RBI and cryptocurrency : the story so far

September 14, 2020

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This article is written by Khyati Basant, pursuing BBA LLB from Symbiosis Law School, NOIDA. This article contains a description on regulations of cryptocurrency in India and the laws that govern them.

Table of Contents

Introduction

The battle is finally over. For nearly two years the Indian courts have been fighting to lift the ban of cryptocurrency in India. It is remarkable that on March 4, 2020, The Supreme Court of India lifted the ban on cryptocurrency including the Bitcoins. The RBI’s circular of April 2018 has been declared unconstitutional. The RBI’s proposed ban has become a rallying point for multiple stakeholders in the crypto industry to come together and push for stronger regulation rather than shunning cryptocurrency for all its potential. The positive decision has taken the nation into a state of utter exuberance and hope for what is to come in the future for us. With this upliftment of the ban, India has an opportunity to draw on India’s huge population of over 300 million unbanked people. While India’s counterparts around the globe are moving into blockchain technology, we risked giving up the potential promised by co-opting crypto.

The country is a sleeping giant with a population going up one billion. India has the power to change the global economy, all thanks to a positive decision by the Supreme court. The CEO of Pundi X, Zac Cheah said that India’s Apex Court removing the crypto ban just confirms the reality that cryptography and blockchain are emerging innovations. India is Pundi X’s second-largest blockchain wallet customer. Allowing cryptocurrency transfers will increase our customer base and put rising volumes of customers into the digital payments fold.

What is cryptocurrency?

A cryptocurrency is a digital or virtual currency protected by cryptography which makes counterfeiting or double-spending almost impossible. Most cryptocurrencies are decentralized, blockchain-based networks — a public database operated by a dispersed computing network. One distinguishing characteristic of cryptocurrencies is that they are usually not distributed by any central agency, rendering them potentially resistant to intervention or abuse by the government.

The term “crypto-currency” derives from the encryption methods used to protect the network. Cryptocurrencies attract scrutiny for a variety of reasons including their use for illicit activity, exchange rate fluctuations, and network flows that underlie them. They were also praised for their portability, accountability and divisibility. Cryptocurrencies are almost always intended to be free of government influence and regulation, but this core feature of the technology has come under fire as they have become more common. The currencies modelled after bitcoin are called altcoins collectively and have often attempted to present themselves as modified or improved versions of bitcoin.

Types of cryptocurrency

The first cryptocurrency based on blockchain was Bitcoin, which remains the most popular and valuable. Bitcoin was introduced in 2009 by a person or collective known as “Satoshi Nakamoto.” As of November 2019, more than 18 million bitcoins were in circulation with a cumulative market cap of about $146 billion. Bitcoin is one of the first digital currencies to use peer-to-peer technology to enable online transfers. Some of Bitcoin’s success spawned competing cryptocurrencies, known as “altcoins,” including Litecoin, Peercoin, and Namecoin as well as Ethereum, Cardano, and EOS. Today the aggregate value of all existing cryptocurrencies is around $214 billion — Bitcoin currently accounts for more than 68 per cent of the total value.

The top cryptocurrencies

Ether, introduced in 2015, is presently the second-biggest digital currency by market value behind bitcoin, but it lags by a substantial margin behind the dominant cryptocurrency. Effective January 2020, the market value of ether is around 1/10 the size of bitcoins. Ethereum is focused on realistic smart contracts for the digitalisation of transactions used by several companies. Ethereum is a decentralized computing framework that enables the construction and running of Smart Contracts and Decentralized Applications (DApps) without any third party interruption, theft, power or intervention. On Ethereum, the programs run on the platform-specific cryptographic token, ether.
Launched in 2012, Ripple helps banks to real-time settle cross-border trades for end-to-end transparency and lower costs. With its new business model, Ripple has seen success; it remains one of the most appealing digital currencies for mainstream financial institutions finding ways to revolutionize cross-border payments. This is also the world’s third-largest cryptocurrency by overall market value at this time. Ripple had a market cap of $9.2 billion as of January 8, 2020, and a stock of $0.21 per token.
Litecoin, launched in 2011, was among the first cryptocurrencies to follow in bitcoin’s footsteps and was often referred to as “silver to bitcoin’s gold.” It was created by MIT graduate Charlie Lee and former Google engineer. Litecoin is based on a decentralized open-source payment network that is not governed by any central authority and uses “scrypt” as proof of operation, which can be decoded using consumer-grade CPUs. As of January 8, 2020, Litecoin had a $3.0 billion market cap and a $46.92 per-token valuation making it the world’s sixth-largest cryptocurrency.

