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This article is written by Shivangi Agrawal who is pursuing a Certificate Course in Advanced Criminal Litigation & Trial Advocacy from LawSikho.


With the flagship initiative ‘Digital India’ of PM Modi launched on July 01, 2015, India is striving steadily towards digital economy. FASTags, e-filing of taxes and AADHAR are such examples. Virtual currency is one such upheaval in the era of digitisation, modernisation and technology. Virtual Currencies (VCs) are digital representations of money value issued by private entities stored and transacted through software or networks specified. It is not issued or controlled by formal Financial Institutions (FIs).

The virtual currency, ‘Bitcoin’ was introduced in 2008 and since then there has been a consistent spur in the market. It became operational in 2009 after the paper titled “Bitcoin- A Peer to Peer Electronic Cash System” was released under the pen name Satoshi Nakamoto. 

There has been mixed reaction among the nation-states on virtual currencies. However, India has accepted virtual currencies with open-heart and invested enormously, though the concrete policy on regulation of virtual currencies is still absent. The Reserve Bank of India has by time and again warned of use and risk associated with virtual currencies. After complete prohibition by RBI, the order was challenged in Court. The Court set aside the RBI’s circular on “ground of proportionality”.

Before digging deep into the context, let us understand the two tools VCs are essentially based on, i.e., blockchain and cryptography. 

Blockchain as the name specifies is a typical database that stores information in blocks that are then chained together. As the new data comes, it is stored into a fresh block and once the block gets filled, it gets chained with the previous block. It is used in a decentralised manner, means no individual can exercise control over it- rather it is used collectively. Since the blockchain forms a network of computers and is connected through nodes, so even if there arises fallacy or error at one node, it can be corrected using thousand other nodes. In this way, the information cannot be altered by one single node; hence the information that enters the blockchain is irreversible.

The idea of blockchain was incentivised by David Chaum in 1982 in his dissertation titled “Computer Systems established, Maintained, and Trusted by Mutually Suspicious Groups”. In 1991 further work was done by Stuart Haber and W. Scott Stornetta in 1991. They wanted to introduce such a system where document information could not be tampered with. The Bitcoin protocol is based on blockchain, though the former uses it only to record ledger of payments whereas latter can be used to store any information such as votes casted in an election, records of students, medical reports, etc. There are other areas such as votes in elections that are pondering overuse of blockchain to ensure transparency, remove human error and prevent tampering of records.

The November 2018 elections in West Virginia tested this technology. Some companies like Walmart, Siemens, Pfizer, Unilever have incorporated the concept of blockchain. IBM created its Food Trust blockchain after the reports of food getting infected with viruses such as E-Coli to track the route of food packet till the delivery location and identify the source of contamination. The Wall Street Journal reported that Everledger, a blockchain technology company is partnering with IBM to trace the origin of diamonds to ensure they are ethically mined. The game CryptoKitties, based on blockchain technology was in news in 2017. NEN, the Dutch organisation uses blockchain with QR codes to authenticate certificates. Thus, it can be fairly observed that blockchain technology made its way to every sector from health, politics, finance, food, gaming to music, energy and others. 

Cryptography as the word ‘crypt’ means ‘hidden’ and ‘graphy’ means ‘writing’ is the technique of protecting information through the codes that are hard to decipher so that information can be read and processed only by the person to whom it is intended. It refers to converting plain-text to cipher-text (referred to as encryption) and vice-versa (decryption). The practice dates back to 2000 BC with Egyptians using hieroglyphics. However, the first use of technique is known from Julius Caesar (100-44 BC) who did not trust his messengers and used to communicate with his staff through writing in such a way that every letter of the alphabet was replaced by the alphabet ahead of three positions. 

With the recent SC judgement lifting ban while allowing trading with VCs, including cryptocurrencies and government announcement to soon bring a bill on cryptocurrencies, the debate around legality and utilisation of VCs has again triggered. While Robert Kyosaki asserts the price of Bitcoin to be $50,000 in 2021 with a market cap of $928 billion which would be around 10.3% of gold’s market cap. There are around 6700 types of cryptocurrency available for trading on public platforms. Some popular examples are Bitcoin, Ethereum, Ripple, Dogecoin, XRP, etc. In this regard, it has become necessary to lay down a few points. Hence, this article.

Misuse of VCs

The two major issues debated against VCs are ‘anonymity’ and ‘volatility’. The blockchain technologists argue that it is ‘difficult to track’ and since VCs are devoid of State control, it gives extra window bad actors to enter and exit a VC network without any liabilities. Next is anonymity, where participants are spread across the globe and VCs provide quick cross-border transactions, the anonymous factor can prove to be fatal in controlling or trailing VCs. Also, VC transactions are irreversible. There have been a number of instances where an individual falls into the trap of malicious actors, forgets his password, there are no ways to get the money back even in innocent cases. Exploiting these gaps, hackers tinker different hacking techniques to fraud investors. 

