Op EdsOP. ED.

I. Introduction

The coronavirus crisis encouraged traditional and even first time investors to look for alternative investment opportunities, and cryptocurrencies have been an unconventional and increasingly popular alternative ever since.[1] Cryptocurrencies are a form of digital currency based on blockchain technology, widely considered secure, decentralised and providing anonymity to its users, while using cryptography[2] to secure the transaction records. Due to the highly secure nature of transactions, purchases cannot be traced, and individuals can use it to purchase even illegal merchandise, including drugs or firearms.[3] Although cryptocurrency is “secure” two elements make cryptocurrencies riskier than bank accounts: market volatility and the lack of federal insurance and regulation.[4]

The cryptocurrency market crossed $1 trillion value earlier this year,[5] while unofficial industry estimates suggest that Indian owned investments in cryptocurrencies to be approximately US $1.4 billion.[6] Further, the PwC 2020 Time for Trust Report[7] found that blockchain technology would add $1.76 trillion (~1.4%) to the global Gross Domestic Product (GDP) by the year 2030. A global poll revealed that 73% of millionaires would invest in cryptocurrencies, such as Bitcoin and Ethereum, before the end of 2022.[8]

In 2018,  Reserve Bank of India (RBI) promulgated a circular[9] which prohibited banks from extending financial services that involved cryptocurrency, though  RBI had raised concerns about the potential financial, legal and security risks associated with it since 2013.[10] The Ministry of Finance constituted an Inter-Ministerial Committee which published the report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, 2019[11] raising several pertinent concerns including the need to secure consumers from fraud and risks, the protection of the financial system, and the need to prevent criminal activities. Thus, the Committee submitted the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019[12], which suggested a blanket ban on cryptocurrencies. Interestingly, the Draft Bill provided under Section 8(1) that whoever directly or indirectly mines, generates, holds, sells, deals in, transfers, disposes of or issues cryptocurrency, shall be punished with up to 10 years of imprisonment. The severity of the proposed imprisonment is in line with Para 2 of  Part A of the Schedule under the PMLA, giving us a clear indication as to how seriously the Government views these transactions.

However, a Supreme Court Bench comprising of  R.F. Nariman, Aniruddha Bose and V. Ramasubramanian, JJ. quashed  RBI circular in Internet and Mobile Assn. of India v. RBI,[13] (hereinafter “IMAI”), on the ground of proportionality, and upheld the contention that the denial of access to cryptocurrency users would be tantamount to a denial of the right to carry on any trade or profession guaranteed under Article 19(1)(g)[14] of the Constitution of India (hereinafter “the Constitution”). Thereafter, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was set to be introduced in the Lok Sabha, to prohibit all private cryptocurrencies operational in India.[15] There is a strong likelihood that this step is being undertaken, because  RBI is instructed to launch its own digital currency.[16] Yet, as on date, there is no definitive regulation governing cryptocurrencies, adding to the uncertainty and confusion about its legality in India.

The Government of India initially wanted to encourage blockchain technology whilst opposing the legitimisation of cryptocurrency because once the unit of transaction changes from rupees to any kind of cryptocurrencies, tax recovery or general regulatory control would become extremely difficult and may reach beyond the regulatory capacity of the Government.[17] Thus, the Government has attempted to welcome blockchain technology,[18] but has vehemently opposed the use of private cryptocurrencies.[19] Recently, it was reported that the Government plans to consult experts and seek “legal opinion at the highest level” before it comes to a final decision on whether to allow the trading and holding of cryptocurrencies within the domestic market.[20]

Therefore, it is warranted to declutter the aspect of cryptocurrencies regarding the foregoing anticipation of money laundering attached to it, as to whether it can or rather should, be regulated through the PMLA, in view of its decentralised and peer-to-peer (P2P) network mechanism apropos its tenuous legality.