New cryptocurrency in India

Despite the national shutdown and coronavirus pandemic, the Indian crypto-currency industry has expanded rapidly. Two new cryptocurrency exchange sites are being launched in India while current crypto companies are awaiting clarity from India’s Reserve Bank of India (RBI) central bank. India’s crypto market shows strong growth with many crypto exchanges announcing a ten times rise in trading volumes and a large increase in new users.

European cryptocurrency exchange aggregator Coinswitch releases an Indian mobile crypto-trading app on June 1. Users merely input the INR number and the cryptocurrency they wish to purchase to use this shared liquidity and the app will include a list of discounts at different exchanges that “auto-refreshes every 30 seconds. By aggregating liquidity across all Indian exchanges, Coinswitch Kuber will ensure the best rate. The exchanges include Binance, Huobi, Hitbtc, and Kucoin.
The Bitpolo based in Bangalore confirmed it is now online. The exchange makes immediate INR deposits, saying that withdrawals are in seconds. Crypto markets appear to deliver the greater payoff, and they plan to introduce convenient and robust technology to Indian traders and holders.

Timeline of RBI and Cryptocurrency

In the last few years, India with a population that is over 1 billion strong has been experiencing something of an economic renaissance. This was the degree to which the world developed that the International Monetary Fund called it the fastest-growing developing economy. Over 40 per cent of the country’s population has access to telecommunications and Internet services. A country steeped in mystery, history and culture, when it comes to technological advancement, it’s not one to fall behind either. Bitcoin and other cryptocurrencies traded throughout the nation for many years now.

The cryptocurrencies story began in 2008 when a paper titled “Bitcoin: A Peer to Peer Electronic Cash System” was published by the name of Satoshi Nakamoto by a single or group of pseudonymous developers. The real network only took some time to launch with the first transfers that took place in January 2009. A year later the first actual sale of an item using Bitcoin occurred with a user swapping 10,000 Bitcoin for two pizzas in 2010, which for the first time attached a cash value to the cryptocurrency.
By 2011, other cryptocurrencies started to emerge, all making their debut with Litecoin, Namecoin and Swiftcoin. Meanwhile, the cryptocurrency Bitcoin that started it all began to be criticized when reports arose that it was being used on the so-called “dark web,” particularly on sites like Silk Road as a way of paying for felonious transactions. Over the next five years, cryptocurrencies slowly gained momentum with an increased number of transactions and Bitcoin’s valuation, the most common cryptocurrency soared from around $5 in early 2012 to about $1000 by the end of 2017.
Riding on the back of this popularity surge, multiple cryptocurrency exchanges started operating in India between 2012 and 2017, offering much-needed depth and liquidity to the cryptocurrency sector in India. Those included common exchange platforms like Zebpay, Coinsecure, Unocoin, Koinex, Bitxoxo and Pocket Bits.
India’s RBI released a press release warning the public against virtual currency mining, like Bitcoin mining back in 2013. With the price of shooting up cryptocurrency and their increasing acceptance and usage by people outside the conventional cults, authorities around the world started to consider this emerging development. RBI’s First Press Release warning consumers about Virtual Currency Risks were:

No central bank funds Digital currencies.
Value is a question of speculation, not of an asset or a good.
RBI has not permitted trading or the use of virtual currencies.
RBI is in the process of reviewing the proposed regulatory structure for cryptocurrencies in India and will give further directions based on their review.

