Crypto assets
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This article is written by Khyati Basant, from Symbiosis Law School, Noida. This article consists of a description of the regulatory approaches for cryptocurrency or crypto assets in India.


India is one of the few countries in the world that has no idea what to do with cryptocurrencies. There is specifically no definition for crypto assets or cryptocurrency in India. While some countries like China have outlawed cryptocurrencies entirely, many others like Japan, Thailand, and Malta are becoming the launch point for modern blockchain and cryptocurrency startups. Owing to part ignorance and part lack of prioritization, the Indian government has never given the attention it deserves to this emerging investment market. Under the existing regulatory framework, the country’s central bank, the Reserve Bank of India (RBI) and India’s Securities and Exchange Board (SEBI) have some authority over the country’s cryptocurrency regulations. One of the big problems when it comes to regulating cryptocurrencies is that it cuts across jurisdictional limits. The current regulatory loophole leads to blockchain fraud, brain drain, and the possibility of being left behind in a transition that is ahead of other nations. RBI’s knee-jerk banking ban on the country’s cryptocurrency-based companies has contributed to it hijacking the story and becoming the country’s de-facto cryptocurrency regulator. 

There is no specific definition of virtual currency, crypto-assets or crypto-currencies in India as the legislation currently stands. Directly on the topic of virtual currencies, the single rule is a circular (the Virtual Currency Circular) issued by India’s central bank, Reserve Bank of India (RBI), which prohibits the use of regulated banking and payment networks for virtual currency transactions and purchases. The VC Circular is currently on the constitutional challenge before the Indian Supreme Court by India’s Internet and Telephone Community in the case against the RBI. The Indian population demonstrated a strong interest in virtual currencies. Before a new regulatory restriction imposed in April 2018, traders in India were listed at around 5 million in 24 exchanges, with trading volumes of 1,500 bitcoins a day. But in April 2018, the central bank had tightened rules to discourage the use of virtual currency such as Bitcoins, prohibiting any associated services from banks and financial institutions.

According to the VC Circular, RBI and the Ministry of Finance released caution statements about the dangers associated with virtual currency, like money trafficking, customer safety, business fairness, cybersecurity and uncertainty. This shows that the key government bodies, namely the government and the RBI, have considerable reservations regarding the use and trade in virtual currencies in India so far. The Tax department has been saying that the crypto investors have been evading the taxes in the country. 

It is just the investor who is negatively affected by the new regulatory vacuum for crypto-assets. On the one hand, most consumers are not aware where they are in the eyes of law and therefore refuse to complain about fraudulent or unscrupulous activities even after they are revealed as such, for fear of backlashing. In the very event where they sign they don’t want to be charged. Knowing that regulation can help the business grow, most of them still shy away from the possibility of regulation under the misunderstanding that it would become burdensome in the digital or crypto-asset space.

The initial idea of cryptocurrency dates back to 1998 when Wei Dai first discussed the idea of digital money called ‘B-money,’ its popularity/emergence can be traced for all practical purposes since October 2008, when a presumed pseudonymous developer Satoshi Nakamoto published a nine-page paper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System.’ Ironically, while the cryptocurrency spectrum was limited to a comparatively closed community until about 2016, demand for cryptocurrencies has increased exponentially since the beginning of 2017. Notwithstanding their success, policymakers have been somewhat courageous about their consequences for financial stability.

Accordingly, different countries displayed inhibitions to varying degrees. India was no different. After an initial informal guidance period, on April 6, 2018, the Reserve Bank of India (RBI) released a circular banning all commercial banks from dealing with what RBI called “virtual currencies” (VCs). By comparison, regulators such as India’s Stock Exchange Board (‘SEBI’), i.e., the Indian capital market regulator, have continued to stay quiet on its stance on controlling crypto assets. More recently, India’s Supreme Court quashed the RBI circular in judgment on March 4, 2020. Much enthusiasm about this decision has been created among the VC community.

What are crypto assets

A crypto-asset is a digital asset that uses cryptography, peer-to-peer networking, and a public ledger to regulate the creation of new units, check transactions, and secure transactions without any middleman’s intervention. Crypto-assets promote industrial decentralization, eliminate intermediaries by using cryptography and peer-to-peer networking, and in effect reduce costs. If you make transfers, exchange data or use the internet of things (IoT), you usually need a crypto-asset to make it work. 

