerings (ICOs) or Token Sales.

• Gaming platforms and applications utilize cryptocurrencies for in-game purchases and creating unique digital assets.

Benefits to startups:

Accepting cryptocurrency payments brings several benefits for businesses:

• Direct transactions: By utilizing crypto, businesses can eliminate intermediaries, streamlining refund and chargeback processes while minimizing the chances of fraud and errors.

• Reduced fees: Cryptocurrency transactions generally incur lower fees, typically less than 1% of the transaction amount, in contrast to the higher fees associated with credit card sales (up to 4%).

• Protection against fraud: Cryptocurrency payments offer security against fraudulent chargebacks, like cash transactions, as there are no third-party intermediaries involved.

• Enhanced customer convenience: Providing cryptocurrency payment options meets customers' preferences for secure and digital payment methods, enriching their overall shopping experience.

• Expanded global sales potential: Embracing cryptocurrencies allows businesses to avoid foreign transaction fees and decrease the delay between payments, opening new markets and increasing sales opportunities.

Disadvantages of Cryptocurrency

• High volatility and instability: Cryptocurrencies exhibit significant price fluctuations and lack stable value because of reliance on investor sentiment, making them prone to rapid changes.

• Lack of government regulation: Cryptocurrencies are not governed by any central authority or official body, resulting in limited legal protections for users.

• Irreversibility of transactions: Once a cryptocurrency transaction is executed, it cannot be reversed, and there are limited security measures because of user anonymity.

• Dependency on private keys: Users who misplace or lose their private keys risk losing access to their cryptocurrency holdings permanently.

• Limited acceptance: While gaining popularity, cryptocurrencies are not universally accepted as a form of payment, limiting their practicality in some situations.

• Cybersecurity concerns: Storing cryptocurrencies in cold storage wallets may expose users to potential cybersecurity risks, as these wallets can be vulnerable to hacking attempts.

• Tax implications: The tax departments treat cryptocurrencies as property or investments, and transactions may be subject to capital gains or losses, requiring proper tax reporting.

Regulatory Challenges in Cryptocurrency Space

• The dynamic and fast-changing nature of the cryptocurrency market poses significant hurdles in applying or developing already existing regulatory frameworks.

• Regulatory authorities struggle to attract skilled personnel and acquire the necessary expertise, given their limited resources.

• The decentralized and fragmented nature of crypto markets makes monitoring challenging, as regulators face difficulties in keeping track of numerous participants who may not adhere to conventional disclosure and reporting norms.

Cryptocurrency Regulation in India- A Timeline

Over the course of the past few years, the government's stance on digital assets has undergone significant shifts—from an outright ban on cryptocurrencies in 2016 to the forthcoming Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, aimed at regulation. As of now, there exists no explicit regulation or prohibition concerning the utilization of cryptocurrencies within the country.

2013-2017- Acceptance by banks

In 2013, the RBI warned the public about the risks of using virtual currencies. In 2017, the RBI clarified that virtual currencies were not legal tender, but there was no official ban, allowing most banks to continue facilitating transactions on cryptocurrency exchanges.

2017-2020- Beginning of Regulations by RBI

In April 2018, the RBI imposed restrictions on banks and financial institutions, prohibiting them from dealing with virtual currencies. This move significantly impacted the growth of the cryptocurrency industry in India.

2020-2022- Government’s Positive approach

The Supreme Court of India declared the restrictions on cryptocurrency transactions imposed by the RBI as unconstitutional in March 2020. Subsequently, in December 2020, the government introduced the Cryptocurrency and Regulation of Official Digital Currency Act, which seeks to restrict private cryptocurrencies and establish the digital rupee as the official digital currency. In January 2021, government displayed a positive approach, indicating the government's willingness to consider the use of cryptocurrencies and move towards regulation.

2022-Present- Taxing Cryptocurrency

In India, the Ministry of Corporate Affairs issued a notification on March 24, 2021, making it obligatory for cryptocurrency companies to divulge the gains or losses arising from transactions, the quantum of cryptocurrencies held, and any deposits or advances received from individuals.

The 2022-23 Union Budget in India introduced a 30% withholding tax on virtual currency transfers and imposed taxation on gifts in the form of virtual assets/cryptocurrencies. Concurrently, the RBI recommended implementing restrictions on cryptocurrencies in July 2022, citing concerns about their impact on the country's monetary and fiscal stability.

Further, the Economic Survey of 2023 highlighted the necessity for a unified approach to regulate cryptocurrencies is essential, as the unregulated crypto market poses significant challenges to financial systems worldwide.

Analyzing Present Regulations on Cryptocurrency

Cryptocurrencies are renowned for their robust security, achieved through complex mathematical encryption. Nevertheless, recent studies have uncovered vulnerabilities that expose them to hacking and theft. The current regulations concerning cryptocurrency are deficient in addressing its legal status, leading to potential confusion regarding the taxation of cryptocurrencies without explicit legalization. The government appears to be focused on maximizing its revenue by implementing a 30% tax on cryptocurrency profits until formal regulations are established. Further, accepting cryptocurrency payments benefits businesses with direct transactions, reduced fees, enhanced customer convenience, and expanded global sales potential.

