1. Setting the stage

Cryptocurrency or virtual currency gained immense popularity after the 2008 financial crisis. Moreover, the sudden increase in the value of certain forms of virtual currency like Bitcoin has also made it a lucrative investment option. On the other hand, lack of accountability has also led to the employment of cryptocurrency for criminal and unethical activities. In light of this background, the Indian legislature has proposed a Bill banning all forms of private cryptocurrency in India which is pending before Parliament on the date of writing this paper.[1] Although the text of this proposed Bill is not available in the public domain, it is widely believed that the same is based upon a draft Bill which was proposed in 2019.[2]

This paper argues that instead of imposing a blanket ban on use or possession of cryptocurrency, appropriate regulatory framework would be a more suitable alternative. This regulatory framework maybe brought in by making suitable amendments to the existing legislation or by enacting a novel suigeneris legislation altogether. Furthermore, this short paper focuses on only one aspect of such regulation, namely, cross-border transactions through cryptocurrency. It is pertinent to mention here that though cryptocurrency is difficult to define and no universally accepted definition of cryptocurrency exists, however, cryptocurrency for the purposes of this paper would mean a financial instrument in intangible form produced and stored on servers using blockchain technologies and does not include digital currency or electronic currency like digital wallets, prepaid credit top-ups, loyalty points, etc.

Cross-border aspect of cryptocurrency regulation assumes importance as there is a growing consensus that there is an increase in cross-border trade via cryptocurrency. This is simply because in ordinary parlance, cryptocurrency can be understood as a private currency without backing of any sovereign guarantee. Thus, it overcomes the risk of failure of the entire payment system in case of any crisis wherein the sovereign is not able to fulfil its guarantee. One instance of such failure is the infamous 2016 demonetisation in India wherein the Government refused to honour its guarantee of payment in lieu of 500 and 1000 rupee bank notes. Such a unilateral revocation is not possible in case of cryptocurrency. Thus, by banning cryptocurrency instead of regulating it, India would be missing an opportunity on benefitting from this global currency.

In India, foreign trade, foreign investment and all forms of cross-border transactions are governed by the Foreign Exchange Management Act, 1999 (FEMA).[3] At the outset, it is pertinent to mention here that the applicability of FEMA and related rules on cross-border cryptocurrency transactions is still ambiguous as would be demonstrated in this paper. Therefore, even in the scenario that a blanket ban is imposed on cryptocurrency in India, short-term issues would arise pertaining to disposal of existing reserves of cryptocurrency in India. In other words, Indian entities currently possessing cryptocurrency would not be able to sell cryptocurrency amongst residents because of the ban and they might not be able to sell it across borders due to the looming ambiguity around FEMA.[4] Therefore, though the primary argument in this paper is to regulate cross-border transactions through FEMA, the suggestions and observations made in this paper would also be relevant to overcome the short-term problems in case of a blanket ban by providing an exit route to the existing holders of cryptocurrency in India.

2. Classifying cryptocurrency

The first step to proper regulation under FEMA is to adequately classify cryptocurrency within the framework of FEMA. This is important to determine applicable rules and regulations to cryptocurrency.

The first category of classification is “currency”. In this respect, Section 2(h) of FEMA5 prescribes an exhaustive definition of “currency” wherein a residuary power is given to Reserve Bank of India (RBI) to declare any instrument as currency. Historically, RBI has always maintained a sceptical attitude for classifying cryptocurrency as “currency” because the same would give it a status of fiat money or a legal tender. Moreover, this view is also supported by the Inter-Ministerial Committee Report6 because if cryptocurrency is considered as legal tender then it would have to be backed by sovereign guarantee which is very difficult given the volatile nature of cryptocurrency. Hence, as of today cryptocurrency cannot be classified as “currency”. At the same time, it is also pertinent to mention here that the Supreme Court in Internet and Mobile Assn. of India v. RBI7 had noted that RBI has abundant power to notify cryptocurrency as “currency” under FEMA. However, commentators have maintained that notifying cryptocurrency as “currency” is less likely as it would require complex framework, which would discourage use of cryptocurrency in India.8 Furthermore, as already noted above, one of the benefits of cryptocurrency is the lack of a sovereign guarantee that makes it arguably the most suitable medium of exchange for any cross-border transaction. In agreement with this observation, this paper does not support the argument that cryptocurrency should be conferred a status of “legal tender” rather it argues that there are alternative ways of regulating cryptocurrency under FEMA.