Prime Minister Narendra Modi announced a demonetization program initiated on November 8, 2016. The government’s decision to demonetize about 86 per cent of the country’s paper currency sent shockwaves across India’s subcontinent. People with substantial cash reserves wanted a new way to keep their capital without significant tax pressures and sundry policy oversight. Buying massive orders of Bitcoin or other cryptocurrencies became standard practice for others and then trading them at a later date. This meant that they circumvented what should have been large taxation had they wanted to transfer their money into the financial sector.
Transaction volumes and acceptance of cryptocurrencies in India picked up in earnest just after the demonetisation of high-value currency notes in November 2016, with the government focus on digital payments contributing to alternatives to mainstream online banking such as cryptocurrencies pushing their way into public consciousness. Indian cryptocurrency exchanges began to accumulate customers at a much higher rate than pushed up demand on all Indian exchanges for cryptocurrency transactions.
The 2016 demonetization policy may have sparked the adoption of cryptocurrencies among a large portion of the population but soon realities started to surface that stifled the country’s market development. Despite its large population, India contributes just 2 per cent of the overall global blockchain industry capitalising. The small role that such a large economy plays can be attributed to high cryptocurrency prices & government crackdown led by the RBI.
In November 2017, under the chairmanship of Shri Subhash Chandra Garg, Director, Department of Economic Affairs, Ministry of Finance and composed of Shri Ajay Prakash Sawhney (Director, Ministry of Electronics and Information Technology), Shri Ajay Tyagi (Chairman, Securities and Exchange Board of India) and Shri B.P, the Government of India formed a high-level Inter-Ministerial Committee. The Committee’s task was to research different problems relating to virtual currencies and to recommend concrete steps that could be taken in conjunction with them. In July 2019, this Committee submitted its opinion proposing a ban on private cryptography.
Both the RBI and the Ministry of Finance released press releases in December 2017 advising the general public about the hazards and threats associated with cryptocurrencies, with the Ministry of Finance Press Release noting that cryptocurrencies are like Ponzi schemes, and also announcing that they are not currencies or coins. It should be noted here that until the end of March 2018, the RBI and the Ministry of Finance had released numerous press releases on cryptocurrencies warning people against their threats but none of them either took legal action or gave enforceable guidance against cryptocurrencies.
On 1 February 2018: In the Union Budget Statement, Finance Minister Arun Jaitley said that cryptocurrencies are not a legal tender and can not be used as part of the payment systems. If anyone does, the government will come down harshly and cryptocurrency won’t be permitted because they can be used for illegal operation.
The RBI directed banks to stop servicing cryptocurrency exchanges before there was a clear policy in effect. The circular dated 6 April 2018, in which the RBI prohibited commercial and cooperative banks, payment institutions, small financial institutions, NBFCs and payment system providers from not only trading with virtual currencies themselves but also ordering them to avoid offering services to all organizations dealing with virtual currencies. With immediate effect, all licensed agencies have been barred from managing or delivering services to any person or company dealing with or settling virtual currencies.
The circular result was that cryptocurrency exchanges, which relied on conventional banking networks to send and receive money to and from their customers, we’re unable to access any financial services in India. It effectively crippled their business activities as turning cash into cryptocurrency was an integral part of their activities and vice versa. And pure cryptocurrency exchanges that did not trade with fiat currency were unable to carry out their daily activities without access to banking facilities, such as paying for office rooms, workers wages, storage space, distributor payments, etc.
RBI said the move was appropriate at the time to curb “ring-fencing” of the financial system in the region. It has also claimed that it is not appropriate to view Bitcoin and other cryptocurrencies as currency because they are not made of metal or reside in intangible shape, nor were they stamped by the government. The central bank ‘s 2018 notice sent fear to many local startups and firms providing cryptocurrency trading services.
The Indian government has been debating “Banning the Cryptocurrency and Controlling the Official Digital Currency Bill 2019.” The bill was introduced by the Interministerial Committee (IMC), to research all facets of cryptocurrencies and make country recommendations. Former finance secretary Subhash Chandra Garg headed the committee. The Indian crypto group claims the bill is flawed and has been lobbying for the IMC guidelines to be re-evaluated by the Government. Since then, Garg has left his government job.
In the face of the double impact of decreased trading rates and lack of access banking facilities, the crypto-currency exchanges themselves find it difficult to maintain operations. In the face of such an existential danger, members of the Internet and Mobile Association of India (IMAI) submitted a written petition to the Supreme Court on 15 May 2018 entitled The Internet and Mobile Association of India v. Reserve Bank of India.
On 4 March 2020, the Supreme Court lifted the ban imposed on 6 April 2018 by the RBI in the case entitled “Internet and Mobile Association of India (IAMAI) Vs Reserve Bank of India which prohibited its regulated entities, such as banks, from trading in or facilitating banking transactions in virtual currency (VC). Subsequently, the RBI published IAMAI ‘s circular request, shareholders/founders of crypto-asset trading platforms, and real crypto-asset traders who were the petitioners submitted before the SC. A three-judge Bench of the Supreme Court of India drafted a Reserve Bank of India curricular,2018 which sought to prohibit banks and institutions from trading in ‘virtual currencies’ — often referred to as cryptocurrencies, such as Bitcoin — and to provide services to those engaged in trading in such currencies. The court order comes seven months after an inter-ministerial committee has proposed banning cryptocurrencies, recommending instead to introduce an official digital currency in the region.
On many counts, they contested the RBI circular. Through that circular, the RBI had prohibited banks from extending a range of services to facilitate the handling of cryptocurrencies by individuals and entities. The list of such services included ‘keeping accounts, registering, trading, settling, clearing, lending against virtual tokens, accepting them as collateral, opening exchange accounts and transferring/receiving money in accounts related to the purchase/sale of VCs.
Justices Rohinton Nariman, Aniruddha Bose and V. Ramasubramanian set aside the 2018 RBI circular, saying, “The impugned rule can not be considered to be proportionate.” Their rationale was based on the fact that the RBI did not notice that virtual currency trading practices did adversely affect the institutions it controlled. This was not banned in the region, even as virtual currencies were not. “But the trade-in VCs and the working of VC exchanges are sent by the impugned circular to comatose by disconnecting their lifeline namely, the link with the normal banking system,” the order said.