India's incomplete regulations on cryptocurrency, and the potential move to ban it, could lead to the country's isolation from the globalized world where many nations have embraced cryptocurrency regulation as a means of fostering innovation and financial inclusion.

The proposal for creation of digital Rupee by Reserve Bank of India, grants more authority to RBI, despite concerns about the absence of robust data protection laws. The central bank has repeatedly expressed concerns about the potential impact of cryptocurrencies on macroeconomic and financial stability.

The lack of proper regulation or outright bans on cryptocurrencies could lead to their exploitation for illicit activities. The unregulated crypto markets can become avenues for money laundering, fraud, and funding illegal activities.

The encryption technology employed makes it challenging for law enforcement to trace wrongdoers, creating additional complexities. In conclusion, while the strong encryption of cryptocurrencies offers notable security advantages, recent hacking incidents and the potential for misuse in unlawful activities highlight the urgent need for stronger legal frameworks and innovative security measures to safeguard the cryptocurrency ecosystem.

Consequences of Banning Cryptocurrency

It has been seen off late, an active Indian traders participation in cryptocurrency activities. Projections indicate huge growth, with the market expected to reach US$222.70 million by the end of 2023. Further, the India’s crypto ownership rate is almost double than global average of 15 percent. As of 2022 there were two crypto unicorns namely- Coindcx and CoinSwitch and nearly 350 startups blockchain related activities. The world has been shifting towards recognizing cryptocurrency as mode of payments. Like MasterCard and Visa now accept certain cryptocurrencies for payments. Tesla invested $1.5 billion in bitcoin and allowed bitcoin payments.

The Indian authorities have a chance to leverage cryptocurrencies by removing the obstacles related to traditional currencies and positioning the country as a global hub for cryptocurrency investment, thereby attracting substantial business and investment. However, to achieve this, they must meticulously devise fresh laws and regulations specific to cryptocurrencies, as existing laws fall short in regulation of cryptocurrency. Adopting well-crafted regulations that account for the intricacies of cryptocurrencies presents a more balanced approach, enabling India to attract investments and nurture a flourishing cryptocurrency industry while mitigating potential risks. Regulatory policies that are already in place like crypto exchanges required to provide transparent and comprehensive financial statements concerning their cryptocurrency dealings and customary practice for crypto exchanges in the country to retain general KYC information for all traders and investors who have registered on their platforms can help address the grey areas of cryptocurrency regulations.

Can Central Bank Digital Currency be an Option?

In February 2019, the Finance Ministry proposed the introduction of Digital Rupee. The rising global popularity of digital currencies, or cryptocurrencies, has prompted numerous central banks to consider launching their own digital currencies to address existing shortcomings and accelerate the transition towards a cashless society.

Central Bank Digital Currency (CBDC) refers to a digital form of legal tender and liability issued by a nation's central bank. It is denominated in the country's sovereign currency and is recorded on the central bank's balance sheet. CBDC operates as a digital currency that can be converted or exchanged at the same value as conventional cash and traditional central bank deposits of the nation.

CBDC differs from private cryptocurrencies as it operates on a permissioned blockchain, giving exclusive mining and control authority to the Central Government and authorized agencies. It is intended to be a Stablecoin, pegged to the Indian Rupee, offering a secure and convenient currency management solution unlike private cryptocurrency which has notional value.

Non-regulated crypto-backed transactions after ban by RBI: A possibility

It is imperative to acknowledge that the ban on private cryptocurrencies poses technological challenges due to their decentralized nature i.e., lacks a centralized entity or governing authority. Further, a ban on private cryptocurrencies may encounter considerable challenges as digital wallets established on decentralized exchanges (DEXs) that hold cryptocurrencies are not easily traceable. Consequently, complete ban or regulation from the source becomes unfeasible. Instead, the government should regulate and potentially prohibit specific elements such as usage, holding, and transactions within the cryptocurrency domain. Therefore, attempting to ban cryptocurrency as there are concerns related to volatility, consumer risks, power consumption, and potential criminal activities like money laundering and terrorism can have serious repercussions.

Views around the world on Cryptocurrency

European Union

Cryptocurrency legality in the European Union (EU) varies by member state, while taxation ranges from 0% to 50%. Recent directives like Fifth and Sixth Anti-Money Laundering Directives have strengthened KYC/CFT obligations and reporting requirements. The Markets in Crypto-Assets Regulation (MiCA) framework aims to enhance consumer protections and introduce licensing requirements. Additionally, Parliament approved measures requiring specific crypto service providers to obtain an operating license, providing regulators with tools to track crypto usage in money laundering and terrorism funding.

United States of America

The U.S. unveiled a fresh regulatory framework for cryptocurrencies in 2022, granting authority to established market regulators like the SEC and CFTC. The SEC's actions against Ripple and crypto exchanges indicate a trend towards tighter scrutiny. SEC Chairman emphasizes the importance of investor protection, and it is anticipated that stricter regulations will be imposed to manage the influx of new digital currencies. The outcome of ongoing legal cases and regulatory efforts will determine the classification of cryptocurrencies as securities in the future.