One such is cryptojacking, where miscreants use the memory, processor power and electricity from someone else’s computer to generate cryptocurrencies for themselves. India witnessed its first such cryptojacking attack in April 2018 where more than 2000 computers of Aditya Birla Group were hacked to mine virtually untraceable digital currency called Monero. 

Another such technique is Ransomware, where a hacker steals and encrypts the data and information stored in a computer. Then, he demands ransom for data retrieval. These days ransom is demanded in the form of cryptocurrencies enabling hackers to conceal his identity. Even after the payment of money there is no guarantee that one will regain the system access. Such attacks hit the globe in 2017 were WananCry and Petya, spread across around 150 countries infecting the systems of government agencies, hospitals, banks, companies, etc. 

Besides these, Anil Bhardwaj’s GainBitcoin $ 300mn Ponzi crypto-scam, Divuesh Darji’s $12.7bn Bitconnect extortion scam are more such incidents. Techniques such as ‘chain-hopping’, ‘peel chains’ are also in vogue.

Curbing white-collar crime

The biggest factors where investigating agencies miss out to probe into ongoing scams are lack of technological advancement, dependence on paper documents (that does not alert the system unless you yourself check the previous transactions), corruption, bureaucratic rigidity and lack of awareness or absence of conscience. Leaving the last three factors, i.e corruption and bureaucratic rigidity, which is bound to exist till money flows into the system and lack of awareness, that encompasses factors such as poverty, unemployment, education, etc., and is a social phenomenon depending on policy frameworks thus, outside the scope of this article. Coming to first two factors, technological advancement and paper works- and the blockchain technology is a way to repair both as:

Anonymity or increased transparency

The anonymous nature of the VCs is much debated and it is argued that such anonymity has led to an increase in white-collar crimes making it a cat-and-mouse game. This means that in addition to developing technology, individuals are also developing new techniques of evasion. It is Over The Counter (OTC) brokers who facilitate the trade between an individual owner and seller. These OTC brokers sometimes get engaged in laundering money through illegal channels. Since the blockchain works in a decentralised manner, its records of the transactions are at least theoretically far too away for hackers to get access into.

But, since all blockchain and cryptocurrencies transactions are automated and digitized, they are all tracked in a distributed ledger. The best part is that it cannot be manipulated by either people or companies, which greatly diminishes the risk of fraud and corruption. This means citizens will be able to keep track of where funds will be oriented and will thus have a say within their own political climate.

Digital analysis of transactions

Traditional methods of analysing bank records with bundles of papers piled up is often a very slow and hectic task accompanied with higher risks of human miscalculation. Blockchain analysis provides for on-time analysis of transactions providing insights into where the money travels, it’s all complete route.

Internationally, the application of Distributed Ledger Technology is being explored in the areas of trade finance, mortgage loan applications, KYC or AML requirements, cross border fund transfers and settlement systems. The role of analytics companies is bound to increase to ensure better integration of KYC and AML guidelines to track the money.

It would also save a lot of paper and would be an environmentally-friendly approach.

However, this is still a nascent question with several risks and regulatory challenges. Despite the growing popularity of VCs, governments, institutions, lobby groups have remained critical of cryptocurrencies. They note that volatility in crypto assets is far more than in the stock market or gold. The answer would depend on how the governments and agencies work on technology, scalability and interoperability with additional concern of cyber security and data protection. Looking towards the steps to be taken to utilise the better prospects of virtual currencies are as follows:

  1. In October, Indian crypto exchange BuyUCoin, in its document titled, Regulatory Sandbox: The Key To Cryptocurrency Mass Adoption In India, had talked about the importance of bringing crypto earnings under the purview of tax. The document said that this would enable the government to gain from Indian users’ participation in crypto, as well as allow investigating authorities to keep a check on those who might be using crypto for the wrong purposes. Imposition of proper taxes on earnings through VCs can help menace the abrupt use of cryptocurrencies. In addition, the government should take proper account/survey of individuals losing or gaining through cryptos to keep a check on individuals associated with cryptos. 
  2. The legislature would need to amend laws such as FEMA, SEBI, IT Act, GST, IPC, IT laws to protect user’s data, check cybersecurity and include the provisions for punishment for those trading illegally on digital platforms.
  3. The agencies need to hire experts in blockchain technology, Machine Learning, Artificial Intelligence to get better equipped in the fight against money laundering.
  4. The Cryptocurrency exchanges would need to ensure extensive due diligence on OTC brokers operating the platform.
  5. The authorities working on big data such as law enforcement agencies, banks, regulators, online retailers need to coordinate with each other extensively as against the present mechanism of chaos and improper and unclear segregation of powers.