Laws relevant for cryptocurrency

Guidance should be taken from other jurisdictions that have already had extensive discussions and workshops on this subject while evaluating the legal approach on cryptocurrency. The U.S. The Uniform Law Commission has drafted legislation on the issue, the ‘Uniform Regulation of Virtual Currency Businesses Act’ (‘ULC Model Law’), after reviewing the opinions of policymakers, members of the public, non-profit groups and leading leaders of the industry. Crypto-assets are a common phenomenon rather than a regional authority, thus, making global precedents easy to apply to the Indian context.

The Prevention of Money Laundering Act (PMLA) is the definitive Indian law on KYC/AML(Know your Customer/ Application lifecycle management). Crypto-asset undertakings may be brought under the PMLA as any entity that is a ‘bank company, financial institution, intermediary or a person carrying on a designated business or profession.’ In any event, the RBI has the power to prescribe enhanced or simplified measures under the Prevention of Money Laundering (Maintenance of Records) Rules to verify the identity of the client. Consideration of the type of customer, corporate arrangement, complexity and importance of the transactions concerning the potential risk of money laundering and terrorist funding.

The RBI will adopt a risk-based strategy and mitigate money laundering issues while preventing a full ban on funding these businesses. This will require accountable and reputable businesses to work in a controlled manner. The RBI Circular might not be appropriate for that approach. A new regulatory system will require responsibilities for crypto-asset companies, such as financial adequacy, audits and monitoring. A proposed licensing system will help to better safeguard customer safety.

