This article has been written by Shyamali Panda pursuing Diploma in US Technology Law and Paralegal Studies and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

In recent years, India has emerged as a prominent player in the global cryptocurrency landscape. It is poised to become a global leader in the cryptocurrency industry. The country’s burgeoning interest in cryptocurrencies and blockchain technology has prompted experts to label it the “next crypto powerhouse.” With a vast population and a growing tech-savvy youth, India presents enormous potential for crypto adoption and innovation. As the cryptocurrency market grows into a trillion-dollar economy, it is crucial to shift the discourse towards investor protection. The common misconception that cryptocurrencies are a speculative bubble that will burst soon must be addressed.

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One of the significant challenges is defining the regulatory authority responsible for overseeing the cryptocurrency market. This issue remains contentious and requires resolution to establish a robust regulatory framework.

The crypto journey in India has been marked by uncertainty and ambiguity as the nation grapples with the need for comprehensive crypto regulations. This article explores the evolving landscape of cryptocurrency regulation in India, highlighting the pressing need for regulatory clarity and the challenges faced in achieving it.

What do you mean by cryptocurrency

Before we delve deeper into the regulatory aspect of cryptocurrency, first let us get a hang of what cryptocurrency means, the technology that it is built upon, and how it all started. Well, to begin the story, you all must be aware of the Great Recession that took place in the year 2008. This particular incident created a lot of mistrust among the common citizens against the government and the financial institutions in general. 

During this time, a man called Satosi Nakamoto (there is still no confirmation about who he is or whether it is an actual person or a pseudonymous person) saw an opportunity to bring forth something that went on to change the world a few years down the lane. He released a white paper and introduced the concept of a peer-to-peer cash system without the involvement of a financial institution, which would take place with the help of a cryptographic system.  

In the white paper, he only talked about Bitcoin and its workings but in today’s world, there are a number of cryptocurrencies that we can boast of. But one might wonder how it works. Cryptocurrencies are usually built using blockchain technology. Without using any technical jargon about what a blockchain means, it could be understood simply. Consider that you want to send money to someone who doesn’t stay in India or that you want to make any kind of cross border transaction. How would you do that? One would approach the bank and wire the money with the help of a bank, and the bank would charge a certain amount ranging from 0$ to 50$. Imagine if you could do that directly. Imagine if you could send the money without the involvement of a bank or any kind of third party, just with a click and it would reach the intended recipient within minutes. Wouldn’t that be convenient? That is what cryptocurrency helps you achieve. It makes a trustless system work! Also, when compared with financial institutions, it is very difficult for anyone to tamper with it. But over the years, we have come across a lot of frauds being committed, hackers taking the money out of the system using the very foundation that it stands on, which is maintaining the anonymity of the transacting parties, but then which system is devoid of flaws? We find ways to circumvent it and that is what we will discuss in detail in the later stages of this article. 

Comparison between cryptocurrency and fiat money 

Money, the lifeblood of economies, has undergone a remarkable transformation over the years. In recent times, the emergence of cryptocurrencies has sparked a revolution in the world of finance, with significant distinctions setting them apart from traditional fiat currencies.

One of the most fundamental differences between fiat currency and cryptocurrency lies in their legal status and backing. Fiat currency, such as the US dollar or the Euro, is a legal tender. It is officially issued and regulated by the government and is backed by the full faith and credit of the government. This government backing lends fiat currencies their stability and widespread acceptance.

Cryptocurrencies, on the other hand, exist in a decentralised digital realm. They derive their value from the technology underpinning them—the blockchain. Unlike fiat money, cryptocurrencies are not endorsed or controlled by any government or central authority. Instead, their value is rooted in the trust and transparency of the blockchain technology itself.

One of the primary criticisms of cryptocurrencies, particularly early ones like Bitcoin, has been their volatility. Their values can fluctuate wildly over short periods of time. However, the cryptocurrency landscape has evolved. Stablecoins, like USDC and USDT, have emerged as a reliable subset of cryptocurrencies. These stablecoins are pegged to established fiat currencies, usually the US dollar. As a result, they maintain a stable value, providing users with a more predictable means of transacting in the crypto world.