There are thousands of different forms of crypto assets or cryptocurrencies, as you might recognize them. You’ve already heard of a few – Bitcoin, Ripple, Litecoin and Ethereum have all recently been listed in the press. The first part of the term, ‘crypto,’ means ‘encrypted’ or ‘secret,’ which represents the security code used to monitor who owns what, and to make consumer payments. The second part of the term, ‘monetary,’ shows us why cryptocurrencies were first designed: an online currency form. There is no central bank or government to control the network or step in if something goes wrong. Some people find this attractive because they believe they have more leverage of their funds but there are significant risks. If your assets are robbed, no one is responsible for helping you get your money back, without banks or the central government covering you. However, while much of the literature on the topic considers all crypto-assets for legal research purposes similarly, there are over 1500 crypto-assets in existence, each with its special technological features. Bitcoin was structured mainly for capital conversion, some can reflect the issuer’s underlying properties thus representing securities, and others might also reflect a privilege to access a digital network.

The regulatory approaches of Switzerland and the United Kingdom which classify crypto-acquisitions that could be useful. Both jurisdictions recognised three types of crypto-assets:

  1. ‘Pay tokens’ or ‘Exchange tokens’ – These tokens are used for cash transfer, for instance ‘Bitcoin’ and ‘Litecoin’
  2. ‘Safety tokens’ or ‘Asset tokens’ – These tokens reflect physical property assets, shares in the company, sales sources or other underlying properties of interest. For example, the ‘DAO tokens’ the Americans concluded. To be ‘securities’ Securities and Exchange Commission (SEC). 
  3. ‘Service tokens’ – These tokens are the right to access a digital product or service. Since the token ‘Ether,’ for example, indicates a right of entry to the Ethereum network. 

In India, Payment tokens such as Bitcoins may amount to intangible “goods” or “information” under Indian law, whereas security tokens such as DAO tokens may amount to “securities” Similarly, utility tokens such as Ether can amount to a license fee charged to use the network. In addition to being intangible “goods”, crypto-assets can also amount to “payment systems” requiring authorization, particularly payment tokens, if an identifiable “user” exists. So any crypto-asset and the way it is implemented has a particular legal and tax import. A given crypto-asset can fall into more than one of the categories set out above. For example, the ‘Ether’ crypto-asset can be used both as a payment token and as a utility token. 

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Government policy

In India, after the boom in open market crypto asset trading regulators, specifically the Reserve Bank of India (‘RBI’) and the Income Tax Department were swift in their actions to shut down all business dealings involving crypto assets in 2013. On the other hand, the Government has balanced with a constructive approach. Crypto-assets and cryptocurrencies peaked in 2017 and the peacefulness around crypto-related news is currently uneasy. It’s very much in the market, though. Trading, generating financial goods through systems like crypto funds and crypto-exchanges, whereby tokenization replaced direct trading with cryptocurrencies, became the standard.

Several countries have opted for a “ban” rather than legislation and it appears that India will soon lean to outlaw cryptocurrencies as well. China has, in turn, released multiple advisories advising not only about cryptocurrencies but also the broader “virtual currency” group. In 2018, the Finance Minister declared in his Budget Speech that, ‘the government does not recognize cryptocurrencies as a legal tender or currency, and will take appropriate steps to prevent the use of crypto-assets in the funding of illegal operations or as a part of the payment system.’ This stance also tends to reflect in the draft legislation pending before Parliament that expressly forbids the use of crypto-assets as part of the payment system. 

There is also a discussion about whether to prohibit cryptocurrencies at all. After all, how the government can execute it without violating everyone’s rights. Cryptocurrency can be processed using any type of electronic computer. The Indian government essentially forced the whole economy into the cash network by shutting the banking road, making it more anonymous and untraceable. By comparison, a study published in September 2019 by a committee formed by the Ministry of Finance (Department of Economic Affairs) acknowledged that ‘the Blockchain and Initial Coin Offerings (ICOs) are revolutionizing the global fintech environment’ and defining types of cryptocurrency, primarily utility tokens and protection tokens. It should be remembered that, unlike other facets of Fintech, agritech, KYC, etc., the study makes no policy guidelines on cryptocurrencies or Blockchain.