China

In China, cryptocurrencies are categorized as assets for inheritance determination. The People's Bank of China (PBOC) has imposed a ban on crypto exchanges. Furthermore, China enforced a prohibition on Bitcoin mining in May 2021, leading to the complete shutdown or relocation of mining operations to more lenient regulatory jurisdictions. Subsequently, in September 2021, cryptocurrencies were unequivocally banned in the country. Despite these stringent measures, China has been actively pursuing the development of its digital yuan (e-CNY) and officially initiated the subsequent phase of its central bank digital currency (CBDC) pilot test program in August 2022.

Brazil

In Brazil, Bitcoin may not have the status of legal tender, but a recent law has given cryptocurrencies the green light as acceptable payment methods across the country by including digital currencies and air mileage programs in its definition of payment methods. The government's executive branch will determine the responsible office for monitoring the law's implementation, while tokens considered securities will remain under the jurisdiction of the Brazilian Securities and Exchange Commission (CVM).

United Kingdom

In the UK, cryptocurrencies are treated as property and not recognized as legal tender. Crypto exchanges must register with the Financial Conduct Authority (FCA), and trading of crypto derivatives is not allowed. Specific reporting requirements are in place for Know Your Client (KYC) standards, Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT). Taxation of crypto transactions depends on the nature of activities and the parties involved, with capital gains tax applicable to trading profits. As of August 2022, crypto firms must comply with reporting obligations to the Office of Financial Sanctions Implementation (OFSI) regarding financial sanctions and suspicious activities.

South Korea

South Korea enforces stringent rules for cryptocurrency exchanges and virtual asset service providers, mandating registration with the Korea Financial Intelligence Unit (KFIU), a division of the Financial Services Commission (FSC). Privacy coins were also banned from exchanges in 2021. Additionally, the implementation of a 20% tax on digital assets, initially scheduled for 2022, has been postponed to 2025.

El Salvador

In 2021 recognized Bitcoin as the legal tender, thus becoming 1^st country to do so.

Common Thread

The global approach to cryptocurrencies involves continuous development and adaptation of legal, regulatory, and policy measures. In the United States, cryptocurrencies are taxed for exchange, use, and holding, but none are considered legal tender. The United Kingdom treats cryptocurrencies as capital assets, subjecting them to capital gains tax. Canada and Germany have more lenient tax approaches. In Canada, digital assets are regarded as virtual assets, and taxation is applied solely when they are sold. In contrast, Germany views cryptocurrencies as private currency and levies taxes if they are exchanged or sold within a one-year duration. Most countries choose to impose taxes, controlled recognition, and self-disclosure mechanisms to handle cryptocurrency users and investors, recognizing the diverse nature of the cryptocurrency ecosystem.

Way Forward

There is a need to establish comprehensive and consistent global standards for cryptocurrencies, relying on standardized taxonomies and reliable data. Regulatory responses should maintain flexibility to accommodate market developments and future international standards. The recent downfall of FTX, a cryptocurrency exchange, is a testament to the vulnerabilities in the crypto ecosystem. Hence, the lack of comprehensive global regulations for cryptocurrencies is a matter of global concern which must be addressed urgently.

Context

The preliminary version of the National Deep Tech Startup Policy (NDTSP) has been made public for feedback. The main goal of this policy is to strengthen India's position in the global deep tech value chain, focusing on key areas such as semiconductors, Artificial Intelligence (AI), and space technology.

Meaning of Deep-Tech

The term "deep-tech startup" lacks a precise definition, but it generally refers to startups that emerge from research-based disruptive innovations originating in STEM labs at academic and research institutions. These startups are characterized by their ability to address complex problems and tackle challenging issues.

Scope of the Policy

The core objective of the policy is to fortify India's position in the global deep tech value chain, with particular emphasis on semiconductors, Artificial Intelligence (AI), and space tech. Its primary focus is on empowering research and development in deep tech startups, streamlining intellectual property regulations, providing financial support, and nurturing the growth of these startups through various means. Notably, the policy targets deep tech startups that tackle fundamental and technical challenges, setting them apart from companies that primarily capitalize on technology through innovative business models. Additionally, the policy outlines strategies for funding deep tech startups during critical stages, such as before their products or ideas are launched in the market.

Notable provisions of the policy

India's National Deep Tech Startup Policy, aiming to fuel the country's knowledge-driven economy, encompasses a range of strategic initiatives.

• Strengthening the research and innovation ecosystem is at its core, fostering scientific breakthroughs and technological advancements. To attract international deep tech startups, the policy emphasizes bolstering the Indian intellectual property regime and ensuring competitiveness.

• Facilitating access to diverse sources of capital is another vital aspect of the policy, achieved through specialized funding programs, increased venture capital, angel investments, and tailored government financial support avenues. Encouraging a culture of industry-relevant research in academia is also highlighted, with an emphasis on translating such research into product and technology leads.

