This article is written by Asmita Topdar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

It has been 12 years since the idea of bitcoin was conceptualized and proposed by some individual under the pseudonym Satoshi Nakamoto in his paper named “Bitcoin: A Peer-to-Peer Electronic Cash System”. The objective behind his brainchild was to allow online payments between two parties in the form of peer-to-peer version of electronic cash without the need for channeling the transactions through financial institutions.^[1] The value of Bitcoins skyrocketed from around $32,000 to nearly $38,000 in January 2021 with the supporting tweets coming from Elon Musk who said bitcoins to be inevitable.^[2]

In recent times, we have seen similar supports being showered by the likes of Jack Dorsey, Marc Andreessen, Reid Hoffman, Peter Thiel, Chamath Palihapitiya, and Naval Ravikant.^[3] Last few years have witnessed the trend wherein some companies have been considering bitcoins for funding their mergers and acquisition deals. As per PwC Report of 2020, 2018 saw 189 merger and acquisition deals being funded by cryptocurrencies while 2019 witnessed 114 M&A deals. The report also highlighted that Asia and EMEA (Europe, Middle East and Africa) are gradually becoming the new home and attracting majority of crypto M&A deals and fundraising. This exhibits the broader scope in the sector of crypto M&A funding.

This Article discusses the funding of M&A deals by bitcoins by providing statistics of crypto M&A deals and highlighting the laws of India while dealing with cryptocurrencies.

What is bitcoin and how does it work?

Before understanding M&A funding through bitcoins, it becomes inevitable to first understand what a bitcoin is and how a bitcoin works. Bitcoin is nothing but a virtual currency. One can even refer to it as an online cash. This virtual mode of currency can be used to purchase products and services however there are many countries like China and Pakistan who have banned such currency altogether. Each bitcoin has a bitcoin address which is a private code printed inside them without which the bitcoin will have no value.^[4] People can transact by sending bitcoins to each other’s digital wallet and each transaction gets recorded in a public list called blockchain.^[5] Government banks do not govern these crypto transactions and though bitcoins are recorded in a public list, people can transfer bitcoins anonymously wherein the transaction account number will not be visible. This is the premise for which certain countries fear that bitcoins can be utilized for terror funding and thus have completely banned the use of such virtual currencies.

The entire network of bitcoin is built on blockchain which is a shared public ledger. The ledger records all the transactions, keeps account of the spendable balances of all accounts, and ensures there is no fake transaction taking place using bitcoins. It verifies and ensures that the account from which bitcoin is transacted, is owned by the account holder. Bitcoin wallets uses a secret piece of data called a private key or seed to sign transactions thereby providing a mathematical evidence that they have come from the owner of the wallet.^[6] The Signature also aids in verification to ensure that no alteration of transaction takes place after issuance of the bitcoin. A distributed consensus system, called mining, is used to confirm pending transactions by including them in the blockchain. It protects the neutrality of the network, enforces a chronological order in the blockchain and allows different computers to come to a consensus on the state of the system.^[7] 

Is funding of M&A deals possible through bitcoins?

While there are many crypto currencies available in the market like ripple, tether, ton, ethereum, litecoins but it is the bitcoin which has taken the central stage in terms of its popularity and has attracted maximum attention. According to a newspaper report published in March 2021, the volume of transactions using cryptocurrencies in India rose by 30% during the past one year with the price of bitcoins getting skyrocketed by 445 percent between March, 2020 to February, 2021.^[8] Vikram Rangala, Chief Marketing Officer of ZebPay, told that the crypto industry in India is trying to create a new asset class for investments, and also a new software for various kinds of applications built on blockchain. Further, he added, that Indians are open to new investment vehicles and follow global trends. This highlights the significance bitcoins is gaining in Indian market even when the citizens are fighting pandemic and are under complete lockdown.

The 2019 PwC report had already indicated that investments in crypto M&A deals have now shifted from American market to Asia and EMEA markets. Total of 189 M&A deals were crypto funded in 2018 of which 66% of them came from American market while 14% deals happened in Asia. Though the total number of crypto M&A deals reduced to 114, crypto deals in Asia soared to 22% while America saw a dip by 15%. As per the report, 2019 also saw M&A being funded by crypto currencies in diversified fields. Sectors of trading infrastructure, media, consulting firms and research witnessed a sharp rise in crypto funded M&A deals. 7 out of top 10 crypto M&A was in the sector of mining and crypto exchange.

