Historically, Reserve Bank of India (RBI) has not endorsed the use of virtual currencies in the Indian economy. Instead, it has always adopted a cautious approach towards the use of such currencies. This is evident from the press release dated 24-12-20131, wherein RBI expressed its concerns with respect to the financial, operational, legal and security risks associated with virtual currencies. It stated that virtual currencies, being currencies in digital form are stored in electronic wallets, and the holders/traders of such currencies are consequently prone to suffer losses due to hacking, compromise of access credentials, loss of password, malware attack, etc. Although these concerns are well placed, it is worth exploring them through the lens of the blockchain mechanism, which comprises of key features such as high encryption, internal verification of transactions, and distribution of transaction ledgers. It may be noted that despite expressing concerns in relation to the risks associated with virtual currencies on numerous occasions2, RBI has not imposed any definitive ban on individuals or entities from holding/trading in virtual currencies in India.
Constitution of Interministerial Committee and Introduction of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
On 2-11-2017, a high-level Interministerial Committee (IMC) was constituted to study the issues relating to virtual currencies in India, and to propose specific actions to be taken in relation thereto. Based on the comprehensive analysis of all the issues relating to virtual currencies in India, the IMC in its report dated 28-2-2019 (IMC Report) recommended a law to ban cryptocurrencies in India. Accordingly, the Government of India introduced the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (Cryptocurrency Bill, 2019).
The Cryptocurrency Bill, 2019, defined the term “cryptocurrency” to mean any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value, or functioning as a store of value in a financial transaction.3 Bearing in mind the definition of “cryptocurrency” provided under the Cryptocurrency Bill, 2019, it is imperative to understand that cryptocurrency is a form of decentralised virtual currency. It is an asset, the functioning and regulation of which is not the sole reserve of State institutions, but one that is based on blockchain technology. Apart from the evident difference in “form” (i.e. digital and physical respectively) between cryptocurrency and the currency issued by RBI (being, fiat currency), the key difference between cryptocurrency and fiat currency is with respect to their “value” determination. Cryptocurrency draws its value primarily from the market forces of supply and demand, while fiat currency is measured against the value assigned to it by RBI.
The Cryptocurrency Bill, 2019 created a turmoil in the market. The holders/traders of cryptocurrencies were startled by the provisions of the Cryptocurrency Bill, 2019, which prohibited the use of cryptocurrencies4, and made mining, holding, selling, issuing, transferring or use of cryptocurrencies in the territory of India as an offence punishable with fine or with imprisonment of up to a period of 10 (ten) years, or both5. However, much to the delight of the holders/traders of cryptocurrencies, the Cryptocurrency Bill, 2019 did not materialise into a law, thereby enabling individuals and/or entities to continue holding/trading in cryptocurrencies within the territory of India. If the Cryptocurrency Bill, 2019 had been passed as a law by Parliament, the holders/traders of cryptocurrencies would have lost their entire value of investment in a trice, possibly leading to slower response towards the inevitable confluence of finance and technology.
RBI Notification imposing selective ban on virtual currencies and Supreme Court of India’s verdict on the Notification
Vide Notification dated 6-4-20186 (RBI Notification), RBI imposed a ban on the entities regulated by it, from dealing in virtual currencies or providing services for facilitating any individual or entity in dealing with virtual currencies. While the RBI Notification did not impose any ban on virtual currencies per se, it did raise certain apprehensions about the future of virtual currencies in India. However, the Supreme Court of India vide order dated 4-3-20207 set aside the RBI Notification.
The order passed by the Supreme Court of India provided the holders/traders of virtual currencies respite and reassurance with respect to the legality of such currencies in India, but this reassurance was short lived.
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
The Lok Sabha Bulletin dated 29-1-2021 reflected Parliament’s intention of introducing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Cryptocurrency Bill, 2021) for deliberations. While the Cryptocurrency Bill, 2021 is not available in public domain, it is understood that the objective of the Cryptocurrency Bill, 2021 is to create an enabling framework for the official digital currency to be issued by the RBI, and to prohibit all private cryptocurrencies available in India. At present, the definition of the term “private cryptocurrencies” lacks clarity. However, experts believe it to include any cryptocurrency, which has not been issued or recognised institutionally, by the RBI.
MCA Notification mandating disclosures in relation to virtual currency transactions undertaken by companies during a financial year
On 24-3-2021, the Ministry of Corporate Affairs released a notification (MCA Notification) mandating companies to inter alia make certain disclosures with respect to the virtual currency/cryptocurrency transactions undertaken by them during a financial year. The MCA Notification requires companies to make disclosures in their financial statements with effect from 1-4-2021, pertaining to:
(a) the profit earned/loss incurred during a financial year on transactions involving virtual currencies/ cryptocurrencies;
(b) the amount of virtual currencies/cryptocurrencies held as on the reporting date; and
(c) the deposits or advances received by companies from any person for the purpose of trading or investing in virtual currencies/cryptocurrencies.
Over the past few years, the Government of India has been deliberating over the fate of virtual currencies/ cryptocurrencies, and has released various advisories cautioning investors against the risks associated with virtual currencies/cryptocurrencies in India. In light of the recent speculation around the ban on private cryptocurrencies vide the Cryptocurrency Bill, 2021, the MCA Notification may indicate a step to meet the expectations of the investors. However, the inherent conflict between the Cryptocurrency Bill, 2021 and the MCA Notification will not repose much confidence amongst the investors in relation to the legality of virtual currencies/cryptocurrencies in India. The conflict arises, as on one hand, the Cryptocurrency Bill, 2021 seeks to ban issuance/use of private cryptocurrencies in India, while on the other hand, the MCA Notification mandates companies to make disclosures with respect to virtual currency/cryptocurrency transactions undertaken by them during a financial year.
It cannot be said with certainty that the Cryptocurrency Bill, 2021 would attain the force of law but undoubtedly the MCA Notification has to a certain extent raised the hopes to settle the ambiguity relating to the legal nature of virtual currencies/cryptocurrencies in India for the foreseeable future.
† Senior Partner, AZB and Partners, New Delhi.
†† Associate, AZB and Partners, New Delhi.
††† Associate, AZB and Partners, New Delhi.
1 RBI cautions users of Virtual Currencies against Risks, Press Release No. 2013-2014/1261, 24-12-2013.
2 RBI cautions users of Virtual Currencies, Press Release No. 2016-2017/2054, 1-2-2017; Reserve Bank cautions regarding risk of Virtual Currencies, including Bitcoins, Press Release No. 2017-2018/1530, 5-12-2017.
3 S. 2(1)(a), Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
4 S. 7, Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
5 S. 8, Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
6 Prohibition on dealing in virtual currencies, Notification No. RBI/2017-2018/154, 6-4-2018.
7 Internet and Mobile Assn. of India v. RBI, (2020) 10 SCC 274.