Competition Commission paper on blockchain tech spells regulatory risk

In case of permission-less blockchains, network participants may be anonymous or pseudonymous - their identities are not known fully - the CCI discussion paper notes

Major financial bodies are looking more seriously at blockchain, the underlying technology of cryptocurrencies like bitcoin. The Competition Commission of India (CCI), in collaboration with EY, recently came out with a discussion paper on blockchain and its legal ramifications. The 50-page document, which has been reviewed by Business Standard, retains the government’s stand to allow innovation in blockchain but points to regulatory risks as this technology proliferates.
 
“Given the decentralised nature of blockchains, there may not be any identifiable host, or an operator and the nodes may be spread across the globe with transactions occurring between the nodes located in different jurisdictions. Therefore, in case of any legal, policy or regulatory issue, it is difficult to understand which jurisdiction’s policies and regulations may apply,” the paper notes.
 
“In the case of permission-less blockchains, network participants may be anonymous or pseudonymous, ie, their identities are not known fully. In such a scenario, policymakers and regulators are likely to face enforcement challenges in terms of identifying liable entities and penalising them for wrongful conduct.”
 
As major applications of blockchain will likely be in the finance domain, CCI is focused on the legal structures of such entities. The paper says that under the Indian law a blockchain can be potentially understood to be an “association of persons” for legal and tax classification, or may be treated as a partnership where “each partner would be held jointly responsible for all liabilities of the business and all personal assets of each partner are subject to seizure or lien by creditors”.
 
It, however, says that there is little possibility to hold someone accountable for data breach as data in blockchain is immutable, not erasable and held by multiple participants.

 
Given these concerns, it is unlikely that blockchain firms will be given a free hand to grow without first structuring the business under Indian laws. That said, government and private entities are being allowed to test blockchain in various applications.
 
Among the ongoing pilots, as noted in the paper, are:
 
* Coffee Board, in collaboration with Eka Blockchain Marketplace, launched a pilot blockchain-based coffee e-marketplace to integrate Indian coffee growers with global markets in a transparent manner and ensure fair price realisation for the producers.
 
* NITI Aayog, Oracle, Apollo Hospitals and Strides Pharma Sciences, in 2018, piloted a blockchain-based drug supply chain solution. The solution permanently registers a drug’s record, including its serial number, labelling and scanning, through its movement from a manufacturer to logistics, from stockist to hospital, or from pharmacy to consumer, limiting the scope for the record to be deleted or tampered.
 
* The National Stock Exchange (NSE) has tested the use of blockchain for its ‘know your customer’ (KYC) process along with some Indian banks and undertaken a pilot for e-voting using blockchain.
 
* The Government of Andhra Pradesh has announced plans to use blockchain technology for hosting land records and for streamlining the process of maintaining records pertaining to vehicles’ ownership.
 
The anonymity of blockchain-based transactions is one of the key reasons why bitcoin trading was banned in India in 2018, and is likely to be banned again as part of recommendation in the soon-to-be-table Cryptocurrency Bill.
 
In 2018, the government created an inter-ministerial committee to study and provide recommendations on cryptocurrencies and blockchain. In its report submitted to the finance ministry in 2019, the committee recommended a ban on cryptocurrencies and also formulated a draft law, the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, which mandates a fine and imprisonment of up to 10 years for dealing in private cryptocurrencies. The Bill is still in the discussion phase.
 
The committee, however, said the government should keep “an open mind on the potential introduction of an official cryptocurrency”, while also look to deploy blockchain “for financial services such as cross-border payments, loan issuance and tracking, insurance, securities and commodity trading, collateral and ownership registries, such as land records”.
 
Earlier in 2017, the Reserve Bank of India had issued a white paper on applications of blockchain technology for the banking and the financial sector in India which identified blockchain as one of the three pillars to drive digital transformation and innovation in the Banking, Financial Services and Insurance (BFSI) sector.