The 2020 PwC report highlights that 2020 witnessed more than double of the total value of M&A deals being funded by cryptocurrency from 2019, which accounted for an increase by 131%. What is more interesting is that this increase came at a time when the whole world was battling against the deadly virus and such deals were getting finalized while working from home. Further, 2020 saw an increase in the average deal size from US $19.2m to US $52.7m. What comes as a great news is that though the majority of the deals are still taking place in the American market, however crypto M&A deal activity is gradually shifting from American to Asian and EMEA markets. 60% of the 2020 crypto M&A deal activity happened in Asia and EMEA as opposed to 51% in 2019. 2021 is expected to see more institutional players entering the crypto market through their investments and acquisitions.^[9] Also, according to the report, 2021 is expected to see a rise in the number and value of crypto M&A deals with more activity taking place in Asia and EMEA.

M&A deals can be funded by bitcoins and the above analysis of the report clearly showcases that the crypto industry is getting matured year by year and what we can call as a silver lining during the pandemic is that Asia along with EMEA is gradually becoming home for such crypto funded M&A deals. Henri Arslanian, PwC global crypto leader
said that 2020 was a record for M&A and crypto fundraising but 2021 is already on track to significantly surpass it from every single metric.^[10] With increase in the value of bitcoins, interest from investors and endorsements by businessmen, it can be said that the crypto currency market is expanding, and we can see many more such M&A deals getting financed using crypto currencies.

Since we now know that funding M&A deals by cryptocurrency is not only possible but gaining grounds in Asia gradually and providing a golden opportunity which Indians must take advantage of, let us finally get an overview about how the law of land regulates cryptocurrency in India.

What does the law say about cryptocurrency in india?

Post demonetization there was heightened interest among the Indians about bitcoins so much that ‘bitcoins’ was the most searched word on Google search by Indians in 2017.^[11] However, the Indian financial regulatory body, RBI, has been hostile to virtual currencies and had issued a warning in the year 2013 before imposing prohibitions on dealing in such virtual currencies vide circular dated April 6, 2018. RBI, in its 2013 warning circular, had pointed out the following risks associated with virtual currencies –

• VCs are stored in digital wallets which is an electronic mode and since they are not channelized through any authorized central registry or agency, it is more prone to risks like compromise of access credentials, hacking, loss of password, malware attack etc. Such loss could result in the permanent loss of VCs and thus may not be retrievable.
• Since the transactions are happening on a peer-to-peer basis, it is difficult to have recourse in case of disputes or customer complaints.
• Since the VCs are not backed with any asset, the value of VCs appears to have huge volatility, thereby exposing customers to potential risks.
• Since VCs like bitcoins are traded in various exchanges located at jurisdictions with unclear legal status, it can pose both financial as well as legal risk to the investors.
• There also lies the risk in using VCs for anti-laundering and terror funding activities due to the anonymous character in the peer-to-peer system.

The 2018 circular imposed prohibition on those institutions who are regulated by RBI to either deal or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, trading, clearing, registering, settling, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/ receipt of money in accounts relating to purchase/ sale of VCs. It did not impose any ban on dealing in virtual currencies. The applicability of the circular was only limited to those organizations within the purview of RBI’s regulation and thus exempted the organizations who are neither regulated by RBI nor needed any support from RBI regulated institutions for dealing in Virtual Currencies (VCs).

However, there was absence of detailed research by RBI before issuing such a warning. While replying to an RTI Application filed by one Mr. Varun Sethi, seeking explanation on the efforts taken to arrive at the decision stated in 2018 circular, RBI confirmed that it did not established a team of officers to understand the nature, working and usage of VCs, neither constituted any committee to determine the risks associated with VCs as set out in the 2013 Circular and nor communicated with central banks in other countries to understand the regulatory framework governing VCs.^[12]

There were many writ petitions filed following the 2018 order by RBI and finally on March 4, 2020, the Supreme Court in the case Internet and Mobile Association of India v. Reserve Bank of India held RBI’s April 6, 2018 circular as ultra vires as it did not qualify the test of proportionality and reasonableness and led to curbing of Fundamental Right. The ratio decidendi of Supreme Court in this case was mainly based on two questions – whether cryptocurrency is money or a commodity and whether the Circular was an appropriate exercise of its power.^[13] The Supreme Court tried to determine if cryptocurrency fell within the four walls of ‘money’ i.e – medium of exchange, unit of money, standard of deferred payment and store of value. After analysing the same, the Supreme Court did not clarify the nature of Virtual Currencies and therefore left the room for further interpretation. The court order only mentioned that If an intangible property can act under certain circumstances as money (even without faking a currency) then RBI can definitely take note of it and deal with it.^[14]

Pertaining to if RBI has power to issue such circular regulating VCs, Supreme Court held – ‘in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system.’ This was with reference to section 18 of the Payment and Settlement Systems Act, 2007 which entitles RBI with the power to lay down policies relating to the regulation of payment systems and to give directions pertaining to the conduct of business relating to payments systems.

