Unveiling Legal Frontiers and Opportunities in India’s Exploration of Web 3.0

INTRODUCTION

“Change is the only constant.”, a simple phrase which keeps on proving itself rightfully supreme. The legal field is familiar with change, as it is the only thing that keeps the industry afloat and with the emergence of Web 3.0 this change was much needed.This paper deals with these changes and additions made to the legislation that were highly required for the regulation of what some believe to be the next big thing. Web 3.0 is the descendant od Web1.0 & Web 2.0 the first version was a set of static pages and was characterised as read only internet which later evolved into a read write internet one which the reader might be familiar with, infact this article is an example of this kind of internet, but Web 3.0 is different in the way that it envisions a more democratic online space, emphasizing decentralization, token-based economies, and the integration of blockchain technology. 1

The research is centered on the legal framework surrounding Web 3.0 in the Indian context, along with other factors that have driven the nation with the 2nd largest internet user base to come up with robust regulatory measures. From the groundbreaking Web 3.0 Regulatory Sandbox in Telangana to the implications of the Digital Personal Data Protection (DPDP) Act of 2023 along with the inclusion of Web

3.0 related issues into the ambit of The Prevention of Money Laundering Act (PMLA), the paper sheds light on the intricate inter-connectivity of emerging technology and and legal framework.

ABSTRACT

In this detailed review and compilation of India’s steps towards the future, the research attempts to foresee the legislative decisions made by a country of 1.4 billion people today and their future implications, while also looking back at the events that

1 Forbes.com https://www.forbes.com/advisor/investing/cryptocurrency/what-is-web-

3-0/ (last visited Nov. 12, 2023)

led to the current state of affairs. The study sees Web 3.0 as a cradle for the upcoming startup boom in India with supporting legislation as the nutrition for the emerging industry. Navigating through the regulations, the reader will explore issues such as Terrorist Financing in the Web 3.0 Era, Impact of Taxation on Cryptocurrency Adoption, Data Protection Laws in India, as well as Economic Losses and Business Migration due to policy changes. By diving into these facets, the research aims to offer a nuanced understanding of the regulatory dynamics shaping India’s Web 3.0 trajectory, shedding light on both challenges and opportunities in this domain.

RESEARCH METHODOLOGY

The paper draws upon a comprehensive analysis of secondary sources, encompassing blogs, news articles, research papers, and insights gathered from discussions with industry professionals working in the domain of web 3.0. The utilization of these diverse secondary sources has been essential in explaining the evolution of regulations governing the Web 3.0 on a global scale, with a specific focus on the dynamic legal developments unfolding in India. By analysing information from these sources, the paper aims to provide a holistic understanding of the gradual evolution of policies and frameworks surrounding web 3.0 technologies, shedding light on the Indian startup ecosystem.

REVIEW OF LITERATURE

India’s legal framework for Virtual Digital Assets (VDAs) in the context of Web 3.0 involves dynamic regulatory adjustments. Despite the absence of specific VDA laws, existing legislation such as the Companies Act, Prevention of Money Laundering Act (PMLA), and Income Tax Act has been modified to address these assets. Noteworthy regulatory initiatives, including the National Strategy on Blockchain and the Reserve Bank of India’s (RBI) exploration of Central Bank Digital Currency (CBDC), indicate a proactive stance toward digital innovation. Amendments to the Income Tax Act introduce taxation on VDA transfers, and the PMLA Notification enhances oversight on entities involved in VDA transactions. Telangana’s launch of India’s first Web 3.0 Regulatory Sandbox demonstrates support for blockchain startups. 2

2

Simultaneously, the Digital Personal Data Protection (DPDP) Act, approved on August 11, 2023, aims to regulate personal data processing, granting individuals rights and imposing regulations on organizations. This has caused concerns about its potential impact on Web 3.0 and emerging technologies, Critics have raised issues about government exemptions and argue that the DPDP Act may lack security when seen in comparison to other countries.3