• To expedite product development, the policy advocates for infrastructure and resource sharing with academic institutions, R&D laboratories, and large manufacturing corporations. For hardware-based deep tech startups, the creation of facilities for product prototyping and validation is sought.

• Streamlining the regulatory environment for innovation is a key focus, aiming to create a conducive atmosphere with clear requirements, exemptions, and incentives. Retaining and attracting the finest human capital is also highlighted, emphasizing equity, diversity, and inclusion as core principles.

• Furthermore, the policy promotes the adoption of indigenous deep technologies, both in the public and private sectors, through favorable procurement rules and innovative adoption mechanisms. The aim is to tap into global markets and position India in the global deep tech value chain.

• In alignment with existing national policies and missions, the policy seeks to solve local, societal, and business problems, focusing on key sectors of national interest. Additionally, the policy addresses the sustenance of deep tech startups, providing targeted solutions to overcome the challenges during the Valley of Death (VoD) phase, such as funding limitations, resource constraints, business knowledge limitations, and risk management.

• It recommends the establishment of an Export Promotion Board to facilitate their entry into international markets and advocates for the inclusion of provisions in foreign trade agreements to ensure favorable market access.

• To attract global talent and expertise, the policy proposes resource-intensive measures, including networking opportunities and attractive incentives (visa and immigration support) for international experts interested in contributing to India's deep tech ecosystem.

• Recognizing the diverse nature of deep tech and its intersection with different ministries, the policy suggests the formation of an "Inter-Ministerial Deep Tech Committee." This committee would be tasked with reviewing and coordinating the necessary requirements to create a thriving deep tech ecosystem.

• The focus of the NDTSP is directed towards deep tech startups operating in the defense and space domains, with the primary goal of augmenting their role in bolstering national security and advancing space exploration efforts.

• Furthermore, the policy highlights the importance of engaging with international partners and multilateral institutions in a well-coordinated manner. This strategic approach is crucial for safeguarding India's interests in deep tech development and manufacturing on the global stage.

Challenges NDTSP aims to overcome

• Deep-tech startups have a longer development timeline, typically requiring 5-8 years to reach revenue, compared to 1-3 years for other startups.

• These startups need more capital, specialized talent, and expert knowledge in multiple domains to develop and validate science-based innovations.

• Deep-tech startups face higher risks of failure at every stage, as they must identify real-life problems and validate market demand for their technology.

• Most venture funds in India prefer lower-risk investments, focusing on startups in the consumer economy or those with cloned products.

• Academic researchers in India face challenges converting their research into deep-tech startups due to a lack of entrepreneurial mindset and limited resources and support from incubators and policymakers.

On July 20, the Telecom Regulatory Authority of India (TRAI) released recommendations for a risk-based framework aimed at regulating artificial intelligence (AI) within the country. This development comes at a time when Sam Altman, the creator of ChatGPT, expressed his skepticism about India's ability to compete with OpenAI in training foundational AI models, sparking discussions on the challenges and prospects for Indian startups in the AI domain.

India's AI market has witnessed remarkable growth, expanding by 22% compared to the previous year. The country now boasts around 109,000 skilled professionals contributing to the AI revolution, reflecting a significant 20% increase from the previous year. Notably, the AI sector has garnered substantial investments, totaling approximately $3000 million, fostering an environment of growth, enthusiasm, and innovation.

Understanding the meaning of AI

Artificial intelligence (AI) focuses on developing computers and machines capable of reasoning, learning, and performing tasks that imitate human intelligence or involve analyzing vast amounts of data. It encompasses various disciplines, such as computer science, data analytics, and linguistics, among others. In the professional sphere, AI primarily relies on machine learning and deep learning technologies, enabling tasks like data analytics, prediction, natural language processing, and intelligent data retrieval. AI serves as a valuable toolset that enhances business capabilities, driving innovation and efficiency.

AI has the power of turning your smartphone into a wish granting Genie. Suppose you are having a rough day at work and to get over the work blues you turn to you phone and say “Hey AI, make me the perfect cup of coffee."  The AI, equipped with an extensive understanding of your taste preferences, brewing methods, and coffee background manifests the perfect coffee for you. Thus instantly, your phone metamorphoses into a mini coffee-making marvel, brewing your favorite beans to perfection and adding a touch of froth art. Therefore, AI is treasure box with endless possibilities capable of both improving and destroying the mankind.

Generative AI

Generative AI is a part of AI that uses advanced learning from lots of data to create new content like text, images, videos, audio, and code. In India, some tech firms are making their own tools using a popular AI called Generative Pre-trained Transformer (GPT) from OpenAI. Other startups are creating their own AI language models for natural language processing. These AI models act as personal assistants for different tasks in companies like marketing, HR, customer support, and more. They help with boring tasks and work alongside human employees.