An allied argument with respect to the currency classification is classification as “foreign currency” or “foreign exchange”. Some authors have pondered on the possibility of cryptocurrency as “foreign currency”.9 To elaborate, Section 2(m) of FEMA10 defines “foreign currency” as any other currency except Indian currency. Nishith Desai Associates in their white paper have opined that where cryptocurrency creates a financial liability, it may amount to foreign currency as defined under FEMA.11 Similarly, the Supreme Court had opined that where cryptocurrency performs functions of money, it cannot be said that RBI has no power to regulate it merely because it is not a legal tender.12 Another argument put forth by supporters of this classification is that in case a foreign country recognises cryptocurrency as a legal tender then it would automatically come within the scope of “foreign currency” in India.13 In this respect, two arguments are put forth by the author. Firstly, till date no jurisdiction except El Salvador14 has notified cryptocurrency as a legal tender. Secondly, as it has already been established that cryptocurrency cannot be classified as “currency” unless until notified by RBI, therefore the question of it being regulated as a “foreign currency”, which is a subset of “currency”, becomes moot. Further, as per Section 2(n) of FEMA15, “foreign exchange” includes foreign currency and various instruments payable in foreign currency. Therefore, since it has been established that cryptocurrency is not “foreign currency”, by extension, cryptocurrency is also not “foreign exchange”.

Another alternative for classifying cryptocurrency under FEMA is by classifying it as “goods”. Although, FEMA does not define goods but it does talk about the import and export of goods.16 In this respect, Section 2(7) of the Sale of Goods Act, 1930 defines “goods” as “…every kind of movable property other than actionable claims and money….”17Again, Section 3(36) of the General Clauses Act, 1897 defines movable property as every kind of property except immovable property.18 Furthermore, Section 3(26) of the General Clauses Act, 1897 defines immovable property to include land and things attached to or fastened to land.19 Therefore, it can be easily said that cryptocurrency is not immovable property and given the broad definition of movable property, cryptocurrency would classify as movable property and by this extension “goods”. This would effectively mean that cryptocurrency transactions would be barter transactions. The implication of the same would be that these transactions would not be covered within the purview of Sale of Goods Act, 193020. This is because Sale of Goods Act, 1930 only applies to monetary transactions and not to barter transactions.21 Nevertheless, there is no prohibition in the Contract Act, 187222 pertaining to barter transactions and the parties to the crypto transaction? may contractually agree upon the exchange rate and other modalities of the transaction. Furthermore, this approach finds support in light of the fact that as per a recent news report, the Central Government is also considering classifying cryptocurrency as “commodity”.23

3. Regulating cryptocurrency under FEMA

From the above discussion it can be seen that cryptocurrency already falls within the regulatory ambit of import and export of goods under FEMA. However, the problem arises as there exists no specific regulations pertaining to import and export of cryptocurrency under FEMA which renders this “goods” classification as otiose. Moreover, as per Section 3 of FEMA24, only authorised persons or persons who have been permitted in this regard by RBI can deal in foreign exchange or cross-border transactions outside India.

a. RBI as the game changer

Theoretically, there can be two broad categories of cross-border cryptocurrency transactions. The first category would be purchase or sale of cryptocurrency itself from outside India. In simple words, currency or fiat money may be used to buy cryptocurrency from outside India or cryptocurrency already held may be sold outside India for foreign currency. The second category would involve using cryptocurrency like money i.e. for payment of goods and services across borders, for making investment, etc.

