Cryptocurrency has had quite a bumpy journey in India, and it has only just begun. While two years back, the Reserve Bank of India (RBI) has announced a ban on cryptocurrency, the recent meeting of the Parliamentary Standing Committee on Finance (PSCF) is in favour of regulation.[i] To know more about cryptocurrency and the dilemma of its legality, read on.
What is cryptocurrency anyway?
Cryptocurrency is a digital currency that operates on Blockchain. No, it is not recognised as legal tender, fiat currency, or in the law, except in El Savador. Thus, the term crypto-“currency” is a misnomer. Bitcoin, Dogecoin, Ethereum, etc. are all different types of cryptocurrency.
What is Blockchain?
Blockchain is a digital ledger that is tamper-free and yet transparent. The technology has many applications, one of which is the operation of cryptocurrency. A blockchain is a network of thousands of computers known as ‘nodes’ across the globe that verify transactions. Each node is a record-keeper, creating a check-and-balance system within the network. The technology is made such that it is decentralized and not controlled by a single entity. When nodes validate transactions, they are rewarded with newly minted cryptocurrency.[ii] It can be purchased using legal tender.
Now that the basic terms are understood, let’s dive deeper into the battle between a ban and a regulatory mechanism.
A Peek at the Past
Introduction of cryptocurrency in India can be traced back to early last-decade. But it was not until 2018 that the RBI issued a Circular to prohibit the use of cryptocurrencies.[iii] The Circular led to writ petitions to the Supreme Court to lift the ban. The RBI’s primary argument to defend its move was to harp upon the fact that it was the only authority in India that could issue currency.[iv] The RBI maintained that it had no intention to support the exchange of cryptocurrency since it had more harms attached to it than benefits.[v]
In 2020, the Supreme Court observed that the RBI was a regulator and thus, only had the power to regulate and not prohibit the exchange of cryptocurrency.[vi]
Another important aspect highlighted in the judgement was the right to trade.[vii] The Constitution of India (the Constitution) gives every citizen the freedom to engage in any trade[viii] subject to restrictions imposed by the State.[ix] While evaluating Article 19(1)(g), the Court noted that investors who engaged in buying and selling of cryptocurrency as a mere hobby could not plead this ground.[x] For the others, who were engaged in cryptocurrency as an occupation or for trade, it was held that the Circular violated Article 19(1)(g).[xi]
Sharp Turns
The doubts regarding cryptocurrency did not fade away after the Supreme Court’s judgement. Rather, blockchain investments were continued to be seen as highly volatile, unsafe, lacked inherent value, and could be manipulated due to lack of regulation.[xii] The Parliament, in early 2021, was mulling over a legislation to completely prohibit the usage of private cryptocurrencies in India.[xiii] However, in a sharp turn, the PSCF, has now tilted towards regulation as opposed to a blanket ban. Presently, there is no central or state regulation on cryptocurrency. The industry bodies follow a Code of Conduct and self-regulate to safeguard their long-term interests and ensure that members and users are legal and tax compliant.[xiv]
The Committee met with several experts in the field of blockchain and cryptocurrency, representatives of the Blockchain and Crypto Assets Council, and academicians to understand the technology before legislating upon it. The valuation of present Indian investments in cryptocurrencies is a whopping 75,000 crore INR.[xv] Given the vast investments, the regulations need to balance the interests of all stakeholders — investors, cryptocurrency exchanges, the RBI, and the Government itself.
What to Expect
For crypto-enthusiasts and the industry itself, potential regulation is a bright ray of hope after the harsh possibility of a ban. However, the previous concerns of possible misuse are still afloat. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will be tabled during the Winter Session of the Indian Parliament but there have so far been no discussions regarding the nitty-gritties of this regulation.
Here is a look at all possible outcomes the Bill may take:
Better Understanding of the Technology
The panel of ministers seem to agree that completely prohibiting cryptocurrency in India is not a possibility. This displays a better of understanding of the technology, compared to what is was in early 2021. Cryptocurrency operates on a decentralised, self-sufficient technology of Blockchain and is not intended to be controlled by any individual entity, including sovereign States.
The recent meeting of the PSCF with experts in the field of cryptocurrency is a positive sign indicating towards a regulation that is not blind to the purpose, need, operation, and impact of cryptocurrencies.
RBI: The Primary Skeptic
Having said that, one must not ignore the apprehensions of the RBI. Ever since the early 2000s, the RBI has continued to express its concerns about private cryptocurrencies. These concerns include such as terror financing, tax evasions, financial instability, lack of capital controls, and exchange rate risk. Although the RBI does not have any control over these private cryptocurrencies, it does have the authority to dissuade, or even prohibit, banking institutions from allowing transactions to and from crypto-exchanges.
The upcoming Bill needs to clarify upon the power of the RBI in relation to any and all crypto-transactions.
Digital Rupee: The Competition
The Government and the RBI have announced its plans to introduce the ‘Digital Rupee’[xvi]—-legal tender, fiat currency entirely operating digitally, similar to cryptocurrencies. However, unlike private cryptocurrencies, the Digital Rupee would be centralised. Such currency is referred to as central bank digital currency or CBDC and has already been introduced by countries such as Nigeria and the Bahamas.[xvii]
Although this prima facie seems like a step towards the acceptance of cryptocurrencies, underneath it appears to be a strategy to fight private cryptocurrencies. The Digital Rupee can be expected to provide more ease, in comparison to private cryptocurrencies, to convert digital currency to physical, legal tender. Further, its acceptance at merchants can be expected to be more than of several major and minor private cryptocurrencies.