Indian Startups building AI

Recent data from a study conducted by Nasscom, a prominent Indian industry association, reveals a remarkable trend in the growth of generative AI startups in India. Between 2021 and the current year 2023, the number of generative AI startups in the country has more than doubled. In the Indian AI startup ecosystem, we encounter two main categories: AI-first startups and AI-enabled startups. AI-first firms primarily focus on providing AI technology directly to end customers as a core part of their product or service offerings. On the other hand, the second group of AI-enabled startups concentrates on developing innovative AI tools and solutions to support other companies in their AI applications. Some generative AI startups in India are: Haptik which is a conversational messaging platform that has been using AI for a long time, Uniphore which is one of the earliest natural language processing startups in India. It examines interactions, including voice, video, and text conversations, between companies and their users to understand customer sentiment, Fluid AI that provides customized enterprise GPT solutions capable of comprehending an organization's entire content and many others.

Benefits of using AI

AI offers various benefits to startups:

• More personalized customer experience: By analyzing vast amounts of data, AI helps startups understand customer preferences, leading to personalized experiences and targeted marketing campaigns, fostering higher satisfaction and loyalty.

• Reduces inefficiency: AI automates repetitive tasks and streamlines operations, reducing manual effort and errors, leading to cost savings and improved productivity.

• Forecasting: Using AI-driven predictive analytics, startups can get valuable information about market trends, what customers want, and how well their business is doing. This helps them make smarter decisions and plan more effectively.

• 24/7 Customer Support with Chatbots: AI-powered chatbots enable startups to offer round-the-clock customer support, addressing queries promptly, and enhancing customer engagement and retention.

• Strengthened Data Security: AI identifies potential cybersecurity threats in real-time, protecting sensitive data and ensuring a secure environment for customers.

• Empowered Market Research and Competitive Analysis: AI tools analyze market data and competitor information comprehensively, empowering startups to stay informed and make strategic moves accordingly.

• Insights from Natural Language Processing (NLP): NLP capabilities extract valuable insights from unstructured data like social media comments, aiding in sentiment analysis and understanding customer feedback.

Requirement for AI specific policy in India

To empower startups to harness AI effectively, it is imperative to establish comprehensive laws and regulations. Although a central law is yet to be enacted, efforts are underway to formulate regulations that address the intricacies of AI. India must introduce a comprehensive "Digital India Act" that addresses the regulatory aspects of emerging technologies like AI, as the existing IT Act of 2000 falls short in tackling the complexities of the digital landscape today. Additionally, there is a pressing need to strengthen and clarify laws related to data privacy and protection to prevent any unethical exploitation of AI technology. The immense benefits AI brings to sectors like healthcare, education, and agriculture outweigh any potential risks. Taking timely action to introduce regulations will promote responsible AI practices and maximize its positive impact.

Efforts undertaken in India

1.       NITI Aayog

• The National Strategy on Artificial Intelligence (NSAI) discussion paper was released in 2018, setting forth the "AI for All" mantra as the governing benchmark for AI design, development, and deployment in India. The strategy prioritized research promotion, workforce skilling, AI adoption facilitation, and responsible AI guidelines, with a focus on developmental sectors. The collaboration with the private sector was also emphasized in this initiative. Later in 2021, a two-part approach paper on 'Principles of Responsible AI (RAI),' outlining ethical guidelines for AI in India was released. The paper also proposed enforcement mechanisms for effective implementation.

• Type of regulation recommended: Risk based mechanism for regulating AI (Correlated to the potential harm an AI system can cause)

• The Niti Aayog paper proposes creating an independent Council for Ethics and Technology (CET) to aid sectoral regulators in formulating AI policies, conducting research, and devising ethics review mechanisms for evaluating AI system efficacy.

2.       Proposed Digital Personal Data Protection Bill, 2022:

• The forthcoming bill will be applicable to AI developers involved in creating and supporting AI technologies. As a result, AI developers will need to adhere to the fundamental principles of privacy and data protection outlined in the bill.

3.       TRAI recommendations

• Establishment of the Artificial Intelligence and Data Authority of India (AIDAI), an independent statutory authority with dual roles as a regulator and advisory body for all AI-related domains.

• Ministry of Electronics and Information Technology should serve as the administrative ministry responsible for overseeing AI matters.

• Suggests a risk-based framework and a multi-stakeholder advisory body to assist AIDAI

• Collaborate with the Ministry of Education and the All India Council for Technical Education (AICTE) for the development of AI courses and ethical AI education for students in both technical and non-technical institutions.

• Establishing a Centre of Excellence for Artificial Intelligence in each state/UT to facilitate R&D of AI capabilities in various fields.

• Utilizing "Digital Communication Innovation Square (DCIS)" scheme to support startups and organizations, fostering idea demonstration and solution improvement.

Given the current lack of a comprehensive regulatory framework for governing the use of AI systems in India, there is an opportunity to draw valuable insights and lessons from the experiences of other nations. By studying how different countries have approached AI regulation, India can better understand the challenges and best practices involved in effectively governing AI technology to formulate a robust and adaptive regulatory framework tailored to the specific needs and context of the country.

