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This article is written by Raslin Saluja, from KIIT School of Law, Bhubaneswar and have been updated by Ishan Arun Mudbidri. This article throws light on the tryst of cryptocurrency in the Indian market amidst the various regulators.

Introduction

Technology has steadily been taking over our lives by integrating into every aspect of it. It has led to a constant struggle for the regulatory authorities across the nations to maintain a balance between the traditional schemes and thriving new concepts. Currently, it exists in a constant state of development and growth and therefore it is important for the regulators to be proactive in their approach and apprehend the market dynamics in order to smoothly bring into effect the infrastructure required to support the new advancements. The world came to know about the concept of crypto currency in 2009 when people were not really bothered about it. In the later years, this term was heard on a daily basis with everybody talking about it. Many traders and investors from all over the world started taking keen interest in the crypto brand. The Indian market was also attracted to it with  Indian traders  readily willing to invest their money in crypto currencies.

The sector that has been quick to evolve is financial technology (FinTech) with the sudden popularity of blockchain and cryptocurrencies. Even with the emergence of the unprecedented pandemic, the fintech sector is on a constant rise. To this end, people are starting to get aware of these virtual currencies and have been investing their time and money in understanding its functioning as it continues to gain popularity. However,  like other world leaders the Indian Government  being skeptical about this whole crypto  brand decided to bring a bill to  put a ban on crypto currencies citing security concerns. With this bill still a draft and not being implemented as of now, the question arises whether the Indian Government should reconsider it’s decision regarding crypto currencies? 

About  cryptocurrency

Before discussing the  status of Crypto Currencies in India, we must understand the concept of Crypto Currencies and why it is attracting  global investors and traders. “Cryptocurrency”, the meaning of this word is in its name. Crypto means concealed or secret and we all know what currency means. Hence, Crypto Currency is a type of digital  or virtual currency which is concealed ,secure and impossible to counterfeit.  It is  not a physical source. Everything is online. Then, what makes crypto currency so different as there are other sources of online payments also? The main difference in crypto currency is that  a specific person can directly transfer his/her money to another person without any middleman that is a bank. One doesn’t have to link his/her money to a bank account. The banks  or any other financial institutions have no control over crypto transactions. Hence, it is said to be one of the most secure sources of payment. Amidst this Crypto currency  scenario, one name always pops up; Bitcoin.

Bitcoin

Bitcoin is the world’s first and the largest crypto currency. Bitcoin was created by a pseudonymous developer named Satoshi Nakamoto in 2009. Over the years bitcoin has made rapid growth and  thanks to the constant efforts to promote bitcoin by billionaires  especially Elon Musk, today  one bitcoin is worth ₨ 45 lakhs. So how does Bitcoin work? Bitcoin is  basically a computer file which works as a type of online currency. To buy bitcoin, one must have a wallet known as a digital wallet. This is where bitcoin or any other crypto currency  is stored. Traders buy and send money  from this wallet. This wallet is stored as a file on the computer or as an app on a mobile.  All these crypto currency transactions are stored in a record keeping technology known as Blockchain technology.

Blockchain technology

Blockchain technology is a type of database whereby all crypto currency transactions are stored. These transactions are stored in groups known as blocks. These blocks form a chain of data and hence they are known as blockchain technology. Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scalable way for myriad uses.  Another term which is often heard along with bitcoin and block chain  technology is Bitcoin Mining. Bitcoin mining is a concept whereby new bitcoins are entered into the market. It also helps in development and maintenance of the block chain.

Cryptocurrency : the Indian conundrum

Gradually crypto currencies  made their way into the Indian Markets and currently as we speak, there are around 7 million Indians (approximately) holding  crypto currency assets worth $1 billion.  Many countries  around the world like Saudi Arabia, Turkey have completely banned crypto currencies. Other Countries like USA, Japan, Canada have imposed reasonable restrictions regarding the same. The Indian Government  also has been skeptical about the use of Crypto Currencies. In 2018, the Reserve Bank of  India and the Finance Ministry  put out a circular  banning  financial institutions from providing services to businesses dealing in exchange/trading of crypto currencies, which put the entire Indian crypto currency  industry in turmoil. The validity of this circular  was challenged before the Supreme Court of India on grounds that this circular was a violation of Article 19(1)(g) of the Constitution of India. The Supreme Court made its decision in  Internet and Mobile Association of India v. Reserve Bank of India.