It is highly possible that the upcoming Bill requires all persons dealing in private cryptocurrencies to necessarily link their portfolios to the Digital Rupee portal.
Assets: Not Currency
Another middle ground that the regulation may settle on could potentially be the categorisation of cryptocurrency as an ‘asset’, similar to gold, shares, and bonds.[xviii] Although the industry views it as a worst case scenario, the investments made by Indians so far in cryptocurrency would be safe and further investments will continue to be permitted.
Increased Accountability
This brings is to accountability — possibly the most important factor dealing to regulation. The Bill would most definitely lay down accountability measures to be adopted by crypto-exchanges and all persons dealing with or in private cryptocurrencies. This could be in the form of linking private portfolios to the Digital Rupee platform, as mentioned above. Further, all crypto-transactions could be linked to PAN and AADHAAR to increase traceability to reduce tax evasions. A 1% GST charge is proposed on crypto-exchanges, to be collected at source.[xix]
Central and Independent Regulator
To ensure that the regulations laid down are followed, the Bill would establish a central and independent regulator, similar to the Data Protection Authority under the Data Protection Bill, 2021.[xx] However, other reports suggest that the Securities Exchange Board of India (SEBI) will be announced as the regulator.[xxi] It is highly likely that SEBI will be the primary regulator of cryptocurrencies if the same are categorised as ‘asset’, however, if the Bill settles on a separate classification, an new regulator could be instituted.
No Active Solicitation
Speculations suggest that crypto-exchanges will not be permitted to engage in active solicitation.[xxii] This means that crypto-exchanges, after the passing of the Bill, will not be freely able to advertise their services on television, newspapers, and other media. Pitfalls of investing in cryptocurrency will have to be mentioned in all advertisements.
The Bill is expected to be tabled soon, in the Winter Session of the Parliament (2021) and so would increase clarity. One thing, however, is very clear — cryptocurrencies are here to stay.
References [i] Neha Alawadhi, ‘Parliamentary Panel Meeting: Regulate Crypto, Don’t Ban, Say House Members’ (Business Standard, 16 November 2021) <https://www.business-standard.com/article/markets/parliamentary-panel-meeting-regulate-crypto-don-t-ban-say-house-members-121111600012_1.html> accessed 18 November 2021 [ii] Antoine Bouveret and Vikram Haksar, ‘What are Cryptocurrencies’, (International Monetary Fund) <https://www.imf.org/external/pubs/ft/fandd/2018/06/what-are-cryptocurrencies-like-bitcoin/basics.htm> accessed 18 November 2021 [iii] Reserve Bank of India, Prohibition on Dealing in Virtual Currencies RBI/2017-18/154 (2018) [iv] IAMAI v. RBI [2020] W.P. (Civil) No. 528 of 2018 (SC) 40 [v] ibid [vi] ibid 110 [vii] The Constitution of India 1950, art 19(1)(g) [viii] ibid [ix] ibid art 302 [x] IAMAI v. RBI (n 4) 148 [xi] ibid, 152 [xii] Ministry of Finance, Government of India, ‘Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies’ (Department of Economic Affairs, 2019), <https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf> accessed 16 November 2021 [xiii] ‘Bulletin Part-II (General Information relating to Parliamentary and Other Matters)’ (Lok Sabha, 29 January 2021) 26 <http://loksabhadocs.nic.in/bull2mk/2021/29012021.pdf> accessed 18 November 2021 [xiv] Advait Palepu, ‘IAMAI Finalises Code of Conduct for Blockchain and Crypto-Firms’ (Medianama, 24 February 2021) <https://www.medianama.com/2021/02/223-iamai-blockchain-crypto-code/> accessed 17 November 2021 [xv] Meghna Maiti, ‘What Does Crypto Regulation Landscape Look Like At Present?’ (Outlook India, 15 November 2021) <https://www.outlookindia.com/website/story/business-news-what-does-crypto-regulation-landscape-look-like-at-present/400990> accessed 18 November 2021 [xvi] Saheli Roy Choundhary, ‘India Could Begin Trials for a Digital Rupee by December, Central Bank Governor Says’ (CNBC, 27 August 2021) https://www.cnbc.com/2021/08/27/india-central-bank-rbi-digital-rupee-trials-could-begin-by-december.html> accessed 18 November 2021 [xvii] Radhika Pandey and Ganesh Gopalakrishnan, ‘Charting India’s Path to a Digital Rupee’ (The Indian Express, 17 November 2021) <https://indianexpress.com/article/opinion/columns/india-path-to-a-digital-rupee-7624607/> accessed 17 November 2021 [xviii] Prashun Talukdar, ‘Crypto Won't Be Ok For Payments, Could Be Treated Like Gold’ (NDTV Profit, 17 November 2021) <https://www.ndtv.com/business/what-indias-likely-to-allow-and-rule-out-for-crypto-10-facts-2614210> accessed 18 November 2021 [xix] Sarthak Dogra, ‘Crypto Trading in India may be Taxed by 1 Per Cent and Regulated by SEBI, New Reports Hint’ (India Today, 17 November 2021) < https://www.indiatoday.in/technology/news/story/crypto-trading-in-india-may-be-taxed-by-1-per-cent-and-regulated-by-sebi-new-reports-hint-1877673-2021-11-17> accessed 18 November 2021 [xx] ‘Regulatory Body to Regulate Cryptocurrency Investments in the Country May Come Soon’ (Economic Times, 16 November 2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/regulatory-body-to-regulate-cryptocurrency-investments-in-the-country-may-come-soon-et-now-reports/videoshow/87732599.cms?from=mdr> accessed 17 November 2021 [xxi] Sarthak Dogra (n 19) [xxii] ibid
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