II. Legality of Cryptocurrency

The key issue surrounding cryptocurrency is the inability to define its legal status. In light of cryptocurrencies being prone to anti-money laundering/counter terrorist financing (AML/CTF), the “silk road,”[21] or sophisticated cyber hackings,[22] almost no country has recognised cryptocurrency as a valid legal tender.[23] Though recently, El Salvador became the first country to adopt Bitcoin as a parallel legal currency,[24] while the move was anticipated to be allied with legal and economic issues by the International Monetary Fund (IMF).[25]

The Supreme Court in IMAI[26] judgment recognised that  RBI could notify cryptocurrencies to fall under the definition of “currency” under the Foreign Exchange Management Act, 1999[27] (hereinafter “FEMA”). Therefore, cryptocurrency users would be deemed to carry on an activity that falls within the control of  RBI. The Court further held that cryptocurrency does not hold any inherent monetary value and it cannot be classified as a prepaid instrument under the Payment and Settlement Systems Act, 2007[28] (PSSA). However, the Court recognised the ability of  RBI to regulate cryptocurrencies under the PSSA. Notwithstanding the IMAI[29] judgment,  RBI has “major concerns” on the impact of cryptocurrency trade on the country’s financial stability.[30]

On 24-3-2021, the Ministry of Corporate Affairs made it mandatory for companies dealing with cryptocurrencies to disclose profit or loss incurred on transactions, the amount of cryptocurrency they hold and deposits or advances from any person.[31] Further, multiple banks have warned their customers of restrictions if they deal in cryptocurrencies, further adding uncertainty on the tenuous legality of cryptocurrencies.[32] The Court in IMAI[33] judgment opined that,

  1. It is as much true that VCs (virtual currencies) are not recognised as legal tender, as it is true that they are capable of performing some or most of the functions of real currency.

Certain cryptocurrencies known as “stablecoins” are today’s economic equivalent of money market funds, which could create significant damage in the broader crypto market.[34] One of the serious criticisms of cryptocurrencies is that it has no inherent worth, and it only has the worth that the world gives it.[35] Moreover, owing to the decentralised structure, a random “broken heart” emoji tweeted by Elon Musk drastically fluctuated the market valuation of Bitcoin.[36] A monetary system that fluctuates on individual opinions, might be regarded as inherently flawed. Further, cybercriminals are going after cryptocurrency, with an increase in the number of new modifications of miners, according to a report by the cybersecurity firm Kaspersky.[37]

Thus, how can there be a currency that is not backed up by a sovereign State? The IMAI[38] judgment noted that, “George Friedman, the founder and Chairman of Geopolitical Futures LLC, an online publication, aptly summarised this dilemma as follows:

  1. 104. Bitcoin is neither fish nor fowl … But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is.

III. Cryptocurrency and money laundering

Some cryptocurrencies such as Monero, Zcash, DASH, Verge and Horizen provide their users with maximum privacy, making it almost impossible to trace the parties involved in the transactions.[39] In other words, most cryptocurrencies allow criminals to hide the source of their wealth. Though Bitcoin records all transactions which are contained in a freely distributed database,[40] criminals reportedly[41] laundered US $2.8 billion through Bitcoin exchanges in 2019, up from US $1 billion in 2018, making it even more appealing to criminals.[42] Thus, there is minimal or no law enforcement oversight protection, since there is no authority for regulating cryptocurrency, as opposed to the active role of the Government in the distribution of fiat currencies.

Cryptocurrencies being primarily based on P2P mechanism attract launderers for having the total cost of cash out strategy at less than 15% of the proceeds of crime, compared to other money laundering methods costing up to 50%.[43] It is because the information relating to the transaction, or the source of funds mostly are anonymous, making it next to impossible to bring it within the ambit of the PMLA, besides the fact that not recording every transaction detail violates Section 12[44] of the PMLA, which imposes an obligation on banking companies, financial institutions, and intermediaries to maintain and upkeep records. This anonymity and accessibility arguably make cryptocurrencies the preferred safe haven for criminal activities including money laundering.[45]