How to buy Bitcoin or any other Cryptocurrency?

Now that we know about the basics of crypto currency, how do we buy it?  There are a number of Crypto Currencies in the world apart from bitcoin. Some of them are, ethereum, litecoin, polkadot,  etc. the latest one in this list is dogecoin. In order to buy a cryptocurrency, the first step is to  have a digital wallet. Then, there are various online exchange portals where crypto currencies are bought. A person wanting to buy crypto currencies must  search for the correct exchange portals. After getting access to an exchange portal and selecting the  desired crypto currency, the next step is to enter the wallet address where the crypto must be delivered and also the amount of crypto currency needed to be withdrawn. After doing all these steps, one must double check all the details given before sending. After  sending, the person has acquired his/her first cryptocurrency.

Legal landscape

It was not long ago that India witnessed and continues to witness a massive surge in cryptocurrency exchanges. The market is untapped and unregulated with a huge capacity which is what has been attracting the masses towards it. As for India, in 2013 the Reserve Bank of India which is the apex financial authority of the country along with the government of India and other regulators took notice of this massive popularity and with the fear of potential revenue loss issued a press release to caution the public against the potential risk in dealing with virtual currencies.

RBI circular

While the report submission remained pending in 2018, RBI exercised its powers under the Reserve Bank of India Act, 1934 (“RBI Act 1934”) and Payment Settlement Systems Act 2007 and went ahead and issued a circular to entities functioning under the regulation of RBI that would prevent all commercial and co-operative banks, the small finance banks, payment banks, and Non-Banking Financial Company (NBFC) to stop dealing with the virtual currencies and providing any financial assistance or services to any entity which deals with the exchange of virtual currencies. Further, if they were already such services to their customers/entities they needed to exit such a relationship.

This acted as an indirect hindrance to stop the money flow into the crypto industry as its money exchanges essentially function through the bank and its banking services for sending and receiving the money for converting them into cryptocurrencies and for further making necessary payments. Thus even though they did not ban virtual currencies outrightly, they put a stop to it by blocking the cash flow from the economic market. This action was based on growing criticism of both the regulators and the government citing them as Ponzi schemes and basing their concerns over “consumer protection, market integrity, and money laundering, among others”

Later in 2019, the Committee submitted its complete report and recommended an overall ban on usage of private cryptocurrencies in India as they were a threat to the regulations.

Internet and Mobile Association of India v. Reserve Bank of India

However, in 2018, the Internet and Mobile Association of India (IMAI) representing the interest of the digital and online services corporations with the support from the public and industry-led petitions challenged the RBI circular in the case of Internet and Mobile Association of India v. Reserve Bank of India (2020). The not-for-profit industry body filed a petition in the Supreme Court. They contended that the ban was beyond the statutory powers of the RBI as a regulator. Even if it does come under their powers, this preemptive ban infringes on the right of the people to use and trade the currency.

In March 2020, the Apex Court accepted that ban was infringing Article 19(1)(g) of the Indian Constitution and scrutinized whether it was actually imposed in the general public interest under Article 19(6) that has to adhere to the doctrine of proportionality. The Court believed that RBI did not apply its mind to find less intrusive measures before issuing the circular and held that the ban was “manifestly arbitrary, based on non-reasonable classification, and it imposes disproportionate restrictions”. The Court further added such a ban has to arise from legislation and not from a regulator’s circular. The Supreme Court  while giving it’s judgment analyzed the  powers of the RBI for issuing the circular. The Supreme Court opined that the RBI has powers to regulate and the claim of the IMAI stating that the RBI has misused it’s powers was  not acceptable. The Supreme Court stated  that though virtual currencies  have a decentralized status, they  do operate as digital representations of value and  are a capable medium of exchange. Further the Supreme Court supported the claim that the RBI circular violated  Article 19(1)(g) of the Constitution of India. The  Supreme Court struck down the RBI circular on the grounds of proportionality stating that the measures taken by the RBI in issuing The RBI circular were not proportionate.