In the realm of fiat currency, transactions often require intermediaries. Whether it’s a bank, a payment processor like PayPal, or a digital wallet provider like Google Pay, these third-party entities play a pivotal role in facilitating transactions. They ensure that money moves securely between parties, but they also introduce inefficiencies, fees, and potential privacy concerns.

Cryptocurrency, however, has the potential to disrupt the status quo. It enables peer-to-peer transactions without intermediaries. When you send cryptocurrency to a friend, you’re essentially transferring digital tokens directly to their wallet without any need for banks or payment processors to verify and process the transaction. This is a fundamental departure from the traditional financial system and has the potential to simplify and democratise financial transactions.

Where does the need for regulation come into the picture

Like every fairytale that comes to an end, we need to remember that crypto is not all rainbows and unicorns. We need to keep in mind and be wide eyed about its setbacks and what we can do to make it better. The most important thing at the end of the day is the interest of the consumer or in this case, the investors and their money. It shouldn’t be put at risk at the behest of a new system. 

The list of attacks by hackers hiding under the garb of anonymity is quite long and embarrassing. The very strength of crypto has become its worst enemy. To put a check on money laundering activities, we need to formulate AML ( Anti-money laundering) guidelines, first internationally and then domestically. Without it, the crypto regime is wild out there!
The journey in India has been quite tumultuous, to say the least. Starting from an outright ban in the year 2017 to the Hon’ble SC overturning the ban in the year 2020 in the case of  Internet and Mobile Association of India vs. RBI, we have come a long way. It gave a much needed boost to the crypto startups, but at the same time, there are still a lot of people who are scared and who want to get into this industry and are shifting to more crypto friendly nations like the UAE, USA, Japan or Singapore, to name a few. Without regulatory clarity on it, we are not moving forward in any way. 

SEBI (Securities Exchange Board of India) gave a statement saying that it thinks it will be difficult to regulate crypto because of its decentralised structure and that a special authority should be formed to regulate it. A bill was also introduced by the government in the year 2021 in the Lok Sabha, but it never saw the light of day. A question that we need to ask is, why did the ball stop rolling? 

We can take inspiration from what other countries have done or the steps taken by them to regulate crypto. 

Comparative analysis of cryptocurrency regulation in the US, Singapore, and Japan

United States

The USA has been at the forefront when it comes to the adaptability of crypto. At the same time, it is also not shying away from taking responsibility for its investors interests and is thinking and churning out ways to protect them. It is currently being regulated by the Federal Trade Commission, the Financial Crimes Enforcement Network, the Securities Exchange Commission and the Commodity Futures Trading Commission. The FBI also acts as a powerful agent to mitigate the risk of money laundering activities. 

Recently, in the case of SEC vs. Ripple (2023), the Securities Exchange Commission, i.e., a regulatory authority in the United States, alleged that Ripple’s use of its XRP cryptocurrency token has raised a lot of money by selling it as an unregistered security offering to investors. To this ripple’s defence, a cryptocurrency cannot be treated as a security and does not come under its definition. 

Here, the court’s relied upon the Howey Test, which came in 1946 but is still held relevant. To decide whether anything can be considered security or not, we need to look at four important factors, which are listed below:  

  • There must be an investment of money
  • It must be invested in a common enterprise
  • There must be a reasonable expectation of profit
  • The profit must have been derived from the efforts of others

Ultimately, it was held that if these cryptocurrencies are offered to institutional investors, they will be treated as securities, but if they are listed on exchanges for retail investors, they are not. 

A clear distinction has been made by the courts and it has come as a boon for crypto exchanges and startups.

Singapore

When we talk about Singapore, things are at a more advanced stage and are more refined. Here, all the cryptocurrency regulation is handled by one organisation – MAS, the Monetary Authority of Singapore. All the applicants need to go through a licencing process, where their backgrounds, history, reliability factor, business governance structure, examination of the board of directors, etc. are done. Only after ensuring that the organisation is capable enough of handling the money laundering risks is that licence granted to them. With this, Singapore aims to create a safe global hub for cryptocurrency users. 