Thus, the Supreme Court order has now come as a relief and has set the stage free for dealing in VCs and cryptocurrency. However, the potential risks highlighted by the RBI circular should not be avoided and given blind spots since the Supreme Court has not ruled out the potential risks associated with VCs in its order.

Conclusion

India has no laws at present which regulate the cryptocurrency, nor it has outrightly banned cryptocurrency in India unlike countries like China and Pakistan. However, the Supreme Court does give respite from the prohibitions earlier imposed by RBI. While the SC order does not rule out the potential risks associated while dealing in cryptocurrency, care must be taken while trading and investing in VCs. There lies a huge potential in the crypto currency industry with numbers and values of crypto funded M&A deals skyrocketing every year. Investment in such crypto deals can be done after analyzing and studying how other Asian countries like Japan are overcoming this fear and going ahead. As it is said every cloud has a silver lining, the fact that Asia is gradually becoming a home for crypto M&A deals is a silver lining in the times of pandemic.

References

^[1] Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf

^[2] Shevlin, R. (2021, March 10). How Elon musk moves the price of Bitcoin with his Twitter activity. Retrieved April 15, 2021, from https://www.forbes.com/sites/ronshevlin/2021/02/21/how-elon-musk-moves-the-price-of-bitcoin-with-his-twitter-activity/?sh=2ebb21b55d27

^[3] Author, B. (2021, February 16). Why India should buy Bitcoin – Balaji S. Srinivasan. Retrieved April 15, 2021, from https://www.medianama.com/2021/02/223-india-bitcoin-balajis-srinivasan/

^[4] Guide: What is Bitcoin and How does it work? – Cbbc newsround. (n.d.). Retrieved April 15, 2021, from https://www.bbc.co.uk/newsround/25622442

^[5] Guide: What is Bitcoin and How does it work? – Cbbc newsround. (n.d.). Retrieved April 15, 2021, from https://www.bbc.co.uk/newsround/25622442

^[6] How does Bitcoin work? (n.d.). Retrieved April 15, 2021, from https://bitcoin.org/en/how-it-work

^[7] How does Bitcoin work? (n.d.). Retrieved April 15, 2021, from https://bitcoin.org/en/how-it-works

^[8] Kurup, R. (2021, March 21). Cryptocurrencies’ transactions in India soar 30 per cent during the past one year. Retrieved April 15, 2021, from https://www.thehindubusinessline.com/markets/forex/cryptocurrencies-transaction-in-india-soar-30-per-cent-during-past-one-year/article34122747.ece

^[9] PwC. (2021, March). 2020 Global Crypto MA and Fundraising Report. Retrieved from https://www.pwchk.com/en/research-and-insights/fintech/global-crypto-ma-and-fundraising-report-mar2021.pdf

^[10] OssingerBookmark, J., Ossinger, J., BloombergQuint, & News, O. (2021, March 29). Crypto M&A set to NOTCH record after doubling in 2020, says pwc. Retrieved April 15, 2021, from https://www.bloombergquint.com/onweb/crypto-m-a-set-to-notch-record-after-doubling-in-2020-says-pwc

^[11] Joseph, V., Ray, D., & Aggarwal, S. (n.d.). Cryptocurrencies in India – past, present and future. Retrieved April 15, 2021, from https://www.argus-p.com/papers-publications/thought-paper/cryptocurrencies-in-india-past-present-and-future/#_ftn9

^[12] Joseph, V., Ray, D., & Aggarwal, S. (n.d.). Cryptocurrencies in India – past, present and future. Retrieved April 15, 2021, from https://www.argus-p.com/papers-publications/thought-paper/cryptocurrencies-in-india-past-present-and-future/#_ftn9

^[13] Mittal, M. (2020, March 17). Crypto-trading’s tryst with destiny. Retrieved April 15, 2021, from https://indiacorplaw.in/2020/03/crypto-tradings-tryst-with-destiny.html

^[14] https://indiankanoon.org/doc/12397485/

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