On the issue of determining the value of cryptocurrencies, it was important otherwise it would easily slip away out of all regulatory control. The Court upon scrutinizing various case laws from other jurisdictions broadly classified it as a store of value, a unit of account, and a medium of exchange still coming under RBI’s regulatory powers.

In 2019, a committee set up by the Government of India,  recommended a draft of a bill which banned the use of private crypto currencies. The  Bill was Ban on Crypto Currencies and Regulation of Digital Currencies 2019:

This bill  banned the use of crypto currency as a legal tender. Buying, selling, mining, holding , issuance, disposal of any type of crypto currency is banned.

  • Under the draft Bill, mining, holding, selling, issuing, transferring or use of crypto currency is punishable with a fine or imprisonment of up to 10 years, or both.
  •  A person must declare and dispose of any crypto currency in his possession, within 90 days from the commencement of the Act.
  • The central government, in consultation with the RBI, may issue digital rupee as legal tender. The RBI may also notify a digital currency recognized as legal tender in a foreign jurisdiction, as a foreign currency.

The bill however, allows use of blockchain technology for other purposes such as research or teaching. This bill is still in contention and  has not yet become a Act. 

However, the legal tussle is yet to reach an end. The cautionary and prohibitory approach of the circular has been enough to hinder the growth of crypto in India. As even after the apex court’s ruling, many banks still continued to halt crypto trading such as the HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, and RBL Bank, etc. As the control still lies with the RBI, the banks cannot go against their decision in supporting crypto-related transactions. Especially as an unregulated commodity, RBI is bound to have close supervision over large Indian rupee conversions.

Ministry of Finance

Earlier this year, during the commencement of the budget session, the government also announced that they will be introducing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. Based on the 2019 draft of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill by the inter-ministerial committee headed by former Department of Economic Affairs (DEA) secretary Subhash Chandra Garg, the new bill aims to prohibit private cryptocurrency players in India along with related activities (such as mining, buying, holding, selling, dealing in, issuance, disposal or use) and introduce a facilitative regulatory framework for officially dealing with the digital currency that will be issued by the RBI.

The entire Bill is divided into two parts 1) banning the private virtual currency based on the risks associated with dealing with them, and 2) paving a pathway for introducing official digital currency, However, once being introduced, the Bill is expected to make rounds before Standing Committee or a Joint Parliamentary Committee.

The Bill is expected to provide for regulation rather than a ban. The reason why RBI was keen on prohibiting its usage was the possibility for doing illegal financing activities (such as funding terror, money laundering, tax evasion, etc.), however, these practices might not be enough to curtail such activities. Other reasons also include protection of the investors, consumers in case of making purchases/sales in lieu of cryptocurrencies, lack of regulations, control, and oversight over the sector. These concerns can effectively be resolved by having a regulatory system in place, addressing the issues, and ensuring the value is available to all. Suggestions towards implementing such a regulatory framework have also been proposed by NASSCOM.

As recent as May 31st, 2021 RBI did release another notification for customer due diligence for transactions in virtual currencies. It clarified that the circular they released in April 2018 has been set aside by the Supreme Court in March 2020 and therefore it is no longer valid and has an effect to be cited from. This though not very explicitly does gives banks and the NBFCs the liberty to trade after conducting their due diligence in line with the regulating standards for Know Your Customer(KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT), and other obligations to be followed by the regulated entities under the Prevention of Money Laundering Act (PMLA), 2002 as well complying to provisions of Foreign Exchange Management Act (FEMA) for overseas remittances.

Statistics

As for the Indian masses they have been taking interest and the Indian crypto industry has shown a record jump in numbers. The number of active users is currently approximately 15 million, while the number of blockchain startups in this space has gone up from 100+ in 2018 to 300+ in 2021. 