RESEARCH QUESTIONS

  1. Economic Losses and Business Migration

The Web 3.0 Regulatory Sandbox initiative by the Department of Information Technology in Telangana, India, empowers startups to influence ethical standards and regulations for Web 3.0. SpotSpreads, a Crypto Market Maker, is actively working with authorities to address market-making and liquidity needs while shaping favorable regulations.4 Noteworthy stakeholders, including Sino Global Capital, Polygon, Bharat Web 3.0 Association, CoinSwitch, and Woodstock Fund, contribute to India’s growing Web 3.0 startup landscape across BFSI, enterprise tech, consumer tech, and edtech, indicating a dynamic evolution in the Web 3.0 sector.In contrast, Dubai is making significant strides in crypto regulation through the approval of the Virtual Assets Law and the establishment of the Dubai Virtual Assets Regulatory Authority (VARA). Attracting major players like Binance, Bybit, and Crypto.com, Dubai positions itself as a global hub for crypto and Web 3.0.5 However, India confronts a notable brain drain, particularly in the crypto and Web 3.0 sectors.High crypto taxes

.globallegalinsights.com https://www.globallegalinsights.com/practice- areas/blockchain-laws-and-regulations/india (last visited Nov. 12, 2023)

3https://www.web3cafe.in/ https://www.web3cafe.in/emerging-tech/story/data- protection-bill-what-is-it-and-impact-on-web3-in-india-625625-2023-08-02 (last visited Nov. 12, 2023)

4medium.com https://spotspreads.medium.com/spotspreads-joins-hands-with-the- government-of-telangana-india-by-being-a-part-of-its-1st-web3-5084a9537eb6 (last visited Nov. 12, 2023)

5 .businessinsider.in https://www.businessinsider.in/cryptocurrency/news/dubai- adopts-crypto-law-as-it-looks-to-become-a-hub-for-web-3- 0/articleshow/90146919.cms (last visited Nov. 12, 2023)

of 30% are pushing professionals to move abroad, affecting India’s innovation and foreign investments.6 Despite India’s substantial developer pool, challenges arising from legal ambiguities and taxation pose threats to the growth of the Web 3.0 industry. Reports emphasizing the Web 3.0 sector’s potential contribution of USD 1.1 trillion to India’s GDP underscores the risks associated with relocating the industry. This undermines the requirement for a supportive environment and clear regulations which is vital to keep and cultivate India’s Web 3.0 talent.7

Solving this challenge necessitates a straightforward solution: granting exemptions and simplifying tax regulations. While this may reduce tax revenue in the short run, creating a friendly space for web 3.0 startups will not only attract indigenous talent but also companies globally, helping India realize its web 3.0 market potential.

2. Terrorist Financing in the Web 3.0 Era:

The growth in popularity of cryptocurrencies, NFTs and other Web 3.0 applications have enabled users and governments to see extraordinary possibilities, but along with these possibilities come challenges like possible misuse of illicit activities, including terrorism. The nature of Web 3.0 applications and its features pose a serious threat to preexisting financial institutions and their security measures, which allows the exploitation of system for untraceable transactions and possibility of use for money laundering

This possible threat intensified into fear when, in 2022 the Delhi police investigated a case where cryptocurrencies were stolen from a citizen’s wallet in Delhi were traced to accounts which belonged to Hamas terrorist groups. The investigation exposed a direct connection between web 3.0 technologies and terror financing. Cryptocurrencies like Bitcoins, Ethereum, and Bitcoin Cash, were transferred by

6linkedin.com https://www.linkedin.com/pulse/d%C3%A9j%C3%A0-vu-great- indian-brain-drain-kicks-again-time-web3-sumit-gupta/ (last visited Nov. 11, 2023)

7 forbesindia.com https://www.forbesindia.com/article/take-one-big-story-of-the- day/india-can-lead-the-web3-revolution-but-lack-of-regulations-can-be-a- businesskiller/84997/1 (last visited Nov. 11, 2023)

fraud, which led the funds to eventually end up in the wallets of the Al-Qassam Brigades, the military wing of Hamas.8

The incident causes one to find urgently for regulations to curb or even stop the potential misuse of Web 3.0 applications for malicious purposes.The Prevention of Money Laundering Act (PMLA) has been included in its ambit cryptocurrencies related money laundering offences and has jurisdiction over them. The objective was to enhance the reach of the crime prevention bodies so they could stop the use of cryptocurrencies for terror financing. The Delhi case reminds us of the challenges that Web 3.0 poses which are often overshadowed by the dynamic features it offers and it also emphasizes the critical importance of robust regulatory measures.