Lessons from Rest of the World

European Union: The EU is developing a separate AI act to prioritize human needs and ensure responsible AI use. It emphasizes on the need of horizontal regulation. The proposed regulation bans certain AI practices, sets strict standards for high-risk AI systems, and imposes lighter requirements on low-risk systems. AI products will be categorized based on potential harm, with stricter rules for higher-risk applications and a complete ban on certain uses like government-led social grading.

United Kingdom: The UK's National AI Strategy outlines its approach to AI, aiming to foster innovation while protecting individuals' rights. Adopts context-specific regulations and emphasizes addressing real threats rather than minor ones related to AI. It provides cross-sectoral principles encompassing safety, transparency, fairness, accountability, and redress. Existing regulators such as Ofcom or the Competition and Markets Authority will implement these principles without statutory enforcement, enabling customized approaches based on AI applications. The government will collaborate with regulators during the initial phase to identify barriers and assess the framework's effectiveness.

Australia: In November 2019, Australia released its AI Ethics Framework, which features voluntary AI Ethics Principles intended to guarantee the safety, security, and dependability of AI. These principles aim to promote safer, fairer outcomes for all Australians, minimize negative impacts on affected parties, and uphold the highest ethical standards during AI design, development, and implementation. The principles apply throughout the AI system lifecycle, encompassing design, data and modeling, development and validation, deployment, and monitoring and refinement, especially when the AI system's use may significantly impact individuals, the environment, or society.

The Australian government has proposed a system of categorizing AI tools into three tiers based on their level of risk, with each tier having different obligations. Higher-risk AI tools would undergo more rigorous assessments and monitoring. Currently, there are no nationwide laws requiring risk assessments for AI, except for government suppliers in New South Wales. Australia has been an early adopter of voluntary AI Ethics principles, which aim to achieve safer and fairer outcomes, minimize AI-associated risks, and promote ethical standards.

USA: In April 2020, the Federal Trade Commission (FTC) issued five principles for companies to follow while using AI and algorithms to manage consumer-protection risks. These guidelines emphasize transparency, fair decision-making, robust data and models, and accountability. The White House's Office of Science and Technology Policy (OSTP) also published a blueprint for an AI Bill of Rights in October 2022, outlining core principles for responsible AI development. These principles focus on user safety, non-discrimination, data privacy, notice and explanation, and access to human alternatives. Additionally, the US Department of Commerce sought public opinions in April 2023 to create rules and laws ensuring AI systems operate as advertised, considering the possibility of an auditing system to assess potential harmful bias or misinformation.

Common Thread

The consensual recommendations from TRAI and the rest of the world include the emphasis on responsible AI use and the need for effective regulation. Both highlight the significance of transparency, fairness, and accountability in AI systems. They also prioritize user safety, non-discrimination, and data privacy as crucial aspects of AI governance. Additionally, they advocate for collaboration with relevant stakeholders, such as educational institutions and startups, to foster the development and adoption of AI technologies while ensuring ethical practices.

Way Forward

As a policy think tank, ADIF is committed to promoting the ethical use of AI and safeguarding against potential risks, including fraud, identity theft, deep fakes, and criminal activities. Recognizing the dynamic startup ecosystem in India, ADIF emphasizes the necessity of defining broad policies and a centralized framework for AI. This approach aims to prevent unnecessary regulatory hurdles and complexities, thereby facilitating a conducive environment for businesses to thrive. By streamlining laws and establishing a comprehensive framework, India can effectively harness the transformative potential of AI while ensuring responsible and secure implementation.

The online gaming sector in India has undergone significant growth and transformation in recent years. Initially viewed as a small segment of the media and entertainment industry, it has now become the fourth largest segment in M&E sector. Statista estimates that the number of online gamers in India is likely to reach a staggering 442 million by 2023, generating nearly $1.3 billion in revenue. Naturally, with such success, the government aims to benefit from this thriving sector through taxation. As a result, a new measure has been introduced in India, which entails the application of a 28% GST levy on the overall value of online gaming, horse racing, and casinos. This development raises concerns as it signifies that skill-based online games, which are devoid of gambling elements, are subjected to the same taxation treatment as games of chance.

It is worth noting that this elevated tax burden arrives at a juncture when the Indian online gaming sector has achieved noteworthy milestones, such as the prestigious unicorn status attained by Dream11, MPL, and Games 24×7 in the years 2019, 2021, and 2022, respectively. Furthermore, Nazara Technologies, a prominent gaming company, has made an impressive debut on the stock exchanges, consolidating its position within the market. In addition to the recently imposed high GST, the flourishing sector also confronts challenges stemming from inadequate regulatory frameworks. The domain of online gaming exists in a regulatory ambiguity. Hence to better understand why a comprehensive regulation is needed, it is first important to understand what entails online gaming, what are the types of online games and what are the already existing complex and multifaceted laws.

Revisiting the Fundamentals

•          Online Game: Indian government defines it as "A game that is offered on the Internet and can be accessed by a user through a computer resource or an intermediary.”

•          Online Intermediary: It refers to a platform that provides one or multiple online games. Being an intermediary implies that its main function is to host and transmit user-generated content from third parties. The Indian government clarified that publishers do not fall under the category of intermediaries according to the IT Act.