According to a recent report by India’s industry association IndiaTech.org, Indian users currently hold crypto assets worth more than $1.5 Bn and their daily trades in crypto are worth $350-500 Million. The sector has also received immense funding from international players such as Tiger Global, Draper Associates, Binance, Coinbase, Block.One and Polychain Capital, Indian startups have received less than 0.2% of the $5.5 Billion funding raised by blockchain startups globally. Today, WazirX which is India’s most trusted cryptocurrency exchange estimates the investment of around 7 Million Indians in crypto-assets worth USD 1 Billion. 

Step ahead

India needs to have clarity on its decision on whether to continue with cryptocurrency or not. Either they can decide to completely ban its usage or follow the approaches that are being explored in other jurisdictions according to their suitability. On the 24th of September 2020, the EU Commission has officially released the Proposal for a Regulation on Markets in Crypto-assets (“MiCA”). The proposed regulation aims to bridge the gap in financial services regulations in the EU in relation to crypto-assets (which includes cryptocurrencies).

However, if a complete ban is imposed on virtual currencies, it will only lead the Indian cryptocurrency investors to invest in them in unmonitored circumstances. Further, even if they decide to introduce the new framework and state-owned cryptocurrency though their aim may be to develop a safer technological environment, the risk factor involved shall remain the same. It is essential to note that during the last week of March 2021, the latest amendment that was introduced to the Schedule III of the Companies Act, 2013, the government of India directed that all the companies have to disclose their investments in cryptocurrencies from the commencement of the new financial year. This also means that the companies have to reflect their profit/loss made on transactions around cryptocurrency.

Even in the draft published by the Ministry of Electronics and Information Technology on National Strategy on Blockchain, 2021, the benefits of dealing with cryptocurrency were highlighted. To that end, cryptocurrency has managed to have a global impact, and banning it shall not seem a befitting step. Rather the country could take effective steps in incorporating a system following the steps of other jurisdictions that have been successful in doing so.

Is it safe to invest in Crypto currency in India?

In a  country like  India with over 1.3 million people, anything can happen. Hence, a person to person source of payment without  any authority controlling it can be risky. The virtual currency is not guaranteed by the Central Government, so, in order for any virtual currency to be declared legal tender, it will have to be expressly guaranteed by the Central Government. The Reserve Bank of India has also stated the  potential legal risks that come  with crypto Currency. Crypto Currencies like Bitcoin and ethereum have given Indian investors huge returns and hence most of the Investors in India want to invest in Crypto currencies despite the legal risks that come with it. Also, it is viewed as an asset like gold which makes it more exciting for the Young Indian Investors. In spite of all this, the regulators and the Government have  been skeptical about the dealings in crypto currencies. Many experts are of the view that instead of banning crypto currency the Indian Government should think of  following the path of countries like Japan, USA, UK, Canada etc. who have not completely banned the use of crypto currencies but have imposed certain regulations on it’s dealings which makes it less risky. In doing this, the Government can also keep a track on it’s dealings. Imposing certain regulations on Crypto currencies will mean that  all the bad activities like money laundering, fraud etc. may not happen. Therefore, imposing certain  regulations on crypto currency transactions will help the central authorities as well as the investors  who deal in such transactions.

Conclusion

Thus, based on the aforementioned facts and to and fro decisions are given by various authorities involved like the RBI, Ministry of Finance, and the Supreme Court it can easily be induced that there is a lack of clarity in relation to cryptocurrency regulation in India. It is the need of the hour for us to have a well-structured regulation in place pertaining to the issues of crypto trading, exchanges, protection of investors, and people employed in the sector along with blockchain technology. There is inherent fear due to a history of odious incidences of cyber frauds as well as money laundering, we have to accept that blockchains are one of the most reliable ways for functioning the digital economy. Though not impossible, cryptocurrencies are unlikely to get hacked. For a transaction to be made it needs the consensus of the chain users with repetitive validations and if a data entry were to be hacked, it will require about 51% of the miners acting in bad faith which does not seem to be a probable event. Therefore, the government could rather focus on using cryptocurrency technology in ensuring security and immutability of information for developing a system with higher credibility and low-risk factors.

References


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