Although the Prevention of Money Laundering Act (PMLA) in India is an important step towards addressing the potential misuse of Web 3.0 applications for illegal activities like terrorism financing, it serves only as a primary line of defense. The global nature of the problem makes it necessary to come to a global solution and the major nations recognize the same .As a single token of currency gains wide acceptance, tracing transactions done through it becomes increasingly harder due to its decentralised nature. The solution lies in prevention , i.e, emphasizing the avoidance of special status of any single token, along with spreading awareness about the potential risks of their wealth being used for terrorist activities, so they practice caution during transactions, buying, and selling.

3. Data Protection Laws in India:

Web 3.0 is the next big thing in the field of technological advancement and offers a decentralized and trust-less environment which contradicts the issues posed by big organizations like Meta, Amazon etc, holding all the personal information of it’s users and selling the same for profit. Despite the promising future of Web 3.0 there are challenges relating to data privacy, which includes vulnerability to online attacks and

8indiatoday.in     https://www.indiatoday.in/india/story/stolen-delhi-funneled-to-israel- hamas-war-delhi-police-cryptocurrency-probe-bitcoin-hamas-israel-war-2447435- 2023-10-11 (last visited Nov. 11, 2023)

innovations like zero knowledge proofs, multiparty computation, and self-sovereign identity address these concerns by enhancing privacy and user control.

Web 3.0 is big on user privacy, using fancy terms like “encrypted communication” and “zero-knowledge encryption” to make things super secure.the Web 3.0 ecosystem ditches use of passwords and adopts zero knowledge encryption to improve security9.Transparency makes the Web 3.0 applications as secure as they are with smart contract audits being crucial.Privacy education within companies is emphasized to prevent data leaks and ensure responsible data management, as Web 3.0 brings trans formative changes in data safety through blockchain. the developers must step up to make sure everything is super secure and private in this new Web 3.0 world!

India is poised to address digital personal data protection with the Digital Personal Data Protection (DPDP) Act which was approved on August 11, 2023. Spearheaded by Ashwini Vaishnaw, the Minister for Electronics and Information Technology, the bill aims to regulate entities’ use of individuals’ data. Approved by the Union Cabinet and responding to parliamentary committee calls, the DPDP Bill underwent revisions and consultations since its 2022 introduction. The bill gives individuals the power to access, correct, and object to the processing of their personal data10

It is mandatory for organizations to obtain user consent to use data for specified purposes, to ensure data security, and delete unnecessary data, The bill raises concerns about Web 3.0 startups and crypto exchanges in regards of request for compliance exemptions during the initial stages. The bill is India’s first principle based approach in the tech space, and is a landmakr in data protection laws. The critisisms however arise when the bill is compared to other global privacy bills.

4.  Impact of Taxation on Cryptocurrency Adoption:

The cryptocurrency taxation situation has been subject to various controversy and the focus of a lot of discussion in India and so it has been subject to significant changes

9 zebpay.com https://zebpay.com/in/blog/web3-role-in-data-privacy (last visited Nov. 11, 2023)

10 web3cafe.in https://www.web3cafe.in/emerging-tech/story/data-protection-bill- what-is-it-and-impact-on-web3-in-india-625625-2023-08-02 (last visited Nov. 11, 2023)

which were influenced by the Digital Personal Data Protection (DPDP) Act and the Union Budget rules of 2022. A tax rate of 30% on profits from virtual digital assets (VDAs) was imposed under the Digital Personal Data Protection (DPDP) Act.

Activities like fiat currency, crypto-to-crypto trading, and payments for goods and services were made taxable11. However, challenges remain regarding the taxation of gifts, donations, airdrops, mining, DeFi transactions, and Non-Fungible Tokens (NFTs).