The Inter-Ministerial Committee (IMC), 2019, established by the Ministry of Finance, has released a report proposing a law banning cryptocurrencies in India. The proposed legislation criminalizes any operation in India related to cryptocurrencies, including mining, buying, selling or processing cryptocurrency, including using cryptocurrency as a way of increasing funds or investing. The criminal penalties introduced in the draft law can lead to the imposition of a fine of up to INR 250 million or up to 10 years in jail. The IMC argues that such a ban is appropriate because private cryptocurrencies (as opposed to the state-issued digital currency) lack currency features, are susceptible to market volatility, and can not replace fiat currency. It has also proposed encouraging distributed ledger systems without the use of virtual currencies, and pursuing a sovereign digital currency. The report of the committee is non-binding and is currently under Policy consideration. 

Interestingly, the IMC study comes a month after Osaka’s G20 Leaders’ Declaration in which world leaders agreed that crypto-assets are not a danger to global financial stability and that there is a need to track trends and be alert regarding emerging threats. The cryptocurrency business is still developing, and the technologies on which it is based. Perhaps that’s why many countries are also exploring and changing ways of controlling these currencies to exploit the promise of these cryptocurrencies and the underlying technologies but at the same time keeping in mind the consequences of financial stability and customer interest.

A convincing argument for a full ban on cryptocurrencies in India is not brought out by the IMC report and draft legislation. The deliberation on the Cryptocurrencies legal framework relies on how it is handled by regulation. The IMC report notes that most of the countries studied allow some form of cryptocurrency trading or exchange. For example, while jurisdictions such as Switzerland, Thailand, Japan, etc. allow VCs to be used as payment methods, jurisdictions such as Russia, Switzerland, Thailand, etc. allow their use for investment purposes and China prohibits all kinds of transactions in those currencies. 

Furthermore, the IMC did not consider possible solutions to the enforcement of cryptocurrencies, including legislation through the anti-money laundering mechanism (AML) in Australia, Canada, Switzerland, securities law in Singapore, Malaysia, etc. and financial services / financial systems law in Singapore, New York, etc. 

No specific governmental authority has been identified for the regulation of crypto-assets and crypto asset transaction companies. However, the Ministry of Finance (Economics Department), the Ministry of Electronics and Information Technology, SEBI and RBI were instrumental in drafting the new regulations aimed at banning crypto assets. Those governmental entities/regulators could, therefore, have the authority to regulate crypto assets and crypto asset-transacting businesses. No single court or tribunal exercises some special authority over crypto asset disputes. Therefore, in the absence of an explicit or implicit restriction, depending on the pecuniary, geographical and existence of the dispute, i.e. civil or criminal, any court and tribunal may exercise jurisdiction, in addition to an appeal lying before the State High Court and the Supreme Court of India. No cryptocurrency exchange may be affected by the local fiat currency. Furthermore, if the draft law is enacted, no person can ‘hold’ cryptocurrency unless such possession is to use the underlying technology or process for experimentation, research or education unless the cryptocurrency is used to make or receive payment in such activity. Several associations such as the Blockchain and Virtual Currency Association, India’s Blockchain Foundation, India’s Digital Asset and Blockchain Foundation, and India’s Internet and Mobile Association, including industry participants and government representatives, have been formed to explore legal and policy issues related to crypto-assets. 

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Crypto assets as securities 

Securities include instruments that indicate a buyer’s ownership rights in the creditor relationship of a company or lender to a business or government. It also states that securities indicate an interest in a common enterprise based on the investment. Digital currencies, including Bitcoin and Ether, have no such right of possession, credit agreements, or participation in a common undertaking. Thus these virtual currencies are unlikely to come under the securities concept. Nevertheless, some (though not all) tokens issued by initial coin offerings (ICOs) may fall within the limits of the Securities Contract Regulation Act,1956 (SCRA) if they come from an Indian entity. 

The Securities Contracts ( Regulation) Act 1956 (SCRA) provides a non-exhaustive description of shares, and its implementation in the sense of virtual currency currently lacks legal guidelines. Digital currencies do not come under the description of things mentioned. The items under the definition further derive their value from an underlying asset. Digital currencies such as Bitcoin and Ether have no underlying properties, however. The value is calculated solely based on demand and supply, instead. Furthermore, virtual currency such as Bitcoin often lacks a recognizable source, unlike the products in the Indian law concept of protection. 

Many virtual currency tokens issuances can also lead to joint investment schemes, which are governed under the 1992 Securities and Exchange Board of India Act. This will be the case where: (i) contributions or payments made by investors, by whatever name they are called, are pooled and used for the scheme or arrangement; (ii) contributions or payments made by investors to that scheme or arrangement to receive profits, income, goods or assets, whether mobile or immovable, from that scheme or arrangement; (iii) the assets, contributions or investments forming part of the scheme or arrangement, whether identifiable or not, are managed on behalf of the investors; and (iv) the investors have no daily control over the management and operation of the scheme or arrangement. 