Therefore, unless anonymity is omitted from all transactions relevant to cryptocurrency, tracing or freezing the digital wallet suspected to be containing “proceeds of crime,” would practically become impossible for an agency like the Directorate of Enforcement (hereinafter “ED”). The Draft Bill which sought to ban all cryptocurrencies, attempted to address the problem of anonymity by bringing the act of mining, generating, issuing, holding, using, selling, transfer and/or disposal of cryptocurrency within the meaning of a “scheduled offence,” under the PMLA. Further, it has been reported that India’s leading cryptocurrency exchanges, including WazirX, CoinDCX and CoinSwitch Kuber, have partnered with Internet and Mobile Association of India to set up an advisory board to implement a code of conduct for the crypto industry in India.[46] Recently, the ED reportedly issued a notice to WazirX for allegedly violating the FEMA for transactions worth ₹2,790.74 crore.[47] Even though India has not yet passed a law on cryptocurrency, certain types of transaction have a higher risk of attracting penalties.[48]

The Supreme Court in  IMAI[49] judgment observed that virtual currencies are not widely accepted modes of exchange and thus they could also not be regarded as a final discharge of debt. The Government once aimed to block cryptocurrencies and welcome blockchain technology in the same breath, however, the Government may be required to recognise cryptocurrency if it intends to generate revenue through it and prevent its misuse as an avenue of money laundering. Moreover, the Indian income tax law is unclear regarding the tax impact on the gains earned from cryptocurrencies.[50]

 IV.  Where the world stands on cryptocurrency

According to the United Nations, the estimated amount of money laundered globally in a year is 2% to 5% (or $800 billion to $2 trillion) of the global GDP.[51] While the world leans towards the sustainable development goals to counter climate change, a debate looms around the energy consumption in cryptocurrency mining. As per an analysis of the Cambridge Centre for Alternate Finance, Bitcoin consumes approximately 110 Terawatt hours per year – 0.55% of the global electricity production, or roughly equivalent to annual energy draw of Malaysia or Sweden.[52] Is the cryptocurrency energy consumption appropriate use of non-renewable resources or the world needs to reject this model of monetary system?

In Canada, digital currencies are not legal tender,[53] but are bound by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2000, which include processes such as record keeping, verification, suspicious transaction reporting, and registration. In Singapore, primarily the Payment Services Act, 2019, mandate that cryptocurrency businesses should obtain a licence complying with AML/CTF regulations. In the United Kingdom, those engaged in crypto related business have to register with the Financial Conduct Authority, and they have to comply with AML/CTF measures provided under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, 2017. Recently, it was reported that up to 50 companies dealing in cryptocurrencies such as Bitcoin may be forced to close after failing to meet the UK’s AML rules.[54]

On the other hand, in the United States,[55] though there is no federal regulation governing cryptocurrencies, the Financial Crimes Enforcement Network (FinCEN) regulates money services businesses (MSBs) under the Bank Secrecy Act of 1970. Thus, while MSBs are required to conduct a comprehensive risk assessment of exposure to money laundering, FinCEN regulates MSBs to develop, implement, and maintain a compliance program for AML/CTF. Recently, the owner of a Bitcoin exchange was convicted by a federal jury for his role in a transnational and multimillion-dollar scheme to defraud Americans and received a 121-month prison sentence.[56] Another man was sentenced to 121 months in federal prison for conspiring to distribute and possess methamphetamine, a dangerous drug, the payment of which was done through cryptocurrency.[57] These are just a few illustrations that point to the dangers of an unregulated anonymous currency.

 V. The way forward

 Cryptocurrency needs to be regulated, undoubtedly. However, the PMLA as it currently exists is wholly insufficient to deal with money laundering via cryptocurrency and there can be two procedures to tackle this insufficiency. Firstly, it may be regulated by amending Section 2(s)(sa)[58] of the PMLA to include cryptocurrency business persons within the meaning of “person carrying on designated business or profession,” bringing the exchange service provider within the meaning of “reporting entity” under Section 2(w)(wa) and imposing “client due diligence/KYC” requirements on cryptocurrency businesses under Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Secondly, an effective legislation can be enacted with an autonomous body as thewatchdog, to affect safe utilisation of the currency. India should reasonably anticipate that decentralised and unregulated cryptocurrencies, while undermining the control of e RBI, can destabilise the economy; alongside being misused for circumventing capital controls, money laundering or illegal purchases. The verdict of the Supreme Court in IMAI[59] shall necessarily be complied with, which makes a ban on cryptocurrencies to be violative of the fundamental right to trade guaranteed under the Constitution. However, it is more likely that this position will have to be revised and a legislative ban be imposed as the dangers of cryptocurrency become clearer.