Payment and Settlement System Act, 2007 – PSS Act Sections 10, 18, and 38 grant the RBI the authority to create rules, directives, and guidance. That is, for example, the control the RBI uses to enforce the Master Directive on Prepaid Payment Instruments. By this legislation, cryptocurrency trading sites can also be put under a licensing regime under the PSS Act. The guidelines released by the Department of Banking Regulation (DBR), RBI, on Know Your Customer (KYC)/Anti-Money Laundering (AML)/Combating Terrorism Financing (CFT) shall extend mutatis mutandis to all agencies that issue PPIs and their employees. This solution will require suitable exemptions in the RBI Circular, as RBI-regulated organizations are currently totally barred from dealing with, or encouraging, virtual currency trading under the circular.
Non-Banking Finance Companies (NBFC) – It puts crypto-asset market operation into a well-established regulatory framework, which requires licenses, financial adequacy, KYC / AML laws, audits, reports and other consumer-focused criteria. The business of an NBFC is defined in Section 45-I of the RBI Act. An NBFC is defined as a variety of categories of ‘financial institutions’ excluding undertakings of mainly buying or distributing products or delivering services and businesses collecting deposits as their main business. This provision grants the RBI the authority to designate any class of entities as NFBCs, with the prior approval of the Central Government. The RBI and the Central Government can, therefore, consider NBFCs to be notifying entities carrying on ‘crypto-asset business activities’.
Consumer Protection Act, 2019 – Under Section 30A of the Consumer Protection Act, the National Consumer Disputes Redressal Commission has the authority to make regulations “to provide for all matters for which coverage is required or expedient to give effect to the provisions of this Act.” The Consumer Protection Act 2019 protects consumers from ‘unfair trade practices,’ ‘deficiencies’ in facilities and ‘defects’ in goods. The word ‘unfair marketing practices’ requires a false or misleading advertisement. Hence, the National Commission is open to developing laws (e.g., establishing a regulatory regime) taking into account the crypto-asset industry’s specific consumer security issues. We suggest this path should also be considered. As a result, customers have redress under the Consumer Protection Act, 2019 where every crypto-asset company renders misrepresentations to customers or offers defective services.
Foreign Exchange Management Act,1999 – FEMA notes that ‘international currency’ is any currency other than Indian currency. The currency of India is limited to any currency expressed in Indian rupees. Consequently, if any crypto-asset can be used to “build a financial risk,” it will amount to “international currency.” The RBI may control the drawing of these FEMA crypto-assets such that only ‘registered persons’ can trade in foreign currency. This would have the benefit of having an increasingly well-established regulatory framework for those concerned with these forms of crypto-assets since they will be subject to all the protections that apply to approved persons. Since certain crypto-assets are called ‘goods’ under FEMA, the regulatory consequences under FEMA (e.g., export compliance) will flow accordingly. However, the RBI did not explain the classification of crypto-assets under FEMA, which confused the issue. The RBI can determine to amend the rules and guidelines on the sale and import of products to clarify their operation concerning crypto-assets.
Information Technology Act, 2000 – Any providers of virtual currencies get information and details about their customers. Platforms that allow credit card transactions in virtual currency must also recognize these laws when processing information about credit cards. These data must be maintained and stored with strict levels of confidentiality and security. Otherwise, the Virtual Currency provider can violate data protection and security laws. The Information Technology Act reads with the Rules on Information Technology, 2011 requires that all those responsible for using data follow strict rules. Such laws require the fact and intent for which the information is gathered, the creation and dissemination of privacy policy and the safeguarding of data. It establishes relatively strict cybersecurity standards for every organizational entity managing confidential personal data, and the Central Government that, if it seems appropriate, recommend clear additional steps for crypto-asset business activities. A new Data Privacy Bill is set to be adopted, and when enacted, the same safety requirements will also be recommended under this Law.
Credit Information Companies Regulation Act – There is some suggestion that due to its tremendous growth, the Credit Information Companies Regulation (CICRA) Act, which became law in India in 2005, is likely to be extended to cryptocurrencies. Since cryptocurrency networks are ubiquitous for many activities such as processing, distributing, redeeming, trading, and exchanging cryptocurrency values, the specifications of the CICRA Act may be implemented. According to this Act, Indian individuals’ credit details must be obtained in compliance with such legislation as set out in this Act. In the case of illegal data theft, organizations which collect financial information may be held liable. Offshore financial transfers are very common in today’s cyberspace, so taking into account the vast amount of persons involved with them, these activities are useful for the security of the individual’s concerned personal data.
Prize chits and Chits Fund Act – Both the Prize Chits Act and the Chit Funds Act,1982 refer to the idea of ‘monies’/’money’ and ‘cash’ in the terms ‘prize chit,’ ‘chit’ and ‘capital exchange scheme’ in their meanings. Since crypto-assets are not technically ‘money’ under Indian law, these meanings must be revised to include the word ‘valuable item’ (as used in Section 2(c) of the Prize Chits Act, so that, among other valuable items, the aims of these Acts can be applied to the crypto-asset schemes.
Taxation laws – In the virtual currency business taxation legislation ranges from country to country. Many countries place taxes on income produced by virtual currency transactions and some others have only proposed taxation legislation. In India, where RBI notifies any such law, any trade therein would be subject to the Foreign Exchange Management (FEMA) Act, 1999. Crypto-asset-related transaction taxes would fall generally into two headings: Goods and Services Tax (GST), and Income Tax. The Crypto like bitcoins is called a capital asset if bought for profit. Any income resulting from a bitcoin trade shall be treated as a capital gain.