Crypto assets as commodities 

If virtual currencies are categorized as commodities, the operation of trading a virtual currency exchange can be governed as a commodity trade that may have ramifications under India’s Foreign Direct Investment Regulation (FDI), i.e. the 2017 Unified FDI Policy Circular (FDI Legislation) and Foreign Exchange Management (Transfer or Issue or of Security by a Person Resident outside India) Regulations 2019 (TISPRO). There are two related terms within the commodity space: a commodity spot exchange dealing with ready supply, and a commodity derivative exchange dealing with derivative contracts. Without government approval, the FDI Policy limits the amount of foreign investment in commodity spot exchanges to up to 49 per cent of the share capital. The SCRA requires a registered stock exchange (i.e an approved entity) to be an exchange conducting commodity derivatives. Nevertheless, under the above regulation, the central government may at any time agree to classify virtual currencies (generally, or any class of them) as commodities. That would bring derivatives contracts within the SCRA (and hence the jurisdiction of SEBI) in virtual currencies. The FDI will then be reduced to 49 per cent of the money for spot trading. There is no special regulatory system presently in force for spot commodity exchanges.

Anti-money laundering 

In the eyes of authorities, the ability to transfer something of interest over the internet that can circumvent the conventional financial monitoring framework has raised alarm, as they are unable to trace the flow of funds that could be used for money laundering. Currently, know your customer (KYC) and anti-money laundering (AML) standards are set in a variety of different laws and directions for RBI. However, such requirements do not explicitly extend to virtual currency-based companies (unless they are financial institutions otherwise regulated). Regulators also have difficulty monitoring virtual currency trades because of their pseudonymous existence. Although wallet identities can be traced in the blockchain, it is not easy to trace such wallet identities to individual identities. KYC/AML requirements under different laws (e.g. Money Laundering Prevention Act 2002 and RBI Master Guide – Know Your Customer (KYC) Guidance 2016) apply only to RBI-regulated companies and other regulators such as SEBI. For this purpose, businesses dealing with virtual currencies relevant to security, as discussed in Section II, or running payment systems as discussed in Section III, may be subject to KYC/AML requirements. While KYC norms do not seem to extend to most virtual enterprises related to currency, such enterprises should adopt KYC measures on the lines adopted by controlled organizations, especially if they allow retail users. This will encourage these businesses to respond adequately to law enforcement inquiries and information demands, to escape accusations of being involved in money laundering or other illegal activities.

Laws in India for fraud in cryptocurrency 

There are no regulations expressly preventing virtual currency theft.
Though in India it may be a common belief that virtual currency businesses work in a fully unregulated environment, this is not the case. Various general rules, such as the Indian Penal Code 1860 (IPC), the Prize Chits and Money Exchange Schemes (Banning) Act 1978 (Prize Chits Act) and the Consumer Protection Act 1986 (CPA), would act against dishonest business practices. Authorities have already taken action against fraudulent, virtual currency-based businesses under the IPC and Prize Chits Act. Criminal laws are the IPC and Prize Chits Act, while the CPA provides a civil remedy. Cheating is criminalized by Sections 415, 416, 417, 418, 419 420 of the IPC. If any person (including a virtual currency business) ‘induces fraudulently [a deceived person] to deliver any property to any person’ and causes or is likely to cause harm to the deceived person, he or she may be penalized under Sections 417 and 420. Similarly, the Prize Chits Act penalizes schemes to raise money quickly or efficiently (capital exchange schemes) and various forms of reward allocation schemes (prize chits). The CPA defends customers from unfair trade practices, quality violations and product defects. Unfair commercial practices include advertising which is false or misleading. As a result, customers would have to redress under the CPA if any virtual currency company makes misrepresentations to buyers or offers inadequate services. 

Crypto assets must be governed by the SEBI 

When you look at crypto laws globally, the financial authorities have a major impact on the business in all countries. The Securities and Exchange Commission (SEC) in the US has been vigorously debating the classification of crypto-assets as stocks, arguing that Bitcoin (and possibly Ethereum) is not a commodity when pursuing platforms it found to be trading tokens in violation of securities laws. The Thailand SEC is a good example too. The first ICO platform, which will allow users to screen and accept valid token sales, was recently approved. The securities regulator is already waiting for the Securities Token Offerings (STOs) phenomenon to come.

