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GS Paper: GS3

  • Why ‘de-dollarisation’ is imminent

    Context

    The war in Ukraine and the subsequent economic sanctions will trigger central banks to go back to their drawing boards to reassess their dependency on the greenback.

    How sanctions on Russia could lead to de-dollarisation

    • The imposition of sanctions and the exclusion from SWIFT by the US could trigger a faster de-dollarisation. 
    • The “de-dollarisation” by several central banks is imminent, driven by the desire to insulate them from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.
    • This can also trigger a shift in the overall global forex market framework.
    • The US dollar, which is the world’s reserve currency, can see a steady fall in the current context as leading central banks may look to diversify their reserves away from it to other assets or currencies like the Euro, Renminbi or gold.

    How China and Russia are responding?

    • Efforts are already underway for the possible introduction of a new Russia-China payment system, bypassing SWIFT and combining the Russian SPFS (System for Transfer of Financial Messages) with the Chinese CIPS (Cross-Border Interbank Payment System).
    • Russia had started its three-pronged efforts towards de-dollarisation in 2014 when sanctions were imposed on it for the annexation of Crimea.
    • However, these steps haven’t sufficed to effectively shield “fortress Russia”.
    • China, on the other hand, aims to use trading platforms and its digital currency to promote de-dollarisation.
    • China has established RMB trading centres in Hong Kong, Singapore and Europe.
    • In 2021, the People’s Bank of China submitted a “Global Sovereign Digital Currency Governance” proposal at the Bank for International Settlements to influence global financial rules via its digital currency, the e-Yuan.
    • The IMF has already added Yuan to its SDR (Special Drawing Rights) basket in 2016.
    • In 2017, the European Central Bank exchanged EUR 500 million worth of its forex reserves into Yuan-denominated securities.
    • However, the lack of full RMB convertibility will hinder China’s de-dollarisation ambition.

    Why the dominance of the dollar continues and how the US benefits from its dominance

    • Currently, about 60 per cent of foreign exchange reserves of central banks and about 70 per cent of global trade is conducted using USD.
    • The status of the dollar was enhanced by the collapse of the Bretton Woods system, which essentially eliminated other developed market currencies from competing with the USD.
    • The association of the USD as a “safe-haven” asset also has a psychological angle to it and like old habits, people continue to view the currency as a relatively risk-free asset.
    • This status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage.
    •  Additionally, sudden dumping of dollar assets by adversarial central banks will also pose balance sheet risks to them as it will erode the value of their overall dollar-denominated holdings.

    Consider the question “Examine the factors that explain the dominance of the dollar in the global economy? How such dominance benefits the US?”

    Conclusion

    While the frequent use of the US dollar as a potential weapon for achieving foreign policy objectives will no doubt accelerate the process of de-dollarisation, there is still a long road ahead.

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    Back2Basics: What is Special Drawing Rights?

    • The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries.
    • The SDR is not a currency.
    • It is a potential claim on the freely usable currencies of IMF members.
    • As such, SDRs can provide a country with liquidity.
    • A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.

  • Back in news: Foreign Contribution Regulation Act (FCRA)

    The Union Home Ministry has placed a US based NGO on its watchlist following an investigation that foreign contributions it sent were being used for climate awareness campaigns, an activity not permissible under the FCRA [Foreign Contribution (Regulation) Act].

    About Foreign Contribution Regulation Act (FCRA)

    • The FCRA regulates foreign donations and ensures that such contributions do not adversely affect internal security.
    • First enacted in 1976, it was amended in 2010 when a slew of new measures was adopted to regulate foreign donations.
    • The FCRA is applicable to all associations, groups and NGOs which intend to receive foreign donations.
    • It is mandatory for all such NGOs to register themselves under the FCRA.
    • The registration is initially valid for five years and it can be renewed subsequently if they comply with all norms.

    Why was FCRA enacted?

    • The FCRA sought to consolidate the acceptance and utilisation of foreign contribution or foreign hospitality by individuals, associations or companies.
    • It sought to prohibit such contributions from being used for activities detrimental to national interest.