However, if the trades in bitcoins are large and regular, the taxpayer may be considered to be dealing in bitcoins, and the revenue would be taxed as corporate income as per the Income Tax (IT) Act, 1961. The complexity of deciding the locations of the users that restrict the application of taxation. It is also difficult to control the VC trans-behaviour and this can hinder the taxation implementation. The primary question under the Income Tax Act is that crypto-asset revenue is classified as ‘capital gains’ or ‘financial or profession earnings and losses.’ Once again, we suggest that this must be determined, rather than take a sweeping view, keeping in mind the reality and circumstances of each case, as individuals and companies will deal with crypto-assets in several ways, often as financial assets, and sometimes in the course of the market.

Benefits of cryptocurrency

Job opportunities – With many startups re-entering the market, competition for top talent in the area of blockchain technology and cryptocurrencies may increase. From blockchain developers to programmers, production engineers and project managers, there will be many suitors for top talent in the field of blockchain. Industry consultants, advertisers, content developers and group administrators among others will now have a major role to play in the national embrace of cryptocurrencies that will now be sought by many startups. The RBI will now be encouraged to help control the world of opportunities that cryptocurrencies generate. The stance made clear by the Supreme Court should that the RBI rethink its restrictive approach to cryptography and then come up with more balanced and well-thought-out rules to protect the public interest and that of other ecosystem stakeholders. The RBI can take a leaf out of its global peers, as many central banks have launched their cryptocurrencies in other countries. Nonetheless, the expectation here is that the latest measures will press for more acceptance and tighter enforcement.
Immunity from theft – At present, the financial system, and the resultant economy, is not immune to robberies or fraud. As we know the planet is becoming more vulnerable to complex leaks and hacks. With several ransomware attacks, data leaks from top-notch banks and credit card companies, news headlines have been abuzz in the last few years. India was going digital at the time, the base of which was built on Aadhaar authentication, Jan Dhan accounts etc. However, the same does give rise to flaws in technology, with criminals planning to break the authentication mechanism of Aadhaar or Jan-Dhan accounts. In making cryptocurrencies all verified transactions must be deposited in a public ledger. To ensure the legitimacy of record keeping, all identities of the coin owners are encrypted. You own it because the currency is decentralized. It has no power over either the government or bank.
Accessibility – Blockchain is the reason why crypto-currency is worth something. Ease of use is the reason why there is a high demand for crypto-currency. All you need is a mobile screen, an internet connection, and you easily make payments and money transfers to your accounts. There are more than two billion people with access to the Internet who cannot use conventional forms of trade. These people are clued-in to the crypto-currency market.
Global economies – Crypto-currency presents Indians with a golden opportunity to be on par with the global economy, particularly the present burgeoning millennial generation. A cryptocurrencies-led economy is a decentralised economy. There is plenty of time and money to secure third-party approvals, and all the time and energy spent in negotiations will no longer be needed when buying, for example, a house etc. Considering some of the trailblazing and epoch-making trends of the past, including the emergence of the internet, the technological economy, the creation of Silicon Valley etc., India has just sought to balance the pace of global innovations.

Criticism of cryptocurrency

The semi-anonymous aspect of cryptocurrency transfers makes them ideal for a variety of illegal practices, such as money laundering and tax evasion. Crypto-currency supporters, though, also strongly respect their anonymity, citing privacy advantages such as protection for whistleblowers or dissidents living under oppressive regimes. Some cryptocurrencies are more intimate.

The cryptocurrency form is not exempt from any financial and security issues. I reviewed many studies and cryptocurrency networks and even explored several markets for selling cryptocurrency to investigate the difficulties and problems that occur in this interactive phenomena.

