This article has been written by Aditya Kapoor pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Are you someone who’s looking to pay for a super car of their dreams with Bitcoin? Or are you wondering if you can pay for your coffee using your crypto wallet balance instead of using UPI? How about paying off for your own wedding with that ‘meme-coin’ that skyrocketed? First, let’s understand what crypto currency is, how it functions and its legal status in India in 2023.

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Definition of cryptocurrency 

Cryptocurrency is a type of decentralised digital currency that is based on blockchain technology and verified by cryptography. Confusing, right? Let me break these terms down for you-

  1. Decentralised – It implies that cryptocurrency isn’t governed by a single body, unlike how banks and other nationalised institutions function; instead, all participating users retain control.
  2. Blockchain – It’s a type of technology where information is stored in data blocks that are connected by chain. In simpler words, it allows for peer-to-peer sharing of information, finance, and services, which eliminates the need for an intermediary. It results in significant reduction in cost of transfers.
  3. Cryptography – It’s a process that helps make cryptocurrency transactions secure, safe and anonymous.

About a decade earlier, everyone thought that it was a new scam that was booming and the majority of consumers didn’t exactly know the purpose of having cryptocurrencies in the first place. Who thought that the crypto-world would be such a huge deal after a decade?

Evolution of cryptocurrency in India

What if I told you that India contributes significantly to the cryptocurrency market and that it has a few of the largest crypto exchanges? Fascinating, right? However, in order to understand how India ended up being such a big player in the global market, we must understand how it all began.

The evolution of cryptocurrency in India can be traced back to 2009, when it was introduced in the form of Bitcoin, followed by its first commercial transaction dating back to 2010 and the establishment of the first cryptocurrency exchange in 2013.

In 2018, the Reserve Bank of India (RBI), the country’s central bank, delivered a significant blow to the cryptocurrency industry by issuing a ban on cryptocurrency transactions. This decision sent shockwaves throughout the Indian crypto community and raised concerns about the future of digital assets in the country.

On April 6, 2018, the RBI issued a circular directing all entities regulated by it, including banks, financial institutions, and payment gateways, to refrain from dealing in or providing services related to cryptocurrencies. This move effectively prohibited banks from facilitating cryptocurrency transactions, making it extremely difficult for individuals and businesses to buy, sell, or hold crypto assets.

The RBI’s rationale behind the ban was primarily rooted in concerns regarding financial stability, consumer protection, and the potential use of cryptocurrencies for illicit activities. The central bank highlighted the inherent volatility and speculative nature of cryptocurrencies, emphasising the risks associated with investing in them. Moreover, the RBI expressed apprehensions about the potential impact of cryptocurrencies on the stability of the Indian rupee and the country’s financial system.

The ban sent shockwaves throughout the Indian cryptocurrency community, leading to a sharp decline in trading volumes and a loss of confidence among investors. Many cryptocurrency exchanges and businesses were forced to shut down or relocate overseas as they were unable to operate within the confines of the regulatory framework.

However, the ban did not completely extinguish the enthusiasm for cryptocurrencies in India. Many individuals and businesses continued to trade crypto assets through peer-to-peer networks and offshore exchanges. The underlying technology behind cryptocurrencies, blockchain, also garnered attention, with several startups and enterprises exploring its potential applications in various sectors.

This led to a drastic loss of sentiment in the Indian crypto market; however, in March 2020, in the landmark case of Internet and Mobile Association of India vs. Reserve Bank Of India (2020), the Supreme Court of India struck down the RBI’s circular banning cryptocurrency via a unanimous decision as it was established to be unconstitutional and that it infringed the right to freely trade and do business under Article 19(1)(g) of the Constitution of India. So, what status does cryptocurrency hold in the current day? Is it legal or illegal? Let’s find out.

Legality of cryptocurrency in India 

The legal framework of cryptocurrency is not laid out prominently, as some aspects of it have been addressed while others continue to remain ambiguous.

As of 2023, the following are the points that a crypto user should be aware of –

  1. An individual can trade, hold and invest in cryptocurrencies, but they cannot be used to make official purchases, which implies that they cannot be used as legal tender.
  2. As per the Finance Bill of 2022, cryptocurrency has been defined under ‘Virtual Digital Assets’.
  3. Income from transfer of virtual digital assets such as crypto and NFTs will be taxed at 30%.

One of the key challenges in regulating cryptocurrencies is their decentralised nature. Cryptocurrencies operate on distributed networks, such as blockchain, which are not subject to the control of any central authority. This makes it difficult for regulators to apply traditional financial regulations, which are typically designed for centralised systems.

Another challenge is the global nature of cryptocurrency markets. Cryptocurrencies are not confined to any one jurisdiction, and they can be traded 24/7 on decentralised exchanges. This makes it difficult for regulators to enforce regulations and coordinate their efforts across borders.