Japan

The cryptocurrency in Japan is primarily regulated by three authorities named below:

  • Japanese Financial Service Agency
  • Japan Virtual Currency Exchange Association
  • Japan Security Token Offering Association

There is a Payment Services Act of 2009 that makes it mandatory for crypto exchanges to register with the Financial Services Agency. The JVCEA is responsible for establishing regulations and guidelines governing crypto exchange service providers, whereas the JSTOA oversees token offerings and other crowdfunding activities. 

Satoshi Nakamoto being a Japanese name, the Japanese government has for sure taken on its equitable portion of duties.

What India can learn from others

As per Crypto News Land, which is one of the leading crypto news websites, India ranks second globally in crypto transaction volume, which is an example of how we are spearheading the world in this space. So the question is, do we really want to stay back when it comes to regulations? There are two sides of a coin, and we must look at both sides and then count our successes. 

In the recent G-20 Summit, which was organised in New Delhi, the need for crypto regulation was very much underlined and emphasised by the other countries and a conclusion was reached amongst them, where they decided that an international framework is needed for them to implement laws domestically. 

However, India should not delay in formulating fundamental guidelines and establishing a regulatory authority. The clock is ticking, and proactive measures are essential!

Legal status of cryptocurrency in India

The current legal status of cryptocurrency in Inypdia is as follows:

  • Legal tender: In India, cryptocurrencies such as Bitcoin are not considered legal tender. In a recent notification, the RBI clarified that cryptocurrencies or other virtual currencies are not legal because they don’t have any backing or any authority governing them.
  • RBI’s Circular (2018): The RBI in April, 2018 issued a circular prohibiting banks from lending services to people who are engaged in cryptocurrency business. This circular caused a disruption among people because it made it difficult for the cryptocurrency holders to covert their cryptocurrency.
  • Supreme Court’s judgement: The SC quashed the RBI’s Circular of 2018, which prohibited banks from lending services to crypto business holders in March 2020. The SC considered this unconstitutional and provided relief to the people who are engaged in crypto business.
  • Lack of rules and regulations: Cryptocurrency is not illegal in India but these currencies do not have any set of rules and regulations that govern their use and trade. This leads to unreliability among investors and business owners in the cryptocurrency world.
  • Taxation and reporting: Cryptocurrencies are subject to tax. The tax authorities of India have rolled out guidelines regarding the taxation of crypto. Because profits from cryptocurrency trading are subject to income tax, traders must maintain proper records of each exchange and transaction. 

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

Some salient features of this Bill are:

  • Its goals are to establish a strong legal framework that will govern the trading of cryptocurrencies and lay the groundwork for the Reserve Bank of India (RBI) to introduce an official digital currency.
  • This Bill imposes a ban on all private cryptocurrencies. Private cryptocurrencies are the ones that are mined by individuals and are not issued by the government. Bitcoin and Ethereum are examples of private cryptocurrencies.
  • The Bill will also set a framework for issuing digital currency in India which will be known as the digital rupee. This digital currency would be issued and monitored by the RBI.
  • The Bill has a provision for formulation of Digital Currency Board of India, which would be responsible for the management and regulation of all the digital currency.
  • The Bill has penalties for those who contravene the provisions of the Act.
  • The Bill also encourages the use of blockchain technology.

Conclusion

India can draw inspiration from these examples and tailor its crypto regulations accordingly. Clear, well defined rules can provide a stable foundation for the cryptocurrency industry to flourish while simultaneously safeguarding against illicit activities. It is imperative that the government maintain a watchful eye on transactions, as money laundering is a grave offence that can have far-reaching consequences. 

It has the potential to harness the benefits of the cryptocurrency revolution while effectively guarding against potential misuse. By studying the experiences of other nations and crafting a balanced regulatory framework, India can position itself as a hub for crypto innovation and a responsible player in the global crypto arena. As the world of finance continues to evolve, India has the opportunity to lead the way in this exciting and transformative industry. 

References

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