Criminal Lawyer based out of New Delhi.

†† Intern, Law Chambers of Jai Anant Dehadrai [3rd Year, BA LLB (Hons), Jamia Millia Islamia, Delhi].

1 Hadar Y. Jabotinsky and Roee Sarel, “How the Covid-19 Pandemic Affected the Cryptocurrency Market” (CLS Bluesky Blog, 26-3-2021) <https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-pandemic-affected-the-cryptocurrency-market/>.

[2] Kathleen Richards, “What is Cryptography” (TechTarget, April 2020) <https://searchsecurity.techtarget.com/definition/cryptography>.

[3] Dawn Allcot, “How Does Cryptocurrency Work – and is it Safe?” (Yahoo Finance, 2-5-2021) <https://finance.yahoo.com/news/does-cryptocurrency-safe-150059419.html>.

[4] Ibid.

[5] Samanth Subramanian, “Crypto is Now the World’s Fifth-Most Circulated Currency by Value” (Quartz, 12-1-2021) <https://qz.com/1954555/all-the-worlds-crypto-is-now-worth-more-than-1-trillion/>.

[6] James Mathew, “Crypto Investors Get a Shock as India Drafts Bill to Ban Digital Currency” (Arabian Business, 20 April 2021) <https://www.arabianbusiness.com/alternative-assets/462324-crypto-investors-get-shock-as-india-circulates-draft-bill-to-ban-the-digital-currency>.

[7] PwC, “Time for Trust: The Trillion-Dollar Reasons to Rethink Blockchain” (PwC, October 2020) <https://image.uk.info.pwc.com/lib/fe31117075640475701c74/m/2/434c46d2-a889-4fed-a030-c52964c71a64.pdf>.

[8] Kevin Helms, “Millionaires FOMO: 73% Will Own Bitcoin by 2022, Survey” (Bitcoin News, 19-11-2020) <https://news.bitcoin.com/millionaires-fomo-73-own-bitcoin/>.

[9] Reserve Bank of India, “Prohibition on dealing in Virtual Currencies” (RBI/2017-18/154, 6-4-2018) <https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF>.

[10] Vinod Joseph et al., “India: Cryptocurrencies In India – Past, Present & Future” (Mondaq, 13-5-2020) <https://www.mondaq.com/india/fin-tech/944312/cryptocurrencies-in-india–past-present-future>.

[11]Ministry of Finance, Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies, (Department of Economic Affairs, 28-2-2019) <https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf>.

[12] Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 <https://prsindia.org/files/bills_acts/bills_parliament/Draft%20Banning%20of%20Cryptocurrency%20&%20Regulation%20of%20Official%20Digital%20Currency%20Bill,%202019.pdf>.

[13] (2020) 10 SCC 274.

[14] Article 19(1)(g), Constitution.

[15] BQ Desk, “India’s Cryptocurrency Ban: Top 5 Things to Know” (BloomberQuint, 18-2-2021) <https://www.bloombergquint.com/business/indias-cryptocurrencies-ban-top-5-things-to-know>.

[16] Manoj Sharma, “RBI Working on Digital Currency, Wants to Tap on Blockchain Technology: Das” (Business Today, 25-2-2021) <https://www.businesstoday.in/current/economy-politics/breaking-rbi-reservations-regarding-cryptocurrencies-shaktikanta-das/story/432317.html>.

[17] Subhajit Sengupta, “A Vehement ‘No’ to Cryptocurrencies but Blockchain is ‘Welcome’, Arun Jaitley Says” (News18, 1-2-2018) <https://www.news18.com/news/business/a-vehement-no-to-cryptocurrencies-but-blockchain-is-welcome-arun-jaitley-says-1648003.html>.

