Case BriefsDistrict Court

Abhinav Pandey, MM, Tis Hazari Court directs Delhi Police to lodge FIR and investigate allegations of fraud in crypto transactions.

Complainant sought directions to the police for registration of FIR and commencement of investigation, into the offences alleged by the complainant to have been committed by the accused.

It was submitted by the complainant that he deals in the sale and purchase of bitcoins, and while doing that he always takes proof of identity before entering into any trade transactions and that he also pays taxes on the gains that he makes in such trade.

Further, it was added that the accused had purchase bitcoins on several occasions, and he used to transfer funds to the bank account of the complainant, in return for which, complainant used to transfer bitcoin to the accused’s virtual wallet on the online transaction portal “Binance”.

Complainant submitted that his bank accounts were frozen on the ground of his transaction in bitcoins to be marked as illegal transactions.

On confronting accused on the legality of the money paid by the accused against bitcoins, the accused admitted that the payments were a ‘scam’ and further he refused to return the bitcoins transferred by the complainant.

Complainant states that he was cheated by the accused and Court intervention was sought in view of the same.

Analysis, Law and Decision

Bench on perusal of the facts and submissions of the matter opined that its jurisdiction was made out in view of the provisions of Section 179, 180 and 182 of CrPC, and due to the absence of any material filed by the police to suggest to the contrary.

CRUX

Whether the complainant himself was carrying out a lawful activity, and whether he himself has come to this Court with clean hands?

Bench noted that RBI in its’ circular dated 6-04-2018 had cautioned the users, holders and traders of virtual currencies while directing the banks and financial institutions regulated by it, not to deal in virtual currencies and not to provide services eg. maintaining accounts, registering, trading, settling, clearing, giving loans and accepting VCs as collaterals, opening accounts of exchanges dealing with them etc., for facilitating any person or entity in dealing with virtual currencies.

Though, the above-stated circular was set aside by the Supreme court in its decision of Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) 10 SCC 274.

But another fact observed by the Court was that the above decision of the Supreme Court did not adjudicate upon the legality of the virtual currency and there was no specific legislation too, as on date, specifically dealing with the legality and regulation of cryptocurrency.

Further, the Bench remarked that the cryptocurrency transaction will comply with the general law in force including PMLA, IPC, FERA, NDPS Act, Tax laws, and with the RBI regulations regarding KYC (know your customer), CFT (Combating of funding of terrorism) and AML (Anti-money laundering requirements).

KYC is the responsibility of the intermediary and cannot be left to the individuals be it institutional transfer or person to person trade, with the intermediary shying away from the responsibility to ensure legitimacy of the source of money and establishment of real identity of the parties.

BINANCE

Responsibility of ‘BINANCE’ is to ensure adequate safeguards against activities such as ‘mixing’ and other random cryptocurrency exchanges, which change the identity of bitcoins being held by a virtual wallet, making tracing of any illegal proceeds and any bitcoins, purchased through it, extremely difficult.

Legal and Regulatory Escape: Is there an existence?

Proceeding to make some more significant observations, Court stated that the opportunistic activities, aimed at exploiting the lack of legal regulation, with utter disregard to the identity of parties, sources and destination of funds, and illegal purposes e.g. terrorism, narcotics, illegal arms, cross-border illegal transactions for which it may be used, still do not enjoy any route for legal and regulatory escape.

Therefore, the aforementioned aspects have to be investigated in detail, and any negligence or complicity of the online VC transaction portal “BINANCE” in perpetration of hiding the proceeds of crime, and in the funding of any illegal activities through cryptocurrency has to be inquired into.

Culpability of accused

Prima facie the screenshots of the conversation with the accused imply the knowledge of the accused regarding the source of money.

Bench noted that the accused was already an accused in two other cybercrime FIRs, hence,

it is quite possible that apart from being involved in the aforesaid cyber offences, the accused may have hid the factum of illegality of money from the complainant, thereby inducing him to deliver bitcoins in exchange of money, while being aware of the fact that it may, sooner or later come under the radar of the banking system, and so it is better to get rid of the same, purchase bitcoins and multiply/ mix transactions to hide its source, and to encash it from ‘safe haven’ countries, where there is absence or lack of regulations.

 As per the Court, there was a possibility that the complainant was unaware of the designs of the accused and fell into his trap.

But complainant’s possibility of giving his consent in the entire gamut of activities could not be ruled out since he did not reveal the complete facts to the Court as he went on accepting the amount from different accounts which may not have been a mere lack of caution or due diligence.

