Initial Coin Offerings: Currency or Security, how(ey) to Decide

Cryptocurrency occupies a bizarre and cloudy area of the Indian legal landscape. It can be said that this is partly due to its novelty and partly due to its anti-authoritarian nature. Blockchain technology and cryptocurrencies haven’t been a part of the legal arena long enough for banks and regulatory agencies to make much sense of them.

With India being one of the unfriendly jurisdictions for Cryptocurrency after India’s Central Bank imposed a ban on the trading of Cryptocurrency initially,[1] it would be interesting to note how  India accepts the Initial Coin Offerings (ICOs)[2]. There are two possible ways of accepting these tokens, which are or may be introduced by private market players, first as a currency and second as security. Most ICOs, especially the ones targeting the Indian market, are not even registered in India but in countries such as Switzerland and Singapore, where cryptocurrency regulations are more friendly.

With being two most prominent forms of assets in India, the ICOs will have to struggle for their acceptance by the Indian market players because as mentioned earlier India has not been a favorable nation when it came to Cryptocurrency before the Apex Court of India decided to lift the ban on the trading of Cryptocurrency in the Internet and Mobile Association v. RBI (IMAI judgment).[3]


To begin with, whether ICOs can be treated as currency, we need to look into the literal meaning of currency and not the traditional one.  As per section 2 (h) of FEMA, “currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.[4] Therefore, making it very clear what can be classified as currency.

Moreover, if we are to look into the liberal interpretation, for crypto tokens[5] to be considered as currency they need to be instruments that need to be notified by the Reserve Bank and thus giving the power to include more instruments to the central bank.


The second prominent question of whether these ICOs are capable of being considered securities is a prominent one. Section 2(h) of Securities Contract (Regulation) Act, 1956 (SCRA) deals specifically with the definition of securities. The SCRA provides an inclusive definition of security, including:

i. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

a. derivative;

b. units or any other instrument issued by any collective investment scheme to the investors in such schemes;

c. security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

d. units or any other such instrument issued to the investors under any mutual fund scheme;

ii. Government securities;

iii. such other instruments as may be declared by the Central Government to be securities;

iv. rights or interest in securities.[6]

The instruments which have been mentioned in the definition of securities have an underlying capital asset. It is also not necessary that all coin offerings are accompanied by an underlying asset; there are certain ‘asset coins’ that provide debt or equity claim against the issuing entity. These asset coins are homologous to the instruments mentioned above even though they don’t strictly fall under the terms “shares” or “debentures,” they may still fall under the expression “other marketable securities of a like nature in or of any incorporated company or other body corporate”. The Supreme Court in the case of  Bhagwati Developers Pvt. Ltd. v. Peerless General Finance  has held that “marketable securities of a like nature”  means that the securities should be freely transferrable.[7] The same reasoning was reiterated in the case of Sahara India Real Estate Corporation Limited v. Securities and Exchange Board of India , wherein the Court held that marketable security would clearly fall under the ambit of section 2(h) of SCRA and that marketable means “capable of being sold”.[8] Hence, there should be no restriction on the transfer of these asset coins offered through the ICOs for SEBI to have jurisdiction over the same.

Further, to bring these coins within the ambit of securities under section 2(h) of SCRA, these coins should be issued by an incorporated company or a body corporate. An inclusive definition of a body corporate has been given under section 2(11) of the Companies Act, 2013 and includes a company incorporated outside India. However, there are instances where coins are issued by unincorporated entities, and coins issued by such entities may fall outside the purview of securities under SCRA.

Section 11(c) of the SEBI Act, 1992 deals with the jurisdiction of the SEBI over the registration and regulation of ‘collective investment schemes’. In the case of Paramount Bio-Tech Industries v. Union Of India, the division bench of Allahabad HC has ruled that to gauge whether an instrument is a ‘collective investment scheme’ or not, and the Court shall use the Howey Test.[9]

The genesis of the Howey Test was a 1946 U.S. Supreme Court judgment of  SEC v. W. J. Howey Co.,[10] and for over 70 years, Howey has remained the principal test for identifying securities that do not otherwise neatly fall within the listed instruments. To determine whether or not an investment contract exists, businesses should apply the following four-prong test:

1. An investment of money

2. In a common enterprise

3. With the expectation of profit

4. To come significantly from the efforts of others

There are two types of tokens: security tokens and utility tokens.

Security tokens give holders ownership rights in a company, which makes them a clear example of security according to the Howey test. There is an investment of money and the expectation of profit. This profit is based on the labor of others. Thus, security tokens would likely be considered securities under the law.

Utility tokens represent a unit of account in a network. The utility of the token is based on its use. When the size of the network and transaction volumes within it grows, so will the demand for tokens. The question of whether utility tokens are securities is rather typical to answer. It fulfils the first criteria of there being an investment of money.  The expectation of profit is also into play. It is not necessary that a utility token may represent shares in a company but that doesn’t mean it won’t grow in value. The increase in the value of a token is based on the ability of a project to attract users and improve the token over time. This increase in value may lead to future profit for token holders, which satisfies the second Howey criteria, and the profit is also based on the labour of others. [11]

Thus, all three criteria of the Howey test are satisfied, making utility tokens securities as well. As far as it can be proven that utility tokens are securities, but it does not immediately imply that all tokens are securities. There are debates surrounding this proposition.


The present legal framework does not cover most of ICOs and leave investors at a risk of fraud and deception associated with the ICO market. With expanding the definition of securities under section 2(h) of SCRA  there is an account for the new ways in which entities are issuing securities to raise funds.   Moreover, different jurisdictions and their securities regulators have adopted different approaches to regulate the security offerings through ICOs. One approach is like the United States to apply federal securities laws to ICOs. However, start-ups may find it challenging to navigate these extensive regulatory requirements with their limited legal and financial resources.  And the second one is like the United Kingdom and Singapore where a regulatory sandbox is created and certain regulatory requirements are relaxed and the entity is allowed to scale and experiment its business model to certain conditions. This approach facilitates the usage of ICOs by small businesses to raise the much-needed funds and allows the regulator to keep a track on the activities of the issuer.[12] India will benefit more from following the second approach as it will give significance to the entrepreneurship and innovation in India, otherwise Indian entrepreneurs may start choosing foreign jurisdictions for ICOs.

It is quite evident that the Securities Exchange Board of India is deliberating upon a regulatory regime governing ICOs. It would be interesting to note whether this regime takes a form of an absolute ban on ICOs or a guiding framework regulating ICOs is about to be seen.

And the issuing companies floating ICOs in India can also be come under the compliance required by the Companies Act, 2013, which prescribes a rigid set of compliances to be followed by companies while issuing securities and accepting deposits to and from public.

The new Banning of Unregulated Deposit Schemes Bill, 2018 which has been proposed to be introduced in the Indian Parliament will also have a huge impact on the future of ICOs in India.  As informed by the Government in its press release this bill will provide a comprehensive legislation to deal with illicit deposit schemes through inter alia a complete prohibition of unregulated deposit taking activity and deterrent punishments for promoting or operating an unregulated deposit taking scheme.

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