Op EdsOP. ED.

Introduction

Passing years and seasons have proved the worth of cryptocurrency, especially Bitcoin, with more than 18 million of it being circulated today. It has progressed quicker than any financial ecosystem in history, from being a buzz phrase used among techies it has managed to attract general attention too. The majority of the contemporary market capitalisation has been driven by investors anticipating the prospects of blockchain technology.

Since the inception of cryptocurrency, from the leading experts to outsiders, all have witnessed its pricing figure that oscillates every few minutes. There would not be a crypto investor who has not tried to get to the root of this problem. Investors have been trying their luck hard to crack the code and decipher why cryptocurrency fluctuates and use that strategy to generate profitable bets in the crypto market. Its nascent stage is the highest contributing factor changing its value but it is not the only one. The presumption goes that such a volatile behaviour of cryptocurrency is likely to be in motion until a sufficient amount of pricing stability and acceptability is attained in the market.

When it comes to the administration and legality of crypto currencies, government perspectives vary throughout the world. Regulations are developing at an unprecedented rate in many parts of the world. Globally, various approaches have come into play such as setting up a body to monitor the Initial Coin Offerings, constituting cyber units to track unregistered securities. Such steps mark an attempt to protect the technology providers, financial institutions, and investors.

European Union (EU) Governments have been unified in their cautious optimism towards blockchain technology, willing to support the new field while avoiding wrongdoing and alerting potential investors of associated risks. In terms of cryptocurrency regulations, Asia has adopted a varied approach, with some nations outright outlawing trade such as China while others showed acceptance and encouragement.

In the Asian sub-continent Japan has the most proactive regulatory environment for cryptocurrencies. Though in past the country faced waves of scams; yet has learned its lessons well which is visible in the fiscal earnings released by Monex Group in April 2021. In comparison to prior years, coin-check revenues rose by more than fivefold to ¥20.8 billion. About 210,000 of the 260,000 subscribers it attracted were concentrated in the second part of the fiscal year, signifying that several people had jumped upon the new crypto bandwagon.

Hong Kong too has been relatively supportive of cryptocurrency. According to the recent government proposals, in Hong Kong, cryptocurrency exchanges will be required to get a licence from the city’s market authority and will only be permitted to provide facilities to professional investors.

Undoubtedly, the spectacular rise of cryptocurrencies in the past few years has piqued the interest of the investing public and financial institutions. Eventually, in most countries, the debate is no more about if a cryptocurrency will survive, rather about measures that will advance, thereby affect the institutions as it attains market maturity with time.

It is noteworthy to observe that with India’s rapid technological progress and extraordinary breakthroughs, particularly due to COVID-19 pandemic, the fintech sector has been on a steady upward trajectory. Nearly 7 million Indians have already invested roughly one thousand million dollars in cryptocurrency the Government is facing a complex challenge to allow the fintech sector to thrive in India while ensuring that it is done safely. However, in India, the story seems to be half-cooked. Though off lately the story has begun to cook more than it was earlier.

Position of cryptocurrency in India

Invariably, the traditional investors hold a conservative view propounding that the Government of India, will sooner or later introduce a Bill concerning cryptocurrency, and such a Bill will put a wet blanket on crypto and thereby banning it. This school of thought believes that Government can never be in a position to legalise cryptocurrency for it will lead to devaluation of Indian rupee. The Finance Minister in 2018 strengthened this lobby when it stated that:

The Government does not consider cryptocurrencies “as legal tender or coin” and will take all measures to eliminate the use of those crypto assets in financing “illegitimate activities” or a part of the payment system. The Government will explore the use of blockchain technology proactively for assuring in digital economy.1

This statement was succeeded by a circular from Reserve Bank of India (RBI).