In one of the WhatsApp conversations annexed alongwith the complainant, the accused is seen advising the complainant to clear his bank accounts immediately on receipt of any consideration against sale of bitcoins, and the complainant fails to be alarmed, thanks the accused for such advice, and admits that he immediately converts any such consideration back to cryptocurrency.

 Yet, the complainant on being fully aware of the legal consequences has approached the Court.

While concluding the matter, Bench held that cognizable offence under Sections 403, 411 and 420 of Penal Code, 1860 were prima facie committed and the real culprits need to be identified.

Bench made another crucial observation that the possibility of the complainant, accused and the online intermediary, being hand in glove cannot be denied too, whereby the accused may have been involved in hacking/cyber-crimes against unsuspecting persons, and transferring the same immediately to the complainant against bitcoins, thus creating a chain of transactions difficult to follow up till the amount is invested in any illegal activity, or is withdrawn in a ‘safe haven’ jurisdiction. The exchange intermediary may either be involved, or may just be keeping its eyes shut to all such activities carried out through it.

Lastly, the Court stated that it is possible that any of the said persons/intermediaries may come out to be innocent or just negligent, hence there is a need for police investigation to be extremely technical.

Registration of FIR does not mean that the accused is to be automatically arrested, and the concerned provisions of CrPC shall apply.

Status of investigation to be informed on 6-08-2021. [Hitesh Bhatia v. Kumar Vivekanand, Case No. 3207 of 2020, decided on 1-07-2021]


Counsel for the Complainant: Mr. Bharat Chugh and Advocate Sai Krishna.

Op EdsOP. ED.

Background

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.

Conclusion

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.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Rohinton Fali Nariman, S Ravindra Bhat and V Ramasubramania, JJ has struck down the curb on trading in virtual currency, cryptocurrency and bitcoins in India.

In the 180 pages long verdict penned by Justice Ramasubramania, it was held,

“When the consistent stand of RBI is that they have not banned Virtual currencies (VCs) and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.”

The Court was hearing the matter wherein, the Internet and Mobile Association of India (IAMAI), whose members include cryptocurrency exchanges, and others had objected to a 2018 RBI circular directing regulated entities to not deal with cryptocurrencies. The petitioners had argued that the RBI’s circular taking cryptocurrencies out of the banking channels would deplete the ability of law enforcement agencies to regulate illegal activities in the industry. IAMAI had claimed the move of RBI had effectively banned legitimate business activity via the virtual currencies (VCs).

  • Reserve Bank of India issued a “Statement on Developmental and Regulatory Policies” on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
  • Following the said Statement, RBI also issued a circular dated April 6, 2018, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

The Court took note of the fact that the VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector.

“What is worse is that this has been done

      • despite RBI not finding anything wrong about the way in which these exchanges function and
      • despite the fact that VCs are not banned.”

The Court further said that the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.

The Court, however, held that anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. It explained,

“RBI is the sole repository of power for the management of the currency, under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under Section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index.”

The Court also rejected the contention that the impugned Circular was vitiated by malice in law and that it is a colorable exercise of power. It said,

“Irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing some of the functions of real currencies. Therefore, if RBI takes steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith. The repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public.”

[Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCC OnLine SC 275, decided on 04.03.2020]

Hot Off The PressNews

Government had constituted an Inter-Ministerial Committee (IMC) on 02-11-2017 under the Chairmanship of Secy (EA), with Secy (MeiTY), Chairman (SEBI) and Dy. Governor, RBI as Members, to study the issues related to virtual currencies and propose specific action to be taken in this matter. The Group’s report, along with a Draft Bill has been received by the Government. This Report and Draft Bill will now be examined in consultation with all the concerned Departments and Regulatory Authorities before the Government takes a final decision.

In the Report, the Group has highlighted the positive aspect of distributed-ledger technology (DLT) and suggested various applications, especially in financial services, for use of DLT in India. The DLT-based systems can be used by banks and other financial firms for processes such as loan-issuance tracking, collateral management, fraud detection and claims management in insurance, and reconciliation systems in the securities market.

As for private cryptocurrencies, given the risks associated with them and volatility in their prices, the Group has recommended the banning of the cryptocurrencies in India and imposing fines and penalties for carrying on of any activities connected with cryptocurrencies in India.

The Group has also proposed that the Government keeps an open mind on official digital currency.

As virtual currencies and its underlying technology are still evolving, the Group has proposed that the Government may establish a Standing Committee to revisit the issues addressed in the report as and when required.

