This article is written by Darshin Parekh from National Law University, Jodhpur. The article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).
A cryptocurrency, crypto-currency, or crypto is a digital asset that is designed to work as a medium of exchange where an individual coin ownership records are stored in a ledger which exists in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. In simple words, there is no currency existing in the physical form, and there is no one particular regulator for regulating these exchanges.
Globally there has been a shift towards a digital economy wherein countries are using electronic means of transfer, cryptocurrencies are in line with the global trend which is also aimed at enabling digital mediums of transactions. Cryptocurrency basically relies on exchanging digital information from one person to another.
In the past decade, cryptocurrencies have seen a thousand-fold rise in the prices of coins, making people attracted to these markets. For example, the value of bitcoin in the early part of 2010 was 0.0008 USD, it had risen up to 60,000 dollars merely in the time period of 11 years, i.e. by May of 2021. This stupendous rise in prices has attracted people from across the globe to invest in the crypto currency, with the aim to earn more profits. This creation of unrealistic profits is not just limited to one cryptocurrency, but a similar pattern has been observed across currencies. Some popular crypto coins are Ethereum, Ripple, Cardano etc.
Now the question that arises is, with so many people entering the crypto market and investing crores of rupees on a daily basis, is there anyone who is regulating the affairs of such transactions and are these transactions even legal. The article aims to discuss the rationale behind crypto- its merits and demerits, legislations regulating crypto by various governments and approaches of the Indian Government on the same.
Rationale behind crypto
CryptoCurrency was invented after the 2008 Global Economic Crisis, to have a decentralized form of currency for individuals. This was created with the intent to prevent any actions or inactions where the governments or the banks could completely tremble the economy of the World. In 2009, the first decentralized cryptocurrency, bitcoin, was created by presumably pseudonymous developer Satoshi Nakamoto. Bitcoin was created as a way for people to engage in financial transactions without relying on banks or governments. It’s a peer-to-peer currency. No one controls your money, but yourself and these transactions are generated, secured and verified because of the use of cryptography.
As per a very recent estimate, there are more than 1600 crypto currencies today. The first of the lot was Bitcoin, which was followed by Lite Coin in 2011. All the crypto currencies that were released post the Bitcoin release claimed to be better than the original crypto currency, but still Bitcoin is the leader in today’s market. Crypto currency in the future will perform similar functions to fiat cash and is soon to be introduced in day-to-day transactions.
Unlike the traditional Stock Market, the crypto market is very volatile. Recently, the crypto market saw a very big dip in the market because China decided to ban crypto currency. Bitcoin and altcoins (refers to all virtual currencies except for Bitcoin) have all reached their lowest prices in the past 6 months. Further, the effect on the prices by mere tweets of wealthy individuals makes one wonder whether the market has any parameters or is it just a bubble that is yet to burst. People are still suspicious and hesitant before entering the market because of its volatile nature. Further, because Crypto coin mining can be done by any individual or group of individuals, how can their credibility be determined. This Article ponders upon the question of whether the virtual currency sphere has any rules or regulations that control the market and approaches of various countries.
Regulation of cryptocurrencies across the world
The union has provided a definition for virtual or crypto currencies. It defines virtual currencies as a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. In the decision of Hedvist, the European Court of Justice had held that transactions to exchange a traditional currency for virtual currencies and virtual currencies for traditional currencies constitute a supply of service for consideration. This allowed transactions to be exempted from Value Added Tax, therefore no VAT is being imposed on Crypto transactions in EU-member states. The judgement recognized the value and nature of these currencies.
Though these currencies are recognized across Europe, there is still an environment of uncertainty regarding these transactions. In early February, a joint statement was issued by the European Supervisory Authorities for securities (ESMA), banking (EBA) and insurance and pensions (EIOPA), warning the consumers regarding virtual currencies. It stated that virtual currencies are high risk and unregulated products, therefore are unsuitable for investment, savings or retirement planning. The European Commission has also presented a legislative proposal to amend the Fourth Anti-Money Laundering Directive (AMLD). It seeks to include custodian wallet providers and virtual currency exchange platforms within the scope of the AMLD. This would help in fulfilling due diligence requirements and have policies that can prevent money laundering, terrorist financing etc. It is quite clear that virtual currencies have not yet received recognition in European countries as it is considered to be a market that is not stable.
United Kingdom today does not have any specific set of laws that regulates the crypto sphere, but it deems the regulation of these currencies as necessary. It states that regulation is necessary because it would help in combating illicit activities, promote market integrity and protect the safety and soundness of the financial system. The Bank of England Act 1988 under Section 2A states that it is the responsibility of the Bank of England to protect and enhance the stability of financial systems in the United Kingdom.
In respect to the provision, the Bank considered the risk that is posed by the use of cryptocurrencies in the United Kingdom. After a thorough understanding, it came to the conclusion that the crypto market is currently not large enough to pose any material risk to monetary or financial stability within the country. It is also necessary to ensure consumers are protected while using forms of payment from money laundering, taxation and use of these systems to finance terrorism or any other crime
This country does not recognize crypto as a legal tender and the banking system also does not accept virtual currencies. In a 2013 circular, the government defined Bitcoin as a virtual commodity, but while warning citizens about the risks of virtual commodities allowed them to freely participate in the online trading of such commodities, but the attitude and perception of the government have been changing in recent years.