Types of Online Games

•          E-Sports: Video games once played privately or on consoles, now organized online games among professional players, individually or in teams.

•          Fantasy Sports: These games in which group of actual players are selected from various teams, and points are earned based on the athletes' real-life performance. Like: Dream11

•          Online Casual Games: Are skill-based i.e., the outcome is primarily determined by mental or physical abilities and based on chance i.e., the result is heavily influenced by random activities like rolling a dice.

•          Online real money game: Refers to a game where users deposit cash or non-cash items with the anticipation of earning winnings based on their performance in the game and its rules. Winnings encompass any prizes, whether in cash or non-cash form, that are distributed or intended to be distributed to users of online games.

•          Permissible online game: An online real money game or any other online game that is not an online real money game.

•          Permissible online real money game: Refers to online real money games that have been verified by a self-regulatory body for online gaming.

Existing Regulatory Framework

The Indian Constitution grants authority to State governments to enact laws pertaining to betting, gambling, and sports of chance through specific entries in the State List of the Seventh Schedule. Games of skill, on the other hand, are beyond the purview of State legislation. In India, the legal distinction between these two categories is significant, as courts have consistently ruled that betting on games of skill is permissible, whereas betting on games of chance is not.

Apart from the Constitutional power given to States to regulate betting and gambling, States have formulated state laws around the age-old Public Gambling Act of 1867 or Police laws. But the limitations of Public Gambling Act are that it does not apply to games of mere skills and it does not define online gambling.

Similarly, IT Act does not deal with gambling directly but entails various cybercrimes which may result from online gaming. So, it is another law used to tackle problems associated with online gaming.

Key legal pronouncement

Ø  The Supreme Court of India ruled that games of skill are legal and not considered gambling under the Public Gambling Act of 1867. The court emphasized that games requiring skill, judgment, or discretion to win are exempt from being classified as gambling.

Ø  Horse racing is a game of skill and is, therefore, not considered gambling under the Public Gambling Act, 1867.

Ø  Virtual currency utilized in online gaming does not qualify as "money," as it is not under Gujarat Prevention of Gambling Act, which implies that engaging in online gaming with virtual currency cannot be classified as gambling.

Ø  Fantasy sports games, such as Dream11 and Rummy involve a notable amount of skill and, as a result, do not qualify as gambling.

State-by-State Perspectives on Online Gaming

Image Source: ME report 2023 (ey.com)

Need for a Central Law

Ø  The absence of a regulatory framework for online gaming in India has resulted in a lack of consensus among states regarding its legal status.

Ø   Some states consider online gamers as illegal gamblers under existing police or gambling laws, while others have embraced online gaming as a legitimate profession.

Ø  This disparity leads to a situation where the legality of activities like poker playing varies depending on the state.

Ø  Enforcing rules like geo-blocking specific apps or websites within state territories has proven challenging for governments.

Ø  Establishing a comprehensive regulatory structure is crucial to curb underground activity, generate revenue, and provide legislative clarity.

Ø  However, regulating online gaming across India is complex due to its borderless nature and lack of physical presence.

Hence, there is a need for central laws with a certain level of state autonomy to ensure consistent protection of data, intellectual property rights, privacy rights, and a uniform policy for online gaming regulation.

New Guidelines Proposed by MEITY

Formation of SROs:

Ø  The new guidelines call for Self-Regulation of the online gaming through establishment of SROs (Self-Regulatory Organisations).

Ø  Initially government will notify three SROs, more will be added later.

Ø  These SROs comprising of educator, a specialist in psychology or mental health, and someone who has served as an officer or member of an organization focused on safeguarding child rights will be responsible for determining the permissibility of games.

       Verification of Games

Ø  Gaming companies or platforms are required to refrain from offering, publishing, or sharing online games that contain harmful or prohibited content. Furthermore, they must authenticate the identity of online gamers.

Ø  Online games that incorporate any form of gambling, including advertisements, will be disallowed.

Ø  SROs will also ensure that games adhere to guidelines aimed at preventing addiction and mental harm. This will be accomplished through the implementation of parental controls, regular warning messages, and age-rating systems.

Ø  Gamers will have the choice to discontinue participation once they have reached their self-imposed limits regarding time or money spent.  

        List of members

Ø  The SRO is required to release and keep an up-to-date record containing information about all its members, including current and past members. This record should include the dates when each member joined, their corporate or business-related identification number, additional details, and any instances of membership suspension or revocation.

        Verification of Users

Ø  Online gaming intermediaries are required to perform user identification and verification prior to accepting cash or non-cash deposits for authorized real-money online games. The verification and identification procedures used by entities regulated by the Reserve Bank of India when establishing a customer account relationship will be applicable in this context.

         Redressal Mechanism

Ø  SROs must publish complaint resolution guidelines and Grievance Officer contact details on their website or app. Complaints will be acknowledged within 24 hours and addressed within 15 days.

         Revoke or Suspend an SRO

Ø  If the SROs fails to perform its duties, its designation as SRO will be suspended or revoked after hearing its plea.