    What was the recent Amendment?

    • The FCRA was amended in September 2020 to introduce some new restrictions.
    • The Government says it did so because it found that many recipients were wanting in compliance with provisions relating to filing of annual returns and maintenance of accounts.
    • Many did not utilise the funds received for the intended objectives.
    • It claimed that the annual inflow as foreign contributions almost doubled between 2010 and 2019.
    • The FCRA registration of 19,000 organisations was cancelled and, in some cases, prosecution was also initiated.

    How has the law changed?

    There are at least three major changes that NGOs find too restrictive.

    • Prohibition of fund transfer: An amendment to Section 7 of the Act completely prohibits the transfer of foreign funds received by an organisation to any other individual or association.
    • Directed and single bank account: Another amendment mandates that every person (or association) granted a certificate or prior permission to receive overseas funds must open an FCRA bank account in a designated branch of the SBI in New Delhi.
    • Utilization of funds: Fund All foreign funds should be received only in this account and none other. However, the recipients are allowed to open another FCRA bank account in any scheduled bank for utilisation.
    • Shared information: The designated bank will inform authorities about any foreign remittance with details about its source and the manner in which it was received.
    • Aadhaar mandate: In addition, the Government is also authorised to take the Aadhaar numbers of all the key functionaries of any organisation that applies for FCRA registration or for prior approval for receiving foreign funds.
    • Cap on administrative expenditure: Another change is that the portion of the receipts allowed as administrative expenditure has been reduced from 50% to 20%.

    What is the criticism against these changes?

    • Arbitrary restrictions: NGOs questioning the law consider the prohibition on transfer arbitrary and too heavy a restriction.
    • Non-sharing of funds: One of its consequences is that recipients cannot fund other organisations. When foreign help is received as material, it becomes impossible to share the aid.
    • Irrationality of designated bank accounts: There is no rational link between designating a particular branch of a bank with the objective of preserving national interest.
    • Un-ease of operation: Due to Delhi based bank account, it is also inconvenient as the NGOS might be operating elsewhere.
    • Illogical narrative: ‘National security’ cannot be cited as a reason without adequate justification as observed by the Supreme Court in Pegasus Case.

    What does the Government say?

    • Zero tolerance against intervention: The amendments were necessary to prevent foreign state and non-state actors from interfering with the country’s polity and internal matters.
    • Diversion of foreign funds: The changes are also needed to prevent malpractices by NGOs and diversion of foreign funds.
    • Fund flow monitoring: The provision of having one designated bank for receiving foreign funds is aimed at making it easier to monitor the flow of funds.
    • Ease of operation: The Government clarified that there was no need for anyone to come to Delhi to open the account as it can be done remotely.

     

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  • Patent Rights on COVID-19 jabs may be waived

    The World Trade Organization chief has hailed a breakthrough between the EU, the United States, India and South Africa on waiving intellectual property rights on Covid-19 vaccines.

    What is a Patent?

    • A patent is an exclusive right granted for an invention.
    • In other words, a patent is an exclusive right to a product or a process that generally provides a new way of doing something, or offers a new technical solution to a problem.
    • To get a patent, technical information about the invention must be disclosed to the public in a patent application.
    • The patent owner may give permission to, or license, other parties to use the invention on mutually agreed terms.
    • The owner may also sell the right to the invention to someone else, who will then become the new owner of the patent.
    • Once a patent expires, the protection ends, and an invention enters the public domain; that is, anyone can commercially exploit the invention without infringing the patent.

    Terms of Patent

    • Patents may be granted for inventions in any field of technology, from an everyday kitchen utensil to a nanotechnology chip.
    • An invention can be a product – such as a chemical compound, or a process, for example – or a process for producing a specific chemical compound.
    • Patent protection is granted for a limited period, generally 20 years from the filing date of the application.
    • Patents are territorial rights. In general, the exclusive rights are only applicable in the country or region in which a patent has been filed and granted, in accordance with the law of that country or region.