Since 2017, the government has taken steps to prevent activities related to crypto currencies, due to concerns regarding financial risks. China hosts around 75% of the total crypto mining due to its established technology supply chains and extremely cheap electricity. Cryptocurrency mining requires huge amounts of computing power, making energy consumption a major overhead for the industry. China very recently imposed a ban on mining due to its very heavy electricity consumption. This has majorly impacted the miners, as they flock to different countries to seek refuge, and many miners even end their operation to comply with government directions. At the time, when China is banning crypto currency, it is also necessary to point out that the central bank of China is planning to come out with its own form of crypto currency. Therefore, the attitude of China regarding the regulation of Crypto currency is still unclear as it is stating contradicting objectives to the world at the same time.
United States of America
This country is among the very few that have actually started taking steps for creating legislation regulating virtual currencies. The Financial Crimes Enforcement Network (FinCEN) does not essentially consider cryptocurrency as a legal tender but at the same time, it considers the crypto currency exchanges to be money transmitters. It recognizes these currencies as a substitute for the natural currency. On similar lines, the Internal Revenue Service or the IRS, also does not recognize crypto currency as legal tender but considers it to be a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value. Further, it has also issued tax guidance regarding the same. The same also has been approved by a 2018 circular by the IRS.
Cryptocurrency also falls under the regulatory scope Bank Secrecy Act (BSA), this would indicate that any crypto exchange service provider must obtain a license from the FinCEN, implement an AML/CFT and Sanctions program, maintain appropriate records, and submit reports to the authorities. The US Securities and Exchange Commission has also indicated that the cryptocurrencies are to be considered as securities and security law will be applicable to it. The Commodities Futures Trading Commission(CFTC) has recognized currencies like Bitcoin, Ethereum, and allowed trading of virtual currency publicly on all the exchanges that it regulates.
Regulation of cryptocurrency in India
India is a developing economy and has generally followed in the footsteps of developed countries from around the world. India has legalized the use of crypto currency, and has allowed various service providers to deal in virtual currencies.
On 6th of April, 2018 Reserve Bank of India (RBI) had issued a circular which stated that the citizens will not be allowed to deal in crypto currencies as there are serious concerns of consumer protection, market integrity and money laundering, among others. But the supreme court seemed to have favoured the virtual currencies by allowing its dealings. In the case of Internet and Mobile Association of India v. Reserve Bank of India, Supreme Court struck down the circular.
The supreme court decided that crypto currency can be accepted as payment for the purchase of goods and services and it should be regulated by the RBI. The Supreme Court also held that RBI is a financial institution aimed at protecting the money of the general public, hence it was within its right to ban the use of crypto. But at the same time it also said that instead of banning these virtual currencies altogether, the RBI could have looked for different approaches that may have been beneficial to the virtual currency users by implementing appropriate regulations. Therefore, crypto currencies are allowed in India but any legislation for regulation has not yet been implemented.
The RBI is also planning to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will prohibit all private cryptocurrencies and lay down the regulatory framework for the launch of an “official digital currency”. The government is also planning to start a central bank-backed digital currency, which will be less volatile as compared to the other virtual currencies. The Government has stated that virtual currencies cannot be considered as fiat currency as it is not stable and hence it will include its own virtual currency. However it is not quite clear what is to be considered as private currencies and which of them will be banned, but RBI has cautioned the general public regarding the misuse of crypto currencies and what can be its possible implication.
Further the latest amendment to Schedule III of the Companies Act, 2013 states that from the new financial year all the companies will be required to disclose their investments in crypto currencies, and also state any profit or loss involved in the transaction. The holder of virtual currencies will also have to state the number of holdings, details of deposit and advances from any person for the purpose of trading. Hence, it is clear that India is trying to regulate the sphere of crypto currencies and is trying to make it less volatile and risky for the citizens but it is still in its nascent stages.
Virtual currencies, unlike traditional investments, do not have any cap on fluctuations. They can be influenced by the smallest of things and are very volatile. Yet, it has not failed to attract investors from across the globe and give a hefty return on their investments. Countries across the globe are worried that this might just be another hoax, that would make citizens lose a lot of their finances. Countries are constantly trying to regulate the sphere so that the market can be stabilized and there are proper indicators of the market movement.
Crypto currencies were introduced with the intent to have a decentralized currency system, that is not controlled by the banks, financial institutions or the governments but if countries across the globe decide to regulate this currency system, then that might adversely impact the very purpose behind introducing virtual currencies. It might also lose its decentralized nature with central banks planning to introduce their own virtual currencies. Hence, Governments around the world will have to carefully ponder upon these questions before bringing about any legislation. They have to make the system more stable for the citizens so that they do not lose money but also at the same time not excessively interfere or control the activities of the market.
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