A Win-Win for Startups

The imposition of bans by states leads to a loss of user base and revenue for gaming operators. It further, disrupts future growth strategies and financial planning. The abrupt bans negatively impact the industry as it puts pressure on technicians to quickly reframe systems to comply with the orders, causing further disruption. Additionally, these incidents affect the confidence of founders, investors, advisers, and employees. Moreover, the regulatory instability makes it challenging for gaming startups to attract investors, despite the sector's potential.

By implementing regulations and addressing the current policy gaps, India can harness the potential of the thriving gaming industry while safeguarding user privacy and confidentiality. This approach ensures that the benefits of the gaming sector can be maximized while maintaining a secure and trustworthy environment for gamers.

What is ONDC?

Open Network for Digital Commerce (ONDC) aims at promoting open networks for exchange of goods and services over digital or electronic networks. It was incorporated as a Section 8 company in December 2021, with the Quality Council of India and Protean eGov Technologies Limited as Founding Members. ONDC is to be based on open-sourced methodology, using open specifications and open network protocols independent of any specific platform. Its shareholders include a Government of India-led non-profit organisation, an e-governance technology company, and several of India's top banks.

Who does it benefit?

ONDC will benefit sellers, entrepreneurs, researchers, buyers, service providers and Payment Gateways amongst others

How is it beneficial?

ONDC helps standardize operations like cataloguing, inventory management, order management, order fulfilment, and digitisation of the entire value chain. Thus, small businesses would be able to use any ONDC compatible applications instead of being governed by specific platform centric policies. This will provide multiple options to small businesses to be digitally visible and discoverable over an open network and conduct business. It would also encourage easy adoption of digital means by those currently not on digital commerce networks and would empower merchants and consumers to break silos to form a single network to drive innovation and scale.

ONDC is expected to make e-Commerce more inclusive and accessible for consumers. Consumers can potentially discover any seller, product or service by using any compatible application or platform, thus increasing freedom of choice for consumers to choose their preferred local businesses. It will enable the consumers to match demand with the nearest available supply, and would thus, promote inclusion of local suppliers, drive efficiencies in logistics and lead to enhancement of value for consumers.

ONDC shall take all measures to ensure confidentiality and privacy of data in the network. ONDC shall not mandate sharing of any transaction-level data by participants with ONDC. Will work with its participants to publish anonymised aggregate metrics on network performance without compromising on confidentiality and privacy.

Various roles available on the ONDC platform?

ONDC identifies 4 types of roles in the industry which it caters to - Buyer Network Participant, Seller Network Participant, Technology Service Provider and Gateway.

Buyer Network Participant: Connects buyers to the ONDC network via a buyer application and shoulders buyer-facing responsibilities such as customer support, ensuring a seamless shopping experience, and providing a single checkout experience across categories.

Seller Network Participant: A Seller Network Participant is responsible for connecting sellers to the ONDC network through a seller application. They are also responsible for digitizing the seller's catalogue and dispersing payments. Additionally, they must train sellers on best practices in e-commerce to ensure quality fulfilment and provide a positive buying experience for customers.

Gateway: Gateways serve as technology providers to ensure that all sellers in the ONDC Network can be discovered. They facilitate multicasting by forwarding search requests from buyer applications to all seller applications and vice versa, as specified in the ONDC Network Policies. The Gateway service enables manual searches by end consumers by providing relevant product/service information from ONDC's seller universe.

Technology Service Provider: Technology Service Providers (TSPs) offer a range of software applications either as standalone solutions or via cloud-based services. As an outsourced software provider, TSPs enable seamless business operations on the network, empowering players to participate in e-commerce without requiring in-house technology capabilities. TSPs also serve as drivers for achieving ONDC goals and attracting businesses of various sizes to join the network.

Steps to follow to start operations and production in ONDC

• Get familiar with how the ONDC functions and how one can leverage the platform to accelerate ones business

• Identify ones role in the network to connect with the right end consumer or the apt B2B channel

• Submit participation form available in the website

• Initiate implementation plan after completion of the onboarding steps including Introductory calls and implementation briefing

• Go into the development phase which includes technology development, policy compliance and operational readiness

• Pass the final checklist verification process which provides steps under technical, operational and regulatory compliance to enter the production phase

• Enter the Testing and operationalization phase which starts with soft launch in pre-production environment with test users

• Go live into the production environment with a Probationary Period with live users

• Launch full-scale production with live users

Categories that ONDC is involved in

Buyers can purchase across multiple categories and services through ONDC enabled Buyer Apps. ONDC has been launched with Grocery, F&B and Fashion categories to start with and is in process of launching new categories.

Does ONDC charge any commission?

ONDC does not charge or recommend any commissions. The commission discussion & agreement is between the seller and seller NP. It is expected that Seller App will charge viable commissions for a category as sellers have choice of joining ONDC through any of the active seller NPs on the ONDC network. The seller also has option of passing the cost of packaging, delivery to the buyer as separate line items from the product selling price.