    Back2Basics: Intellectual Properties

    • IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create.
    • By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.

    Types of IP:

    (1) Copyright

    • Copyright is a legal term used to describe the rights that creators have over their literary and artistic works.
    • Works covered by copyright range from books, music, paintings, sculpture and films, to computer programs, databases, advertisements, maps and technical drawings.

    (2) Patents

    Discussed above

    (3) Trademarks

    • A trademark is a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises.
    • Trademarks date back to ancient times when artisans used to put their signature or “mark” on their products.

    (4) Geographical Indications

    • Geographical indications and appellations of origin are signs used on goods that have a specific geographical origin and possess qualities, a reputation or characteristics that are essentially attributable to that place of origin.
    • Most commonly, a geographical indication includes the name of the place of origin of the goods.

    (5) Trade secrets

    • Trade secrets are IP rights on confidential information which may be sold or licensed.
    • The unauthorized acquisition, use or disclosure of such secret information in a manner contrary to honest commercial practices by others is regarded as an unfair practice and a violation of the trade secret protection.

     

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  • What is Daylight Saving Time (DST)?

    The United States Senate unanimously passed a law making daylight saving time (DST) permanent, scrapping the biannual practice of putting clocks forward and back coinciding with the arrival and departure of winter.

    What does this imply?

    • With clocks in the US going back an hour, the time difference between New York and India will increase from the current nine and a half hours to ten and a half hours.
    • In the Southern Hemisphere, the opposite has happened, where countries have “sprung forward”, and time difference with India has reduced.

    What is DST?

    • DST is the practise of resetting clocks ahead by an hour in spring, and behind by an hour in autumn (or fall).
    • During these months, countries that follow this system get an extra hour of daylight in the evening.
    • Because the spring to fall cycle is opposite in the Northern and Southern Hemispheres, DST lasts from March to October/November in Europe and the US, and from September/October to April in New Zealand and Australia.
    • Dates for this switch, which happens twice a year (in the spring and autumn) are decided beforehand.
    • By law, the 28 member states of the EU switch together — moving forward on the last Sunday of March and falling back on the last Sunday in October.
    • In the US, clocks go back on the first Sunday of November.

    Now try this PYQ:

    Q.On 21st June, the Sun

    (a) Does not set below the horizon at the Arctic Circle

    (b) Does not set below the horizon at Antarctic Circle

    (c) Shines vertically overhead at noon on the Equator

    (d) Shines vertically overhead at the Tropic of Capricorn

    How many countries use DST?

    • DST is in practice in some 70 countries, including those in the European Union.
    • India does not follow DST; since countries near the Equator do not experience high variations in daytime hours between seasons.
    • There is, however, a separate debate around the logic of sticking with an only one-time zone in a country as large as India.

    What does this system mean to achieve?

    • The key argument is that DST is meant to save energy.
    • The rationale behind setting clocks ahead of standard time, usually by 1 hour during springtime, is to ensure that the clocks show a later sunrise and later sunset — in effect a longer evening daytime.
    • Individuals will wake an hour earlier than usual, complete their daily work routines an hour earlier, and have an extra hour of daylight at the end.

  • Why special situation funds are necessary

    Context

    India suffers from a chronic bad debt problem.  To overcome this problem, banks and financial institutions were initially allowed to sell their stressed loans only to ARCs. Now they can sell to SSFs too.

    How bad debt affects the credit supply in economy?

    • Higher bad debt requires higher provisioning, locking up more capital in the banking system.
    • This reduces credit supply and hurts economic growth.
    • To overcome this problem, banks and financial institutions were initially allowed to sell their stressed loans only to ARCs. 
    •  Transfer of stressed loans would release capital locked-up in the banking system and help improve credit supply.

    Two crucial reforms in financial markets

    • Indian financial markets witnessed two crucial reforms earlier this year.
    • 1] SSF: SEBI came out with a dedicated regulatory framework for special situation funds (SSFs).
    • 2] Dual structure bad bank: The RBI approved the new dual-structure bad bank, NARCL-IDRCL.
    • While the bad bank is an upgraded version of the existing asset restructuring companies (ARCs) model, the SSF is a relatively novel concept.