Regarding the first category of cases, there is nothing in FEMA which expressly prohibits purchase or sale of cryptocurrency through use of fiat money as long as such money is sent or received through authorised channels such as banks, etc. This is because these transactions can be considered akin to an ordinary transaction of buying and selling of goods for money. However, in respect of such transactions, it is imperative that necessary declarations are made while selling such cryptocurrency under the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015.25 These regulations do not contain any specific manner for disclosure of cryptocurrency but the general regulations regarding export disclosure are definitely applicable.

The real problem arises when cryptocurrency is sought to be used as a substitute for money. Cryptocurrency can be used for three broad purposes, namely, investment, purchase of assets/immovable property and for payment of goods. As already noted, it would not be expedient to classify or treat cryptocurrency as “currency” or legal tender. Therefore, it becomes imperative to analyse the relevant rules and regulations in respect of these transactions.

Investment by means of cryptocurrency can be a major inflow of cryptocurrency from outside India. This can be done to acquire shares, etc. One facet to be mentioned here is that in case of foreign investment, apart from RBI, Securities and Exchange Board of India (SEBI) also comes into the picture as it regulates the security market in India. The regulations provide that in case of both non-debt and a debt instrument including immovable assets, the mode of payment has to be through authorised bank channels and bank accounts.[5]26

Similarly, in case of payment for exports and imports, the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016, state that receipt and payment for exports and imports have to be made in appropriate foreign exchange or currency.27 Thus, this regulation ipso facto prohibits any transaction via cryptocurrency as crypto is neither foreign exchange nor currency. However, these regulations also provide a residuary power to RBI to permit transactions through any other instrument authorised by it.28 At this juncture, it is noteworthy to discuss here that some authors while interpreting Regulation 5(2)(b) of the said Regulations have opined that payment can be made in cryptocurrency for imported goods if the exporting country recognises cryptocurrency as a valid mode of payment.29 Regulation 5(2)(b) provides that payment of import in case of countries other than members of Asian Clearing Union can be made “… in a currency appropriate to the country of shipment of goods”30. In this author’s opinion, the supporters of this argument have misinterpreted the term “currency”. The real test is to see as to whether cryptocurrency falls within the definition of “currency” as per Indian laws (more specifically FEMA) and it is only after the satisfaction of the first test, it is to be seen as to whether such “currency” is recognised as a valid mode of payment by the exporting/shipment country. Since, it has already been established that cryptocurrency cannot be treated as “currency” under FEMA, thus, the argument that exporting countries can be paid in cryptocurrency when recognised by such exporting country, fails.

Another instance of cross-border payments is remittance to persons in India. As per RBI liberalised remittance scheme,31 a non-resident Indian can remit up to USD 250,000 through an authorised channel to a person in India. Theoretically, such a remittance can be made through cryptocurrency. However, at present there is no authorised agent for such transfers. Therefore, RBI may designate certain cryptocurrency exchanges, public or private or both, as authorised agents for such cross-border payments.

The above analysis shows that the real problem lies in the fact that cryptocurrency has not been recognised and notified as a valid mode of payment. It is imperative to mention here that the phrase “mode of payment” has been used here because it has not been argued that cryptocurrency should be notified as a legal tender. It appears that the ball is in RBI’s court which can easily notify cryptocurrency as a valid mode of payment and can bring out additional regulations to promote cross-border transactions via cryptocurrency. Such tinkering would not change the status of cryptocurrency as “goods” which will imply that the cross-border transactions done via cryptocurrency are essentially barter transactions.