Money laundering – Money laundering is one danger that is highly likely to increase with the usage of VC especially with platforms that allow users to exchange virtual currency with real money. In realistic situations, the police detained a group of 14 people in Korea in 2008 for stealing $38 million from virtual currency transactions. The group translated the $38 million that gold farming produces from Korea into a paper firm in China as purchasing payments.
Black market – Perhaps one of the biggest drawbacks and security issues affecting blockchain is its potential to promote criminal activity. There are several anonymous trades on the grey and black markets denominated in Bitcoin and other cryptocurrencies. For example, Bitcoin was used by the notorious “dark web” platform Silk Road, promoting illegal drug sales and other criminal acts before being shut down in 2014. Cryptocurrencies are now highly common money-laundering devices. They unlawfully acquired money by funnelling through a “safe” conduit that conceals the origins. For examples, when a gamer wants to leave a game, he/she may want to sell the virtual currency that he/she owns by selling it in the game forums. The way payments are collected is dangerous because many fraudulent users can not complete the payment, or challenge after payment. They will then get their money back plus the virtual currency.
Tax evasion – Since national governments do not oversee cryptocurrencies, cryptocurrencies typically remain outside of their direct jurisdiction, attracting tax evaders naturally. In Bitcoin and other coins, several small companies pay workers. They do so to reduce payroll tax responsibility and to help avoid income tax obligation for their workers. Even they embrace tokens from online traders to attempt to escape selling and income tax responsibility.
No refunds – The notion of such an arbitrator violates the decentralizing spirit at the heart of the new theory of cryptocurrencies. What this means is that if you’re robbed in a crypto-currency deal you don’t have someone to turn to. Although cryptocurrency miners play a role in cryptocurrency transactions as quasi-intermediaries, they are not responsible for arbitrating conflicts between the transacting parties. An example is to pay upfront for an item that you never get. Large payment providers such as MasterCard, Visa and PayPal also move in to help solve conflicts between buyers and sellers. Their method of paying for, or refunding, is intended to avoid vendor fraud. Although some newer cryptocurrencies seek to resolve the surrounding chargebacks or refunds problem, the solutions remain incomplete and still unproven.
Data loss – Considering a virtually uncrackable source code, impenetrable authentication protocols (keys) and sufficient security protections (which Mt. Gox lacked), keeping money in the cloud or a physical data storage unit is better than in a backpack or back pocket. Also, those who store their data in a single cloud provider will risk failure if the server is physically compromised or removed from the internet. The early advocates of crypto-currency believed that, if properly protected, digital alternate currencies agreed to help a definitive step away from traditional cash, which they find to be unreliable and potentially dangerous. All this means cryptocurrency consumers are taking reasonable and appropriate measures to avoid data loss. For example, if their computer is lost or robbed, the consumers who store their private keys on single physical storage devices will incur a permanent financial loss.
High price and not exchangeable – The most popular cryptocurrencies, those with the highest dollar market capitalisation, have dedicated online exchanges allowing direct exchange for fiat currency. The remaining cryptocurrencies have no dedicated online exchanges. Many cryptocurrencies have few extraordinary units and are concentrated in the hands of a handful of individuals (often currency developers and close associates). For fiat currencies, they are therefore not explicitly exchangeable. Instead, before the fiat currency conversion, consumers could turn them into more widely used cryptocurrencies, including Bitcoin. These holders manage currency stocks efficiently, making them vulnerable to fluctuations in wild valuation and simple manipulation. This suppresses competition for some less-used cryptocurrencies, and thus the valuation of others.

Global perspective on cryptocurrency

Trading crypto-currency for cash is prohibited and prohibited in some countries where it is either permitted or not yet regulated in other countries. If 2017 was the year of the Initial Coin Offerings (ICO), it seems that 2018 will become the year of regulatory reckoning. Things have also begun to heat up as countries around the world are dealing with cryptocurrencies and seeking to decide how they should be handled. Some are gracious, some are reserved.

China

In 2017, China suspended cryptocurrency trading on Chinese exchanges, making ICO fundraising illegal, curving consumer demand, and triggering a strong overall decline in cryptocurrency markets. China is renowned for some of the largest Bitcoin miners in the country. Many Chinese citizens then turned to exchange cryptocurrencies using international exchanges. It’s unclear how much of an impact subsequent Chinese cryptocurrency bans would have, although it might likely help to fan market scepticism. Now, news from the People’s Bank of China (PBC) is circulating that China can block all links to both domestic and international cryptocurrency exchanges and ICO websites. The People’s Republic of China claims to be the big economies’ most strict blockchain authority concerning cryptocurrencies. This is a strange fact given that Chinese bitcoin miners made up more than 50 per cent of the world’s mining population in 2017 and that the adoption of cryptocurrency in China increased at a rate higher than any other country. Despite China’s tough position against private cryptocurrency trade, the PBC has been carrying out work on releasing its state-run cryptocurrency.