A copy of the Report of the Group, along with the Draft Bill ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 has been placed below:

Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies

Press Release on Report of the Committee on Virtual Currencies


Press Release dt. 22-07-2019]

[Source: PIB]

Ministry of Finance

Case BriefsForeign Courts

Ninth Arbitration Court of Appeals: In a landmark decision, the Ninth Arbitration Court of Appeals of Russia has held that a bankrupt person’s cryptocurrency can be included in the debtor’s bankruptcy estate; thereby giving it the status of property with value, albeit indirectly.

The dispute originated from a claim filed to the Ninth Arbitration Court of Appeals by the bankruptcy trustee Alexei Leonov in October 2017. A lower court had initially directed the bankrupt Ilya Tsarkov to disclose the contents of his Blockchain.info wallet as part of the real estate estimation process. Leonov had earlier requested the court to order the transfer of Tsarkov’s Bitcoins into the bankruptcy estate, which was rejected at the time, stating that cryptocurrency cannot be used to pay creditors since “the laws of the Russian Federation do not recognize cryptocurrency as property.” The present ruling however sets a instance which recognizes the potential use of digital assets in contractual agreements.

[Source: Bitcoin News]

OP. ED.Practical Lawyer Archives

Nudged by several quarters, Reserve Bank of India (RBI) has taken an explicit step towards “ringfencing regulated entities” by prohibiting Indian banks from dealing with or providing services to any entities or individuals who deal with virtual currencies. A specified period of time shall be provided to those entities who are already providing these services to exit the industry.

RBI’s aforesaid step cuts air supply to the highly speculative and unregulated cryptocurrency market. Along with this move, RBI also announced that it would be coming up with its own version of a digital currency which would be a centrally regulated currency.

Before we set out to discuss the implications of this move, it is pertinent to briefly discuss the term “cryptocurrency”.

Cryptocurrencies essentially include digital money. The most popular cryptocurrency which nowadays has become a household name is bitcoin. Cryptocurrencies do not have any intrinsic value and are completely opposite to the Government issued money which has its equivalent in gold.

Cryptocurrencies were devised in order to dispense with the intermediaries and create a peer-to-peer lending system. It has helped in lowering transactional costs and by virtue of being based on cryptography which is quite secure. However, various factors like their volatile nature, lack of a central regulatory authority, no physical equivalent contributed to the growing suspicion around cryptocurrencies and making them unreliable. Institutions and authorities as big as the International Monetary Fund have become wary of cryptocurrencies.

RBI’s move of cordoning the banks under its aegis from any kind of dealing with cryptocurrencies is at best a protective and cautious measure. In the wake of the recent financial scams which have rocked the country and its banking system and massive erosion of public confidence in the financial markets, a pre-emptive step of this kind is welcome.

However, this spells doom for traders who have been dealing in cryptocurrencies. It is to be noted that RBI has not directly placed any ban on cryptocurrencies but has constructively made trading in them almost impossible. If a middle class investor has invested in bitcoins or any other virtual currency, he/she will now not be able to convert their earnings from cryptocurrencies into money. This would lead to huge financial losses not only to the individual but also to the Government which collects huge amounts as taxes from cryptocurrencies.

It is difficult to term RBI’s move blanketly as a positive or a negative step. Some factions are arguing that it is a dictatorial move, as RBI plans to launch its own digital currency while protecting its banks from other virtual currencies.

However, given the volatility and uncertainty extant in the cryptocurrency market, it is efficient, if the Government wants to dispense with the unregulated digital currency and introduce its own digital currency. Such a move is likely to bring about the benefits of a digital currency without having to compromise on the security and safety of small and midsize investors.

One of the most pertinent questions in the wake of this announcement is that whether this step should be looked upon as a death knell to cryptocurrencies in India. RBI has isolated virtual currencies by making them a pariah to its banks. This means that one cannot redeem the cryptocurrencies held by them as bank money. Though, it is beyond doubt that this would hit the cryptocurrency traders hard, but a number of ways may be devised in order to utilise cryptocurrencies through other mechanisms.

For instance, in some countries, people use bitcoins to buy Amazon coupons. Hence, it may be fallacious to term that RBI’s announcement would completely efface unregulated virtual currencies from India. It may be tougher to deal in them but not impossible.

The efficacy of RBI moves in case of cryptocurrencies will have to face the test of time.

* Managing Partner of Corp Comm Legal

** Research Associate.