b. Why Regulation

Once, it has been established that regulation of cryptocurrency under FEMA is plausible, the next question that arises as to whether regulation is the better alternative or not. In this respect, it is noteworthy to mention here that a few years ago; a similar concern arose regarding the regulation of payment instruments like Paytm wallets, etc. Admittedly, there is a difference between the nature of digital currency like Paytm credits and cryptocurrency. Nevertheless, the principal point to be noted here is that instead of completely banning such digital currency, RBI had introduced spending limit and other formalities under the FEMA.32 Today, subject to fulfilment of KYC norms, there is no spending limit and digital currency has become an integral part of the Indian financial market. Therefore, considering the infancy of cryptocurrency in India, it would be suitable that appropriate regulations be introduced under FEMA. Furthermore, there should be separate regulations for retail investors and ordinary businessmen, wherein RBI may consider imposing an accumulation limit for cryptocurrency for retail investor and prescribe additional compliance regulations for businessmen. These regulations maybe eventually relaxed as and when the Indian crypto market matures.

In support of the above suggestion, it is pertinent to mention here that cryptocurrency exchanges in IMAI case33 had submitted that they had put in place measures like avoidance of cash transactions, enhanced KYC measures and limiting to transactions in India.34 The problem with such regulation is that it is a case of self-regulation and therefore, non-binding and non-uniform. Nevertheless, in the proposed system, RBI can easily introduce uniform regulations for all crypto exchanges and users based on such self-regulations.

Lastly, by not regulating cryptocurrency, India would be extinguishing a unique opportunity for Indian industry. At the same time by banning cryptocurrency, no difference would be made in curbing cross-border crimes which is the primary motivation for this drastic move. To illustrate, in a case before the Karnataka High Court,35 the accused had ordered certain drug packets from Netherlands by placing an order through cryptocurrency. Now in such a case, imagine that there had been a ban on cryptocurrency. In such a scenario, tracing of transaction through any other mode of payment would have been easier but in the alternative, a mandatory disclosure under FEMA regarding cryptocurrency would have also served the purpose. Moreover, a ban on cryptocurrency would not necessarily imply that criminal activities through cryptocurrency would be curbed. Instead, the criminals would still conduct the transactions through cryptocurrency as cryptocurrency being legal or illegal is not their primary concern rather it is the lack of traceability which is the primary advantage here. On the other hand, legitimate users would be denied the benefits of this cryptocurrency in case of a blanket ban. Thus, it is imperative that proper regulations are enacted to effectively prevent such cross-border crimes.

4. Conclusion

The Preamble to FEMA36 states that one of its objectives is to facilitate and promote foreign trade. By opting to ban cryptocurrency instead of adopting a regulatory route, the legislature would be violating the objectives of FEMA. While the paper has not discussed the legal validity of the potential ban, such ban would undoubtedly affect India’s capability to engage in foreign trade.

The discussion in the paper has also shown that RBI has ample powers under FEMA to regulate cross-border transactions conducted through cryptocurrency. This can be done by classifying and normatively accepting cryptocurrency as “goods”. In fact, it appears that though the legislature may consider enacting a new regulatory code for regulating domestic and cross-border cryptocurrency transactions, nevertheless, RBI can easily issue relevant rules and regulations under FEMA without any need for a formal legislative amendment.

Lastly, imposing a blanket ban on cryptocurrency without first permitting regulation of cryptocurrency under the FEMA would result in denial of an exit route to the existing cryptocurrency holders. Therefore, in case the legislature goes ahead with a blanket ban, it would still be required to clear the air with respect to the regulatory framework under FEMA along with an adequate buffer period so that existing users can liquidate their crypto holdings (by selling the same in foreign countries) without completely losing upon the value of their investments.

* Associate, KN Legal, New Delhi.

[1]India to Reportedly Propose Cryptocurrency Ban, Penalising Miners & Traders, CNBC (15-3-2021, 11:35 a.m.), <https://www.cnbc.com/2021/03/15/india-plans-cryptocurrency-ban-will-penalize-miners-and-traders.html#:~:text=India%20to%20reportedly%20propose%20cryptocurrency%20ban%2C%20penalizing%20miners%20and%20traders,-Published%20Sun%2C%20Mar&text=India%20will%20propose%20a%20law,senior%20government%20official%20told%20Reuters>.

