UNLOCKING THE MYSTERIES OF VIRTUAL DIGITAL ASSETS

In the era of digital innovation which started in 2009 with Bitcoin, virtual assets are leading the charge in the wave of technological evolution. In today’s futuristic reality, picture yourself owning a piece of digital art worth crores or exchanging virtual currencies as effortlessly as cash. From cryptocurrencies that offer new paths to financial independence to NFTs that redefine ownership and creativity, virtual assets are more than just a passing trend—they’re reshaping how we perceive value and transactions.

Let’s dive into the exciting world of virtual assets and uncover how these digital innovations are opening up fresh possibilities and presenting new challenges in the shifting realm of technology and finance.

1) What does “virtual asset” mean?

The section 2(47A) of the Income-tax Act, 1961 provides a wide and comprehensive definition of virtual assets. Furthermore, the GST law, as amended on August 18, 2023 (30 Of 2023), aligns with the definitions and interpretations used in the Income-tax act in India.

It encompasses all information, code and tokens created through cryptographic methods regardless exchange of consideration is involved or not. These assets hold inherent value and function as a store of value. This definition also includes non-fungible tokens (NFTs) and any other digital assets specified by the Central Government, while explicitly excluding Indian and foreign currencies.

Thus, “virtual asset” serves as an umbrella term for a wide array of digital value representations.

The government has notified the following as non-VDA (Virtual Digital Assets)- subscriptions to e-commerce, OTT platforms, gift cards, vouchers and mobile applications. The new Indian Digital Currency (CBDC) is classified as “bank notes” under the RBI Act, placing it outside the realm of virtual assets.

The landmark Supreme Court judgment in the case of Internet and Mobile Association of India (IAMAI) vs Reserve Bank of India (RBI) – 2020 was pivotal in clarifying the legal status of cryptocurrencies in India.

Let’s explore the most exciting and talked-about virtual assets that are shaping the digital landscape.

2) What are the varieties of virtual assets?

A. Cryptocurrencies

Cryptocurrencies are digital assets that rely on cryptographic techniques to secure transactions on distributed and decentralised networks popularly known as “blockchains”. They’ve fundamentally changed how we handle financial transactions with a new twist of removal of a third-party in between. Below are some prominent examples of cryptocurrencies:

• BITCOIN (BTC): As the pioneer of the cryptocurrency world, Bitcoin remains the most renowned and widely used digital currency.
• ETHEREUM (ETH): Beyond mere transactions, Ethereum’s smart contracts facilitate complex, automated agreements.
• RIPPLE (XRP): Known for its efficiency, Ripple simplifies cross-border payments, making financial transactions faster and cheaper.
• WazirX Token (WRX) – A native utility token of the WazirX exchange, used to pay trading fees and participate in promotions.

B. Non-Fungible Tokens (NFTs)

NFTs are unique digital tokens with private keys that certify ownership of specific digital assets. Their popularity has surged in the fields of art, collectibles, and virtual real estate. The place of the token and assets are different. The NFTs are not interchangeable ensuring its uniqueness.

• Digital Art: Works like Beeple’s “EVERYDAYS: The First 5000 Days” illustrate how art can now be digital and collectible, sold as NFTs.
• Virtual Real Estate: Platforms such as DECENTRALAND and The Sandbox let users buy, sell, and develop virtual land.
• Collectibles: From rare game items to virtual artifacts, NFTs cater to collectors with exclusive, tradable digital goods.
• BOLLYCOIN – A blockchain-based platform offering exclusive Bollywood content and collectibles as NFTs. Bollywood celebrities like Amitabh Bachchan, Salman Khan, Rajnikanth, Kamal Hassan and many more have launched their own NFTs.

C. Utility Tokens

Utility tokens act as access keys within blockchain ecosystems, providing users with various functionalities and benefits. They are intended to offer practical functionalities within their respective platforms like paying transaction fees. These are some examples of utlity tokens:

• BINANCE COIN (BNB): Used primarily on the Binance exchange, BNB offers trading fee discounts and other advantages.
• UNISWAP (UNI): As a governance token for the Uniswap decentralized exchange, UNI holders can influence platform decisions.
• POLYGON (MATIC) – In July 2022, Polygon joined Disney’s 2022 accelerator program, aiming to grow its presence in augmented reality, NFTs, and artificial intelligence. Indian Police in Firozabad had started using Polygon for reporting crimes from October 2022.

D. Security Tokens

Security tokens are digital equivalents of traditional securities, such as stocks or bonds, issued on a blockchain. They offer fractional ownership in assets.

• Tokenized Stocks: These digital tokens represent company shares, providing a novel way to engage with traditional equity markets.
• Real Estate Tokens: These tokens allow fractional ownership of real estate, making property investment more accessible. Sahara Star Metaverse is an initiative by Sahara India to develop virtual real estate providing the opportunity to trade virtual property within this digital space.
• NAVI MUTUAL FUND TOKENS – These tokens represent shares in Navi mutual funds, allowing investors to buy, sell, and manage their investments using digital tokens.

E. Stablecoins

Designed to maintain a steady value by pegging their worth to backing assets like fiat currencies (for instance, US dollars or Euro), stablecoins aim to reduce price volatility in the crypto market. Below-mentioned are some examples of Stablecoins:-

• TETHER (USDT): Tether, which is pegged to the US Dollar, functions as a stable and dependable medium of exchange within the crypto universe.
• USD COIN (USDC): It aims to keep a consistent 1:1 value with the US Dollar, offering a stable and dependable digital asset for both transactions and value preservation.

F. Digital Collectibles

Digital collectibles are the broader category of unique digital items that can be collected and traded, which may or may not utilize NFT technology. These are some examples of Digital Collectibles:

• CRYPTOKITTIES: These virtual cats, each with unique traits, can be bred, collected, and traded, offering a playful collectible experience.
• NBA Top Shot Moments: Highlight moments from NBA games, captured as collectible tokens.
• CRYPTOMYNTRA – An Indian platform that provides a collection of digital fashion items and accessories available for trade in the virtual world.

G. Virtual Goods

Virtual goods are items used in online games or virtual worlds. While they may not always have real-world value however, they enhance the digital experience. These are some popular examples:-

• BATTLEGROUNDS MOBILE INDIA (BGMI): Players can purchase virtual items such as skins, outfits, and weapon upgrades.
• Mythical Games’ “Mirandus” – An upcoming game with virtual goods and assets that can be traded and used within its ecosystem.
• FORTNITE SKINS – Digital outfits and items used to customize avatars in the popular game Fortnite, available for purchase and trade.

Each type of virtual asset plays a unique role in the expanding digital landscape, offering new opportunities for innovation, investment, and interaction. Keep following us to read our next blog to know all about Taxation of Virtual Digital Assets.