The Union Budget rules of 2022 introduced a 30% tax on profits from VDAs, encompassing cryptocurrencies, DeFi, and NFTs. The 1% Tax Deducted at Source (TDS) on crypto transactions became effective on July 1, 2022, with penalties for non-compliance. Tax rates are uniform, irrespective of short-term or long-term gains. Various crypto transactions, such as selling for fiat currency, crypto-to-crypto trading, spending on goods and services, and gifts and donations, are subject to taxation. Globally, there is a push for universal standards in regulating crypto assets, discussed within the G20 framework.

The implementation of VDA taxation in India from April 1, 2022, significantly impacted the crypto market. Finance Minister Nirmala Sitharaman announced a 30% tax on crypto gains, coupled with a 1% TDS effective from July 2022. Major exchanges experienced an 80% drop in trading volumes, prompting some startups to contemplate moving out of India.The initial challenges considered, it is still believed that these measures have had a positive impact. Investors now prefer holding their digital assets for longer periods of time and contributing to a more stable crypto economy12

11coindcx.com https://coindcx.com/blog/cryptocurrency/crypto-tax-guide- india/#:~:text=30%25%20Tax%20on%20Crypto%20income,(plus%20surcharge%20 and%20cess).&text=Selling%3A%20A%2030%25%20tax%20is,asset%20with%20a

%20profit%20margin.&text=Selling%3A%20A%2030%25%20crypto%20tax,also%2 0applied%20on%20such%20occasions.(last visited Nov. 11, 2023)

12outlookindia.com https://www.outlookindia.com/business/6-months-after-crypto- taxation-a-look-at-its-impact-on-industry-investors-news-227172 (last visited Nov. 13, 2023)

In 2023, India maintained its strict crypto tax rules, introducing a hidden change potentially leading to fines or jail time for non-compliance with TDS rules. While the 2023 budget did not explicitly mention crypto, amendments impacting VDAs were discovered. The 1% TDS remains, but a new provision proposes penalties, including fines equivalent to tax liability and imprisonment ranging from three months to seven years, specifically targeting crypto-to-crypto transactions.13 Pending adoption by Parliament, this change aims to discourage Indian retailers from using foreign platforms. Critics often argue that the changes to existing crypto taxes are so infrequent that they may hinder industry growth.

Despite potential negative impacts on growth, stringent policies have advantages. High tax and liquidation rates have reduced crypto transactions, lessening dependency on a decentralized and volatile currency which helps in safeguarding the stability of the domestic currency which is the Indian Rupee (₹). The strict policy aids the surveillance of transactions, making it harder to commit illegal activities under the guise of crypto transactions. Currently, the Indian cryptocurrency community is going through a complicated regulation system where they are balancing compliance with the ever evolving taxation regulations.

5. What is India’s current position in adopting Web 3.0 and the Metaverse, including government initiatives and challenges?

India stands at the forefront of a technological renaissance, where the adoption of Web 3.0, crypto, and the Metaverse is reshaping the nation’s digital landscape. The government, under Prime Minister Narendra Modi’s vision of Aatmnirbhar Bharat, is actively forming a national blockchain strategy and leading in the Global Partnership on Artificial Intelligence (GPAI), demonstrating a strategic commitment to cutting- edge technologies. The startup ecosystem in India has flourished remarkably, experiencing a staggering 15,400% increase from 2016 to 2022, with robust support from initiatives like Startup India. Notably, the crypto and Web 3.0 sector has witnessed an unprecedented surge, with 230 crypto tech startups employing 50,000

13coindesk.com https://www.coindesk.com/policy/2023/02/01/india-keeps-restrictive- crypto-tax-rules-in-2023-budget/ (last visited Nov. 13, 2023)

individuals. Cities such as Bangalore, Mumbai, and Pune have emerged as vibrant startup hubs, fostering a culture of entrepreneurship across different sectors.

India’s prowess in blockchain development is globally acknowledged, boasting the world’s most developed blockchain developer ecosystem, with over 55% of companies leveraging blockchain technology. The applications of blockchain extend to digital identity, post-trade settlements, and payment/fund transfers, with active exploration by state governments for widespread implementation.