    Understanding AIFs and SSF

    • SEBI has introduced SSFs as a distinct sub-category of Category I Alternative Investment Funds (AIFs). 
    • AIFs manage privately pooled funds raised from sophisticated investors with deep pockets.
    • AIFs in equity market: While AIFs have traditionally played a prominent role in equity markets, their participation in distressed debt markets has been limited.
    • No participation in secondary market for corporate loans: Regulations did not permit AIFs to participate in the secondary market for corporate loans extended by banks and NBFCs.
    • The new regulations now create a special sub-category of AIFs, namely SSFs, which are allowed to participate in the secondary market for loans extended to companies that have defaulted on their debt obligations.

    What is Syndicated lending?

    • Syndicated lending is a financial instrument where a group of lenders, known as a syndicate, work together to provide a large loan to a single borrower.
    • This collaborative approach allows lenders to share the risk of borrower default, making it more manageable for individual lenders.
    • The syndicate typically includes a lead bank or underwriter, which plays a crucial role in assembling the syndicate and managing administrative tasks.

    Why SSFs must be allowed full participation across the entire spectrum of secondary market for corporate debt

    • Default is a lagging indicator of financial stress.
    • Lesser haircut: If lenders and bond investors could offload potentially stressed assets to SSFs before defaulting in the secondary market, they would benefit from a lesser haircut.
    • SSFs would also get adequate time for debt aggregation before default, reducing the collective action problems that may arise after default during insolvency or restructuring.
    • It would improve the liquidity: Allowing SSFs to purchase investment-grade loans would also improve the liquidity in the secondary market for corporate loans.
    • Traditionally, banks originated loans and held them till maturity.
    • Over time, lending moved from involving a single lender to multiple lenders via syndicated lending.
    • As volumes in the primary syndication market increased, demand for secondary trading also developed to allow liquidity, risk and portfolio management.
    • Suggestion by RBI task force: Secondary trading of loans is now institutionalised in international financial markets.
    • The RBI task force on secondary markets for corporate loans, chaired by T N Manoharan, made this suggestion in 2019.
    • These markets are liquid precisely because they are open to a wide variety of non-bank participants including insurance companies, pension funds, hedge funds and private equity funds.
    • SSFs are unlikely to jeopardise financial stability: SSFs cannot borrow funds or engage in any leverage except for temporary funding requirements.
    • Consequently, risks associated with liquidity, credit or maturity transformation and asset-liability mismatches are unlikely to arise.
    • Given their structure, SSFs are likely to acquire sufficient debt in a distressed company to acquire control or to influence its subsequent insolvency or restructuring process to maximise its value through business turnaround or sale.

    Consider the question “What are special situation funds (SSFs)? Suggest the changes needed in the secondary trading of loans in India’s.”

    Conclusion

    Overall, the introduction of SSFs promises to usher in a modern era of distressed debt investing in India. To realise their true potential, SSFs must be allowed full participation across the entire spectrum of secondary market for corporate debt and not just be confined to the post-default stage.

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  • Draft National Policy for Medical Devices, 2022

    The government is proposing a new Draft National Policy for Medical Devices, 2022 to reduce India’s dependence on import of high-end medical devices.

    Key features of the policy

    Objectives: Adopting public-private partnerships to reduce the cost of healthcare, drive efficiency, and aid quality improvements in medical devices manufactured in the country

    The key proposals include:

    1. Incentivising the export of medical devices and related technology projects through tax rebates and refunds
    2. Increasing government spending in “high-risk” projects in the medical devices sector
    3. Single-window clearance system for licencing medical devices
    4. Pricing environment with no price control on newly developed innovation in the sector
    5. Allot a dedicated fund for encouraging joint research involving existing industry players, reputed academic institutions and start-ups
    6. Incorporate a framework for a coherent pricing regulation, to make available quality and effective medical devices to all citizens at affordable prices
    7. NPPA (National Pharmaceutical Pricing Authority) shall be strengthened with adequate manpower of suitable expertise to provide effective price regulation balancing patient and industry needs.
    8. Pharmaceuticals Department will also work with industry to implement a Uniform Code for Medical Device Marketing Practices (UCMDMP)