As a result of these challenges, the regulatory landscape for cryptocurrencies is still in its early stages. Some jurisdictions have taken a proactive approach to regulating cryptocurrencies, while others have adopted a more cautious stance. Some of the key regulatory issues that are still being debated include:

  • How to classify cryptocurrencies: Are cryptocurrencies commodities, securities, or something else? This is an important question, as it will determine which regulatory framework applies to cryptocurrencies.
  • How to regulate cryptocurrency exchanges: Cryptocurrency exchanges are platforms that allow users to buy and sell cryptocurrencies. Regulators are still trying to figure out how to regulate these exchanges to protect investors and ensure market integrity.
  • How to address the risks associated with cryptocurrencies: Cryptocurrencies are volatile and speculative investments, and they pose a number of risks to investors. Regulators are still grappling with how to address these risks and protect investors.

The regulatory landscape for cryptocurrencies is likely to continue to evolve in the years to come. As the cryptocurrency industry matures, regulators will need to adapt their regulations to keep pace with the changing landscape.

Digital dilemma : challenges around cryptocurrency

The unregulated status of cryptocurrency poses a great deal of stress as it makes the entire crypto market volatile. Volatility not only results in sudden and major financial losses for inexperienced and even experienced investors but a sudden decline in the cryptomarket may result in panic-selling which in turn affects the economy as a whole.

Another concern and one of the reasons for the initial ban on cryptocurrency, is money laundering. Money laundering is a vice that is often associated with cryptocurrency. Due to its unregulated nature, it’s very difficult to reduce instances of money laundering because it might be disguised in the form of trading or gifts, as unlike our good old stocks, it has never been simpler or easier to indulge in cross-border trading.

Due to its anonymous and difficult to track nature, the government’s concerns about the misuse of cryptocurrency seem valid. They fear that the criminal-minded folks would use this advanced piece of technology to make fund transfers towards terrorism and to deal in drugs. In August 2023 itself, the Enforcement Directorate seized proceeds of crime amounting to a whopping Rs 1,144 crore and arrested 20 persons in cases related to frauds in cryptocurrency/ virtual digital assets.

There are no clear guidelines outlining the legal remedies for consumers/investors that indicate how a dispute shall be settled or where or how it needs to be addressed. The lack of investor protection plans discourages people on the fence from dive-in and gives the crypto market a fair chance.

The ambiguous legal landscape not only affects the investing side of the crypto market but it also stalls the growth of blockchain based applications, which can potentially benefit a lot of businesses.

Sadly, the misuse of cryptocurrency is not limited to the above-mentioned points. It has resulted in various new scams that the scammers try to pull off to get an easy buck from innocent people. Would you believe it if I told you that the scale of such scams is huge, amounting to $300 million. Click here to learn more about one such instance reported in November 2023. Numerous complaints have been registered where people have claimed to have lost a massive amount of their savings.

India, sleeping giant of the crypto world

Imagine a world where you can buy anything with a tap of your phone or smart watch. You must be asking yourself, Is that not possible already using NFC technology? But imagine the same scenario but this time instead of paying with your bank balance or credit card, you’re paying with a crypto balance. How does that sound?

Certainly, there is misuse of cryptocurrency but that doesn’t negate its potential to revolutionise the way our payment system has functioned for decades. If we and the government decide to look past the rupee and remittances, this dream may not be far-fetched.

Central bank digital currencies (CBDCs) or the eRupee, can be considered one of the revolutionising factors, as it’s a government initiative to have a digital token of their currency. If implemented or transitioned properly, the CBDCs can address a lot of concerns, such as:

  • Money laundering
  • Cross border transactions will be monitored to track illegal activities
  • Increased transparency will help reduce corruption and bribes

On the other hand, it may turn out to be a bad idea, as it’s potential downsides include:

  • Government surveillance on the citizens
  • Data privacy breaches

Having said that, even blockchain technology can streamline various financial processes, reducing costs and fraud in areas like supply chain management and healthcare, while cryptocurrency brings unbanked and underbanked populations into the formal financial system, boosting financial literacy and access to financial services.

Conclusion

In my opinion, a lot of individuals, businesses and even the nation as a whole can benefit because not only does India have one of the largest crypto user bases in the entire world, but we also have the potential to become the next superpower. Complete legalisation of cryptocurrency can provide a tremendous boost or kick start to our nation’s economy; however, it would require the following things –

  • Involvement of regulatory bodies such as SEBI and RBI.
  • A proper legal framework that clearly outlines the dispute resolution guidelines along with how crypto-related matters should be addressed.
  • The Cryptocurrency Bill 2021 is still pending in parliament; it should be passed as it would make the legal framework enforceable.
  • Proper technological infrastructure will also be required to support its adoption on a nation-wide scale.
  • Digital literacy should be increased among the less tech-savvy demographics. This will not only enable them to reap the benefits of this technology but also safeguard their interests and protect themselves against potential scams.

Finally, India should also participate in the existing collaborative measures to combat the misuse of cryptocurrency and solidify its position on a global scale. These measures include:

  • The Financial Action Task Force (FATF) has issued guidelines for regulating crypto assets and combating money laundering risks.
  • The G7 nations are collaborating on developing common cryptographic regulations. 
  • Interpol has established a dedicated unit to investigate crypto-related crime.

References

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