Despite market fluctuations and crypto downturns, Indian crypto and Web 3.0 startups showcased resilience by securing over $1 billion in funding during the first half of 2022. Notable startups like Polygon, EPNS, Huddle, Shardeum, and Tegro attracted significant investments, marking the strength of the ecosystem.14

Several specific Web 3.0 startups are making significant strides, with EPNS pioneering push notification integration, Polygon raising $450 million to make Web

3.0 accessible, Huddle enhancing video conferencing with Web 3.0 features, Shardeum focusing on scalability and decentralization, and Tegro creating a marketplace for Web 3.0 games.

In a collaborative effort to boost innovation, India has introduced its first Blockchain Park in Goa, a partnership between WazirX, Atal Incubation Center GIM, and Buidlers Tribe. This movement aims to empower deep-technology blockchain firms by providing technical consultancy, accreditation, and government policy assistance. Challenges persist, including a limited understanding of Web 3.0 and the absence of a conducive framework. A proposed hub and spoke policy framework suggests a central regulatory hub collaborating with sector-specific spokes to address unique challenges, ensure innovation, and protect consumers.

India’s developer talent pool holds a prominent position, constituting 11% of the global Web 3.0 talent and projected to experience a 120% growth rate. To capitalize on this talent pool and position India as a Web 3.0 frontrunner, a supportive policy framework is deemed essential.15

14 linkedin.com https://www.linkedin.com/pulse/rise-web3-startups-india-wazirx/

(last visited Nov. 13, 2023)

15hindustantimes.com https://www.hindustantimes.com/ht-insight/future-tech/Web 3.0-fuelling-india-s-digital-economy-leadership-in-se-asia-101692863339922.html (last visited Nov. 13, 2023)

Web 3.0 is perceived as a transformative force with profound implications for India’s digital future. Recognizing its potential can revolutionize existing systems, making them transparent, secure, and efficient. As India continues to recognize these transformative technologies, it holds the key to enabling inclusive growth, encouraging innovation, and steering towards the direction of its digital destiny.

If the potential is realised, it could bring revolution to existing systems by making them transparent, secure and efficient. As India continues to recognize these transformations, it holds the key to holistic growth, helping and fostering innovation and steering the direction of its digital future16

CONCLUSION AND SUGGESTIONS

In conclusion, the inevitable popularity of Web 3.0 led to the formation of a new legal framework and regulations, causing the legislative bodies to keep up with the changing technology. The shift towards a decentralized, user-centric network represents a departure from traditional internet structures, and Web 3.0’s emphasis on inclusivity and empowerment through decentralization, token-based economies, and blockchain technology is mirrored in India’s legal adaptations.

This research explores the complex regulations surrounding Web 3.0 in India, examining the global trends and specific incidents within the Indian startup ecosystem. The legal framework for Virtual Digital Assets (VDAs) is the main focus. Key regulatory milestones, such as the Web 3.0 Regulatory Sandbox in Telangana and the Digital Personal Data Protection (DPDP) Act of 2023, showcase India’s commitment to navigating the legal complexities of Web 3.0.

Addressing the economic challenges and potential business migration necessitates a legal framework that provides clarity, tax exemptions, and incentives to retain and nurture India’s Web 3.0 talent. The issue of terror financing through exploiting Web

3.0 applications points out the importance of comprehensive and globally coordinated legal measures . Also the implementation of data protection laws signifies India’s commitment towards creating a safer environment for future users.

16expresscomputer.in https://www.expresscomputer.in/exclusives/india-seizes- growth-opportunities-in-the-metaverse-and-web-3-0-aahan-dogra-founder-nocap- meta/101127/  (last visited Nov. 13, 2023)

The effect of the new taxation policy on cryptocurrency transactions showed how India is in constant need of newer and more ambitious regulations which will keep the nation updated in the information technology war. India’s current legal position towards Web 3.0 is both promising and challenging, but a vast pool of youth and an almost endless supply of new future policy makers ensure that India’s future is bright Going through the journey of transformation , India has had the opportunity to lead in Web 3.0 technologies with the help of legislated regulations that are both conservative and future centric. The challenges posed by new technologies provided opportunities for the lawmakers to create new and innovative laws ensuring India’s future in this emerging industry

Rishabh Raj Wadhwa

Faculty of law, Delhi University

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