[2]Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.

[3]Foreign Exchange Management Act, 1999 (hereinafter “FEMA”).

[4]Jaideep Reddy, The Case for Regulating Crypto-Assets: A Constitutional Perspective, 15 Indian Journal of Law and Technology 379, 413-14 (2020).


6Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies (28-2-2019).

7(2020) 10 SCC 274 (hereinafter “IMAI case”).

8Deepanshu Poddar and Advik Rijul Jha, Cryptocurrencies in Need of Regulation: A Primer to Bitcoins Regulation in India, 4 RGNUL Student Research Review 50, 65 (2018).

9Khyati Basant, RBI & Cryptocurrency: The Story so Far, IPleaders Blog (14-9-2020), <https://blog.ipleaders.in/rbi-and-cryptocurrency-the-story-so-far/#Laws_relevant_for_cryptocurrency>.


11Nishith M. Desai, Vaibhav Parikh and Jaideep Reddy, Building a Successful Blockchain Ecosystem for India: Regulatory Approaches to Crypto-Assets, Nishith Desai Associates (December 2018), <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Building-a-Successful-Blockchain-Ecosystem-for-India.pdf>.

12IMAI case, (2020) 10 SCC 274.

13Hatim Hussain, Reinventing Regulation: The Curious Case of Taxation of Cryptocurrencies in India, 10 NUJS Law Review 792, 802 (2017).

14Jay L. Zagorsky, Finally, Bitcoin is becoming Legal Tender in a Country, Scroll.in (6-9-2021), <https://scroll.in/article/1004520/finally-bitcoin-is-set-to-become-legal-tender-in-a-country>.


16FEMA, Ss. 2(l) and (p).

17Sale of Goods Act, 1930, S. 2(7).

18General Clauses Act, 1897, S. 3(36).

19General Clauses Act, 1897, S. 3(26).


21Sale of Goods Act, 1930, S. 2(10).


23Saloni Shukla and Sachin Dave, Govt. Plans to Bring a Bill, Cryptocurrencies to be Treated as Commodity, The Economic Times (3-9-2021), <https://economictimes.indiatimes.com/news/economy/finance/virtual-currencies-govt-plans-to-bring-a-bill-cryptos-to-be-treated-as-commodity/articleshow/85885645.cms?from=mdr>.


25Foreign Exchange Management (Export of Goods and Services) Regulations, 2015,Gazette of India, Pt. II S. 3(i) (12-1-2016), Regn. 3.

26Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, Gazette of India, Pt. II S. 3(i) (17-10-2019), Regn. 3; Foreign Exchange Management (Debt Instruments) Regulations, 2019, Gazette of India, Pt. II S. 3(i) (17-10-2019), Regn. 2, Sch. 1.

27Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016, Gazette of India, Pt. II S. 3(i) (2-5-2016), Regns. 3 and 5.

29Amit K. Kashyap & Akanksha Goyal, India’s Discomfort with Blockchain Based Currency: A Vacuum on the Legality of Bitcoins, 6 GNLU Law Review216, 224 (2019).


31Master Direction–Reporting under Foreign Exchange Management Act, 1999, Reserve Bank of India (1-1-2016),<https://rbidocs.rbi.org.in/rdocs/notification/PDFs/13MDRD77DCF42C4E64B6C9A83C24EF5D4E188.PDF>.

32N.S. Nappinai, Technology Laws Decoded, S. 1.9(e) (1st Edn., 2017).

33(2020) 10 SCC 274.

34IMAI case, (2020) 10 SCC 274.

35Aayush Ajit v. Inspector of Customs, 2020 SCC OnLine Kar 1940.


One comment

  • Thank you for sharing this article.
    But I had a question that is will the cryptocurrency market grow in future?

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