Looking into the future of Digital India, blockchain is bound to grow and it would be one of the most classic inventions of the internet itself. It has transformed the industry as Bitcoin crossed $ 40,000 in January 2021 and its cap rose to $1 trillion (price crossed $50,000) in February 2021.

Steps taken to regulate VCs

It was the first time in December 2013 when RBI ought to regulate VCs issuing warnings against VCs against its risks. However, a solid blow was given by RBI on April 06, 2018 when it put blanket prohibition on dealings with VCs. VCs were also ordered to be terminated within three months. The slew of petitions followed and SC gave its judgement in 2020. 

Meanwhile, RBI constituted an inter-departmental group to explore the possibilities of introducing central bank digital currency in India. The government of India also formed the inter-ministerial Committee (IMC) under the Chairmanship of Subhash Chandra Garg, to suggest regulatory measures after studying VCs both in India and globally. The Committee on February 28, 2019 suggested prohibiting all private cryptocurrencies except those issued by the State. It also draftedthe Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 which proposes imposing fine upto 25 crores or imprisonment of 10-years for those who “mine, generate, hold, sell, transfer, dispose of, issue or deal in cryptocurrencies directly or indirectly.”

The government is very close to banning VCs and introducing RBI backed Central-bank Digital Currency (CBDC). During the budget session, the government introduced The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. RBI also expressed its desire to introduce a digital version of fiat currency saying that it is figuring out the way to operationalize it. But, CBDCs across the world are still at a nascent stage.

International Regime

The global attitude towards VCs is patchy. Many countries have resorted to friendly approaches towards VCs while some have put appropriate legislation to regulate VCs. 

  • For instance, Japan has ordered all cryptocurrency exchanges to submit reports on their system risk management.
  • South Korea permits trading of cryptocurrencies only from real-name bank accounts to ensure compliance of Know-Your-Customer (KYC) and Anti-Money Laundering (AML) laws.
  • Iran has enabled the country’s Central bank to use VCs for import payments by amending its cryptocurrency legislation.
  • Thailand has also approved around 30 legal crypto-businesses for operating legally in the country.
  • China has launched Digital Currency Electronic Payment (DCEP), the digital RMB (or Renminbi, China’s currency) is, as its name suggests, a digital version of China’s currency to bring financial stability and go away with idea of decentralised cryptocurrencies without privacy and anonymity. Countries like Venezuela, Ecuador, Tunisia, Senegal, and Singapore have issued their own cryptocurrencies.
  • On the other hand, countries like China have banned VCs in all shapes and forms.
  • Private players like Facebook, Google, Twitter have disallowed cryptocurrencies and initial coin offerings advertisements on their respective platforms. 
  • The International Monetary Fund (IMF) has also called for greater international discussion and cooperation on cryptocurrencies. 
  • UNICEF launched its UNICEF Cryptocurrency Fund in 2019 to fund open source technology benefiting children and young people around the world.


The VCs have enabled a cheap and speedy processing of financial transactions by eliminating the need of middlemen/banks/intermediaries. However, the absence of any regulating authority or Financial Institution has led to a series of scandals. Some of the questions that needs to be thought into are:

  1. What actually should be the focus area of prevention.
  2. Who should have authority to regulate prevention measures.
  3. How do we measure and evaluate the impact of prevention.

The author believes the answer to these three questions would be an answer to regulation of the future of cryptocurrency in India. Moreover, because there exists numerous agencies that would suggest various ways/solutions to curb the menace according to their area of expertise and then the question will rise which of those agencies would actually exercise dole authority to regulate it or do we need to altogether create separate agencies. Then, the evaluation of your steps taken because India definitely has hundreds of laws but very few mechanisms to trace its implementation. 

Also, there are several issues with the people in India who are devoid of technology and are not conscious about their responsibility. It is agreed that any mechanism should be easy and reflexive enough for easy adoption by people. But with increasing complexities in technology, crimes are bound to increase and people need to upgrade themselves.

For example, it is suggested that KYC and AML guidelines would be necessary criteria for regulating VCs but what happened when PayTM made KYC compulsory. A lot of users dropped out of PayTM and resorted to other alternatives such as GooglePay, Phonepe, etc. If that is how one is going to continue further, he is definitely going to fall in the dark well from where coming out would not be easy.

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