    Need for such policy

    • Policy vacuum: India’s medical devices sector has so far been regulated as per provisions under the Drugs and Cosmetics Act of 1940, and a specific policy on medical devices has been a long standing demand from the industry.
    • Meaningful expense on R&D: The policy also aims to increase India’s per capita spend on medical devices. India has one of the lowest per capita spend on medical devices at $3, compared to the global average of per capita consumption of $47.
    • Reducing import dependence: With the new policy, the government aims to reduce India’s import dependence from 80 per cent to nearly 30 per cent in the next 10 years.
    • Becoming a global hub: It aims to become one of the top five global manufacturing hubs for medical devices by 2047.
    • Domestic manufacturing of high-end products: Indian players in the space have so far typically focussed on low-cost and low-tech products, like consumables and disposables, leading to a higher value share going to foreign companies.

    Earlier attempts for such policy

    • In February 2020, the government notified changes in the Medical Devices Rules, 2017 to regulate medical devices on the same lines as drugs under the Drugs and Cosmetics Act, 1940.
    • This was necessitated after revelations about faulty hip implants marketed by Johnson & Johnson, exposing the lack of regulatory teeth when it came to medical devices.
    • The government said the transition from partial regulation of selected medical services to the complete regulation and licensing of all medical devices is underway.

     

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  • India is amongst the world’s largest arms importers

    India is amongst the world’s largest arms importers, accounting for 11 per cent of global imports, according to the Stockholm International Peace Research Institute (SIPRI).

    India’s arm imports

    • India’s overall imports decreased by 21% between 2012-16 and 2017-21 but that it was still the world’s biggest importer of military hardware.
    • Russia, France and the US are India’s biggest suppliers of arms, accounting for 46%, 27% and 12% of the country’s imports in the last five years.
    • India’s share of global arms imports stood at 11% during 2017-21 compared to 14% in the previous five-year period.

    Dependence on Russia is declining

    • Russia’s arms exports to India fell 47% between 2012-16 and 2017-21 even though the deliveries of several platforms including air defence systems and warships are pending.
    • Russia was the largest supplier of major weapons and systems to India during the two comparative five-year periods.

    Significance of the report

    • The report has come at a time when India’s dependence on Russian military hardware, ranging from fighter jets to rifles and submarines to shoulder-fired missiles has come into sharp focus.
    • Though India has been procuring US military hardware in growing numbers about 60% of the weapons inventory of the three services continues to be of Russian-origin.
    • It is still unclear how the new sanctions against Russia could play out and the problems they could create for the armed forces in the short and long term.
    • The possible impact of Russia’s unprecedented economic isolation on India’s military preparedness and the serviceability of weapons and equipment is threatened.

    Is it a matter of relief?

    • India has major plans for arms imports because of perceived threats from China and Pakistan, and due to significant delays in indigenous production.
    • The drop in India’s arms imports is, therefore, probably a temporary result of its slow and complex procurement process as well as its shift in suppliers.

     

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  • What are Man-Portable Air-Defence Systems (MANPADS)?

    The United States has approved a $200-million arms package for Ukraine, which would include US made Stinger Missiles, which are a type of shoulder-fired Man-Portable Air-Defence Systems (MANPADS).

    What are MANPADS?

    • Man-Portable Air-Defence Systems are short-range, lightweight and portable surface-to-air missiles that can be fired by individuals or small groups to destroy aircraft or helicopters.
    • They help shield troops from aerial attacks and are most effective in targeting low-flying aircrafts.
    • MANPATs or Man-Portable Anti-Tank Systems work in a similar manner but are used to destroy or incapacitate military tanks.