[18] NITI Aayog, “Blockchain: The India Strategy” (Draft Discussion Paper, January 2020) <https://niti.gov.in/sites/default/files/2020-01/Blockchain_The_India_Strategy_Part_I.pdf>.

[19] FE Bureau, “Cryptocurrency ban to be made explicit; Govt to introduce Bill soon” (The Financial Express, 4-3-2021) <https://www.financialexpress.com/money/cryptocurrency-ban-to-be-made-explicit-govt-to-introduce-bill-soon/2205896/>.

[20] Aashish Aryan, “More Liberal Debate Likely: Govt Wants Legal Opinion on Cryptos” (The Indian Express, 21-5-2021) <https://indianexpress.com/article/business/banking-and-finance/more-liberal-debate-likely-govt-wants-legal-opinion-on-cryptos-7323780/>.

[21] David Adler, “Silk Road: The Dark Side of Cryptocurrency” (FJCFL Blog, 21-2-2018) <https://news.law.fordham.edu/jcfl/2018/02/21/silk-road-the-dark-side-of-cryptocurrency/>.

[22] Robert McMillan, “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster” (Wired, 3-3-2014) <https://www.wired.com/2014/03/bitcoin-exchange/>.

[23] The Law Library of Congress, Regulation of Cryptocurrency Around the World (Global Legal Research Center, June 2018) <https://www.loc.gov/law/help/cryptocurrency/cryptocurrency-world-survey.pdf>.

[24] Sandeep Soni, “El Salvador Creates History: Becomes World’s First Country to Adopt Bitcoin as Legal Currency,” (The Financial Express, 9-6-2021) <https://www.financialexpress.com/economy/el-salvador-creates-history-becomes-worlds-first-country-to-adopt-bitcoin-as-legal-currency/2268056/>.

[25] Reuters, “IMF Sees Legal, Economic Issues with El Salvador Bitcoin Move” (The Economic Times, 10-6-2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/imf-sees-legal-economic-issues-with-el-salvador-bitcoin-move/articleshow/83404747.cms>.

[26] (2020) 10 SCC 274.

[27] Foreign Exchange Management Act, 1999.

[28] Payment and Settlement Systems Act, 2007.

[29] (2020) 10 SCC 274.

[30] ET Bureau, “RBI’s Stance on Cryptocurrency Unchanged, Governor Das Says” (The Economic Times, 4-6-2021) <https://economictimes.indiatimes.com/tech/technology/rbis-concerns-on-cryptocurrency-remain-unchanged-governor-shaktikanta-das-says/articleshow/83230813.cms>.

[31] Amendments in Schedule III to the Companies Act, 2013, (Ministry of Corporate Affairs, 24-3-2021) <https://mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf>.

[32] Ridhima Saxena, “HDFC Bank, SBI Card Warn Customers of Restrictions if They Deal in Cryptocurrencies” (BloombergQuint, 29-5-2021) <https://www.bloombergquint.com/crypto/hdfc-bank-sbi-card-warn-customers-of-restrictions-if-they-deal-in-cryptocurrencies>.

[33] (2020) 10 SCC 274.

[34] Bloomberg, “Can a Cryptocurrency Break the Buck?” (Mint, 1-6-2021) <https://www.livemint.com/opinion/online-views/can-a-cryptocurrency-break-the-buck-11622504970042.html>.

[35] Priya Dialani, “Future of Cryptocurrency? Will it Grow or Stoop Low?” (Analytics Insight, 4-6-2021) <https://www.analyticsinsight.net/future-of-cryptocurrency-will-it-grow-or-stoop-low/>.

[36] Eric Lam, “Bitcoin Slips After Musk Tweets Broken-Heart Emoji for Token” (BloombergQuint, 4-6-2021) <https://www.bloombergquint.com/technology/bitcoin-drops-after-musk-tweets-broken-heart-emoji-for-token>.