The United States of America

On 6 February 2018, the Stock Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) took the stance that “we owe it to this young generation to value their passion for virtual currencies, with a reflective and reasonable approach and not a dismissive one.” The US has adopted an approach to promote blockchain and cryptocurrency innovation and development while shielding investors from elevated risks and fraud. In February 2018, the Arizona Senate passed a bill allowing residents to pay Bitcoin income taxes and other state-recognized cryptocurrencies. Bitcoin is classified as the capital by the Internal Revenue Service ( IRS), which subjects it to certain taxable trade activities. Cryptocurrency trading to fiat, bitcoin trading to bitcoin and cryptocurrency investment are both taxable activities that can mildly stress cryptocurrency trading.

Japan

Japan’s Financial Processing Act became the first nationwide crypto-currency exchange registry system. Hackers robbed NEM worth $534 million from Coincheck, one of Japan’s 36 cryptocurrency exchanges, in January 2018. Japanese Yen accounts for more than 36 per cent of the exchange value of Bitcoin, more than any other currency. At just over 31 per cent, USD is second. Japan’s strong demand for cryptocurrency is driven by a well-regulated legal framework that regulates the business in a manner that builds consumer trust and familiarizes itself with stock markets as it applies to cryptocurrency. Coincheck was in the process of getting official recognition from the Financial Services Agency of Japan (FSA). Coincheck has been warned by the FSA that it had inadequate information security that needed drastic upgrades. Coincheck confirmed it would refund the 260,000 impacted customers for $430 million of the missing funds. To plug legal loopholes, the regulatory body will work to create fair trade rules and self-regulation. The body will also negotiate regulation and regulations on cryptocurrencies with the government, and develop laws on insider trade, ads and defence. Members of the regulatory body who fail to follow the policies will face sanctions.

Thailand

The Central Bank of Thailand (BOT) barred Thailand banks from five cryptocurrency-related activities: investing or dealing in cryptocurrency, selling cryptocurrencies, establishing cryptocurrency exchange sites, enabling clients to use credit cards to buy cryptocurrencies, and advising clients on investing and trading in cryptocurrencies. Thailand plans to explain its view on how digital currencies will be governed. The government seeks to protect against illegal activity and deceitful transactions while retaining the advantages of using blockchain technologies in place. Already in talks with Cryptocurrency project OmiseGo (OMG), the Thai government is developing a national digital identity network that offers privacy and security against fraud for customers. OMG will also help to ensure anonymity online, and provide a simple, easy and fast way to make payments.

Conclusion

The world of Cryptocurrencies provides a lot of study opportunities and a lot of studies have to be conducted to have research material. The connection between the current financial laws and the regulatory status of adoption of the cryptocurrency network needs to be more examined from various viewpoints. Additionally, the degree of adoption and approval of broad samples still requires further attention and further study. Trust and honesty are critical considerations that need to be more explored regarding the usage and exchange of the Cryptocurrency types. The further scope of work can be applied to the production of use cases for cryptocurrency applications across growing sectors in India. Cryptocurrency provides a modern, secure and enticing form of payment systems that can raise sales for businesses and operators. It also provides alternative payment methods, apart from real money, that allows users to easily do financial activities such as purchasing, selling, transferring, and exchanging.

Though cryptocurrency platforms open up several avenues for digital financial transactions and have various frameworks and methods for a modern type of currency, they are not managed and supervised as they deserve. The lack of regulation in cryptocurrency systems is seen as the main concern. From my review of the latest cryptocurrency literature and the research undertaken, almost a simple image of the scale of cryptocurrency use has been drawn. While the study was performed with a fairly limited sample, the findings gave me a tentative understanding of cryptocurrency use, development, user trust and future expectations. Consumers didn’t know the full picture of using cryptocurrencies. In reality, many types of cryptocurrency do not yet warrant too much trust.

There are numerous questions, problems and issues in other crypto-currency systems and they are specifically illustrated in the portions of this paper above. Until cryptocurrency is properly regulated and controlled, users must take extra precautions to use that virtual money. The future of the Blockchain paradigm is bright, providing further possibilities for the e-business and e-payment industries to make meaningful improvements and progresses. Crypto-currency does not stop evolving with the fast growth and development of technology.