    Uniqueness of MANPADS

    • MANPADS can be shoulder-fired, launched from atop a ground-vehicle, fired from a tripod or stand, and from a helicopter or boat.
    • They weigh anywhere between 10 to 20 kilograms and not being longer than 1.8 metres.
    • They are fairly lightweight as compared to other elaborate weapon systems, making them easy to operate by individual soldiers.
    • Operating MANPADS requires substantially less training.
    • MANPADS have a maximum range of 8 kilometres and can engage targets at altitudes of 4.5 km.

    Stealth features

    • They have passive or ‘fire and forget’ guidance systems, meaning that the operator is not required to guide the missile to its target, enabling them to run and relocate immediately after firing.
    • The missile stays locked-on to the targeted object, not requiring active guidance from the soldier.
    • The missiles are fitted with infrared (IR) seekers that identify and target the airborne vehicle through heat radiation being emitted by the latter.

     

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  • Retail Inflation climbs to 6.07%

    India’s retail inflation inched up to an eight-month high of 6.07% in February from 6.01% in January, with rural India experiencing a sharper price rise at 6.38%.

    What is Retail Inflation?

    • When we generally talk about retail inflation, it often refers to the rate of inflation based on the consumer price index (CPI).
    • The CPI tracks the change in retail prices of goods and services which households purchase for their daily consumption.
    • The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels.
    • The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.

    What is Consumer Price Index (CPI)?

    • It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
    • In India, there are four consumer price index numbers, which are calculated, and these are as follows:
      1. CPI for Industrial Workers (IW)
      2. CPI for Agricultural Labourers (AL)
      3. CPI for Rural Labourers (RL) and
      4. CPI for Urban Non-Manual Employees (UNME).
    • While the Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it, the remaining three are collected by the Labour Bureau in the Ministry of Labour.
    • The base year for CPI is 2012.
    • To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.

    Significance of CPI

    • Generally, CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability, and as deflator in the national accounts.
    • CPI also helps understand the real value of salaries, wages, and pensions, the purchasing power of the nation’s currency, and regulating rates.
    • CPI, one of the most important statistics to ascertain economic health, is generally based on the weighted average of the prices of commodities.
    • It basically gives an idea of the cost of the standard of living.

     

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  • What is Blockchain Gaming?

    Many Indian gaming companies have expressed their interest in introducing elements of Blockchain technology into their games in the near future.

    What is Blockchain?

    • Blockchain is a decentralised database that stores information.
    • It relies on technology that allows for the storage of identical copies of this information on multiple computers in a network.

    What are blockchain games?

    • To revisit our definition of blockchain games: they are online video games that are developed by integrating blockchain technology into them.
    • It can be diversified into the following components-

    (1) Non-fungible tokens

    • NFTs represent in-game virtual assets that can be owned by players, such as maps, armour or land.
    • These NFTs act as asset tags, identifying ownership of the in-game assets, and are stored on the blockchain.
    • Being on the blockchain allows the player to have a secure record of ownership of the in-game assets and also gives the assets the ability to outlive the game itself.
    • Based on the manner in which the games are designed, it also allows for the in-game assets to be transferred from one game to another.
    • It also creates transparency, since ownership records can independently be verified by any third party as well.
    • In doing so, it makes in-game assets marketable and creates a decentralized market, where they can be bought and sold by people.

    (2) Cryptocurrency

    • Cryptocurrency, such as tokens based on the Ethereum blockchain, may be used for the purchase of in-game assets.
    • These in-game purchases usually enable gamers to buy items like extra lives, coins and so on directly from the game.

    (3) Gaming coins

    • Gaming coins, such as Axie Infinity (ACS) and Enjin Coin (ENJ), are in-game cryptocurrency which may be acquired and then used for the purchase of in-game assets.
    • These gaming coins may be purchased from crypto exchanges (and eventually be traded on these crypto exchanges as well) or, in certain cases, be acquired as winnings in games that have adopted the ‘play-to-earn’ model.
    • In such games, gamers are rewarded for dedicating their time and skill to play the game with gaming coins and in-game assets.