[37] Bureau, “Cybercriminals go After Cryptocurrency: Report” (The Hindu Business Line, 5-6-2021) <https://www.thehindubusinessline.com/economy/cybercriminals-go-after-cryptocurrency-report/article34736492.ece>.

[38] (2020) 10 SCC 274.

[39] Shobhit Seth, “The 6 Most Private Cryptocurrencies” (Investopedia, 5-1-2021) <https://www.investopedia.com/tech/five-most-private-cryptocurrencies/>.

[40] Gaspare Jucan Sicignano, “Money Laundering Using Cryptocurrency:

The Case of Bitcoin!” Athens Journal of Law 2021 7(2) 253 <https://www.athensjournals.gr/law/2021-7-2-7-Sicignano.pdf>.

[41] Mike Orcutt, “Criminals Laundered $2.8 Billion in 2019 Using Crypto Exchanges, Finds a New Analysis” (MIT Technology Review, 16-1-2020) <http://technologyreview.com/2020/01/16/130843/cryptocurrency-money-laundering-exchanges/>.

[42] Nyman Gibson, “What is Bitcoin Laundering?” (NGM) <https://ngm.com.au/bitcoin-laundering/>.

[43] Sergi Delgadi-Segura et al., “Cryptocurrency Networks: A New P2P Paradigm”, Mobile Information Systems (Hindawi, 2018) <https://www.hindawi.com/journals/misy/2018/2159082/>.

[44] Section 12, PMLA.

[45] Matthew Leising, “Booming Decentralized Finance a Potential Haven for Money Laundering” (Bloomberg, 1-10-2020) <https://www.bloomberg.com/news/articles/2020-10-01/booming-crypto-market-a-potential-haven-for-money-laundering>.

[46] Ashwin Manikandan and Apoorva Mittal, “India’s Cryptocurrency Industry Draws Up ‘Legitimacy Plan’ ” (The Economic Times, 3-6-2021).

<https://economictimes.indiatimes.com/tech/technology/indias-cryptocurrency-industry-draws-up-legitimacy-plan/articleshow/83188685.cms>.

[47] Neil Borate, “What ED’s Notice to WazirX Means for Indian Crypto Traders?” (Mint, 15-6-2021) <https://www.livemint.com/market/cryptocurrency/what-ed-s-notice-to-wazirx-means-for-cryptotraders-11623689353255.html>.

[48] Ibid.

[49] (2020) 10 SCC 274.

[50] Harsh Bhuta, “Hold Crypto Assets? Here’s How you are Going to Pay Income-Tax on it” (The Economic Times, 6-6-2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/hold-crypto-assets-heres-how-you-are-going-to-pay-income-tax-on-it/articleshow/83277122.cms>.

[51] United Nations Office on Drugs and Crimes, “Money Laundering” <https://www.unodc.org/unodc/en/money-laundering/overview.html>.

[52] Nic Carter, “How Much Energy Does Bitcoin Actually Consume?” (Harvard Business Review, 5-5-2021) <https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume>.

[53] Government of Canada, Digital Currency <https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html>.

[54] Kalyeena Makortoff, “Cryptocurrency Dealers Face Closure for Failing UK Money Laundering Test” (The Guardian, 3-6-2021) <https://www.theguardian.com/technology/2021/jun/03/cryptocurrency-dealers-face-closure-for-failing-uk-money-laundering-test>.

[55] Tookitaki, Cryptocurrency Regulations in the United States <https://www.tookitaki.ai/compliance_hub/cryptocurrency-regulations-in-the-united-states/>.

[56] Press Release, “Owner of Bitcoin Exchange Sentenced to Prison for Money Laundering” (Department of Justice, 12-1-2021) <https://www.justice.gov/opa/pr/owner-bitcoin-exchange-sentenced-prison-money-laundering>.

[57] Press Release, “California Man Sentenced to 121 Months for Methamphetamine Trafficking” (Department of Justice, 29-4-2021) <https://www.justice.gov/usao-nh/pr/california-man-sentenced-121-months-methamphetamine-trafficking>.

[58] Section 2(s)(sa) of PMLA.

[59] (2020) 10 SCC 274.

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.