The Indian government has one school of thinking that believes cryptocurrencies should be regarded as commodities. If the government does so, otherwise SEBI will become the default regulator as in India it controls commodities. The future is supposed to be fully changed by STOs (newly released tokens representing shares) and tokenized shares (tokenization of current real-world assets). If these live up to their word, we’ll need a regulator who can appreciate securities’ nitty-gritty.

No federal body has always indicated a desire to consider cryptocurrencies, with the single exception of SEBI. Last year, SEBI sent its officials to Japan, UK and Switzerland on ‘research tours’ to learn the crypto-regulatory strategy followed by those nations. These officials worked with global financial institutions and acquired a better understanding of how cryptocurrencies and ICOs are governed. No other police department has demonstrated a constructive approach to cryptocurrencies of this kind.

Countries such as Japan and Singapore have agencies such as the Agency for Financial Services and the Singapore Monetary Authority which are multinational financial authorities in charge of all main financial sectors. Because India has fractured agencies for its different industries, it makes sense to hand over cryptocurrencies to SEBI — which already looks after the stock markets, financial instruments, consumer security structures and other related roles required of cryptocurrency regulators.

Globally, central banks have no major role in controlling the country’s cryptocurrency market. When was the last time you heard a conversation about cryptocurrency from the Federal Reserve? We need to correct this and let SEBI in the absence of a professional crypto-currency regulator take over the crypto-narrative in the region.


Before we can establish an effective government agency to look after digital currencies, SEBI is better placed in the current regulatory environment to look after the crypto-currency industry. India is losing out to other countries in the blockchain and crypto-currency revolution despite having the country’s best of blockchain talent. We urge the Indian Government to lift its unconstitutional ban and allow SEBI to control crypto assets. 

On 4 March 2020, the Supreme Court of India released a judgement on RBI’s ban on financial institutions engaging with any individual engaged in the cryptocurrency-related activity. In the verdict, the Apex Court claimed that RBI had in some way violated Article 19(1)(g) of the Indian Constitution, giving fundamental right to exercise any occupation. Since cryptocurrency companies are not illegal in India, RBI can not refuse entry to the formal financial system for any company dealing with cryptocurrencies. In the verdict, the Apex Court stated that RBI ‘s arguments on financial crimes lacked empirical evidence and that RBI did not propose any alternative measures to mitigate those risks, but the judge also acknowledged that this verdict was based on Article 19(1)(g) and does not cover any individual as stated in the verdict “Persons engaged in the purchase and sale of virtual currencies, even as a matter of leisure, can not lodge their claims under Article 19(1)(g), because what is protected therein is only trade, employment, commerce or business.”

An absolute ban on the Central Government’s use, ownership and/or sale of crypto-assets is likely to fail to accomplish its goals. If the goal is to deter money laundering, maintain the credibility of the market and improve consumer security, then legislation along the lines later suggested in this document

The paper would be more fitting than a ban. The crypto-assets are not a fleeting fad. This is seen undoubtedly by the financial activity in crypto-assets, the acknowledgement by numerous academic institutions and eminent figures of their technical and scientific breakthroughs and the millions of users in India today.

In India, Blockchain has recently undergone immense traction and applause, unlike the scare around crypto-assets. In reality, the policy paper, which forms the basis for the draft law prohibiting cryptocurrencies, acknowledges that Blockchain would play a significant role in marking the advent of a new digital era and expressly excludes the technology from the purview of the prohibition. All corporate companies and agencies of government have been active in pressing for innovation using this platform.

This Judgment, while accepting the jurisdiction of the RBI over the cryptocurrency market, could trigger a spurt of activity in this now moribund market. For this context, though, much would depend on the regulatory and legislative action/reaction. The Government of India has already prepared a draft of the Official Digital Currency Act “Banning Cryptocurrency & Compliance, 2019” in August 2019. This Bill proposed banning cryptocurrency mining, owning, selling, exchanging, distributing, disposing of, or using in India. Although mining, owning, selling, issuing, distributing or using cryptocurrency is punishable by a fine or imprisonment of up to 10 years or both under the draft Act, there is a provision that the central government, in consultation with the RBI, can issue digital rupee as a legal tender.’ The government, however, refrained from adopting the draft bill during the November – December 2019 winter session of the parliament. Moving ahead in India the future of crypto-currency would depend on a variety of unknowns. Illustratively, we do not know if the Central Bank Digital Money will overtake cryptocurrencies in the days ahead.


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