    Need to regulate such games

    • By making in-game assets available for purchase, developers and publishers stand to earn revenue from the sale of such assets.
    • They may also embed certain rules when implementing the code for in-game assets such that a fee is paid to them every time a certain action is taken,
    • It also involves transfers of assets from one player to another.
    • It needs to be ensured that if it is permissible to offer such games in the Indian Territory and also offers protection in the form of intellectual property rights.
    • Other concerns, such as privacy and cyber security, along with how financial regulations would apply to blockchain games, would also need to be addressed.

    Regulatory aspects in India

    Most of the gaming laws were brought into effect prior to the internet era and, therefore, only contemplate regulation of gaming activities taking place in physical premises.

    (A) Legality Check

    • Since blockchain is merely the underlying technology, there is no express regulation in India.
    • It would, however, be relevant to explore the legality of the games from the lens of existing Indian gaming regulation.
    • Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
    • Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
    • However, placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible.
    • As per two seminal judgments of the Supreme Court on this aspect, the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

    (B) Dominant Element Test

    • As such, a ‘dominant element’ test is to be utilized to determine whether chance or skill is the dominating element in determining the result of the game.
    • This ‘dominant element’ may be determined by examining whether factors such as superior knowledge, training, experience, expertise or attention of a player have a material impact on the outcome of the game.
    • While the outcomes of any ‘games of skill’ are affected by these factors, outcomes of ‘games of chance’ are premised on luck and are largely independent of the skills of the players involved.

    (C) Gaming house regulations

    • The Delhi District Court has, in the past, held that a gaming portal would be covered within the definition of a ‘common gaming house’.
    • This would be subjected to conditions where the gaming developers were to take commission / earn revenue from the game offered.
    • This is because such portals merely seek to replace the brick and mortar common gaming houses that Indian law currently envisages and has outlawed.

    Where does blockchain gaming lie within this framework?

    • There is currently a lacuna in gaming law and there are lingering question marks on its interpretation and applicability to online gaming.
    • As the law currently stands, each blockchain game must first pass muster as a ‘game of skill’, as against a ‘game of chance’, to legally be made available in most Indian states.
    • In the past, the Supreme Court has rejected the notion of video games being ‘games of skill’.

    Possible protections available to blockchain games

    (a) Patents:

    • For a blockchain game or any of its elements to be patented in India if it meets the requirements of novelty, involving an inventive step, and industrial application.
    • In terms of Section 3(k) of the Patent Act, 1970, computer programs are per se not inventions and hence, cannot be patented.
    • However, judicial pronouncements in the past have clarified that if an invention has a technical contribution or a technical effect and is not merely a computer program per se, then it would be patentable.

    (b) Trademarks:

    • A trademark is used as an identifying mark to determine the source of a particular good or service, and is obtained to protect the goodwill and reputation of the brand.
    • Any distinguishing mark in a blockchain game or NFT that would allow consumers to identify the source of that particular game or NFT may be trademarked.

    (c) Copyrights:

    • In India, artistic work, musical work, cinematographic films, dramatic works, sound recordings and computer software are capable being of being protected under copyright law.
    • Although there is no specific provision in the Copyright Act that deals with video games, copyright protection of video games may be sought under the category of ‘multimedia products’.
    • Similar to the position with trademarks, the process of obtaining a copyright for a blockchain game would be the same as any other online video game.

    Future roadmap

    • The Finance Ministry had announced in late-2021 that The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would seek to prohibit all private cryptocurrencies.
    • If the legislature does indeed successfully, then, to the extent that existing blockchain games rely on cryptocurrencies, they would be considered illegal in India.
    • Independent of this, the Budget announced that the income from the transfer of any ‘virtual digital assets’ (which include cryptocurrency and non-fungible tokens) would be subject to income tax at the rate of 30%.
    • Policy pronouncements of this nature would need to be carefully considered by publishers of blockchain games while designing their pricing models.

     

     

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