The notification was pertaining to the Prohibition on dealing with Virtual Currency (VCs). While cautioning the user availing virtual currency services it decided to restrict its entities from dealing in VCs or providing services to assist anyone in dealing with or settling VCs. Maintaining accounts, trading, settling, registering, lending against virtual tokens, clearing, taking them as collateral, creating accounts with exchanges that deal with them, and transferring/receiving money in accounts connected to the purchase/sale of VCs are all elements of such services. Regulating entities that provided such services were also asked to exit the relationship by July 2020. RBI time and again has reflected upon the displeasing nature of cryptocurrency and its dissatisfaction in matters of legalising the same.

Nevertheless, the Supreme Court in Internet and Mobile Assn. of India v. RBI2 revoked this order in March 2020. The Court observed that, although Reserve Bank has the power and right to issue such circulars but the notification beforehand lacked the proof of the damage or adversity faced by regulating entities directly or indirectly while operating cryptocurrency.

For both Indian users and crypto firms who wish to serve them, the Supreme Court’s judgment is a huge step in the right direction. The move will not only increase the everyday usage of cryptocurrencies in India, but it will also draw fresh expertise and creativity to the nation’s blockchain endeavours.

Experts believe that as a natural development India will progress to become one of the leading countries for cryptocurrency and digital asset adoption in the near future and it will advance in the direction of a cashless economy if the Government does not take a step backward from cryptocurrency.

After the Supreme Court’s judgment, RBI further cleared the air surrounding its earlier circular by issuing a circular on Customer Due Diligence for Transactions in Virtual Currencies (VC).3 By reference to RBI Circular DBR.No.BP.BC.104/08.13.102/2017-18 dated 6-4-2018, Reserve Bank took notice of the fact that various banks/regulated companies have warned their clients against trading in virtual currencies. It further pointed out that all such notifications were not in congruence as the earlier circular that was issued by RBI back in 2018 was no more valid as it was set aside by the Supreme Court in March 2020.  However, banks and entities, on the other hand, were directed to proceed with proper conduction of due diligence as per guiding norms for anti-money laundering (AML), know your customer (KYC), combating of financing of terrorism (CFT), and regulated entities’ obligations together under the Prevention of Money-Laundering Act, 2002 (PMLA)4, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act, 1999 (FEMA)5 for overseas remittances.

Cryptocurrencies are not illegal in India but it is important to note that India currently lacks a regulatory architecture to manage cryptocurrencies. In November 2017, the Government formed an Inter-Ministerial Committee (IMC) to analyse currencies.

The Ministry of Corporate Affairs — General Notification dated 24-3-2021, remains the only official word conveyed from the end of Government of India (GoI). The notification made it compulsory for companies to disclose their crypto trading/investment during the financial year. The notification proclaimed “Details of Cryptocurrency or Virtual Currency where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the following shall be disclosed—

(a) Profit or loss on transactions involving cryptocurrency or virtual currency.

(b) Amount of currency held as at the reporting date.

(c) Deposits or advances from any person for the purpose of trading or investing in cryptocurrency/virtual currency.”6

In the eye of some, the move has been seen as a ray of hope which foreshadows taxation rules. Investors, economic, and political thinkers are also channelising their energy to understand if the grappling global developments of crypto will incite the Indian Government to soon come with a more unblurred stance on blockchain technology.

Recently, Central American country — El Salvador positioned itself as a first one to accept bitcoin as a legal tender. Legalising bitcoin though is only a chapter in the story of Salvadoran book yet many propound that it is less about the currency game rather more so about motivating people to use crypto. This will allow them to grasp the air of innovation and step their foot forward in the ground of opportunities and thereby tapping the technology sector of the country. Global debates as to whether or not this move is going to be attractive for the investors are going to depend on the leadership’s ability to utilise their irrefutable political capital to bring a large consolidated fiscal deficit into control.

After El Salvador’s bold step, there have been numerous discussions and deliberations if this step is going wake the Indian Government and think rapidly of crypto prospects. Recently many reports hold apprehensions about Indian Government’s inclination to classify bitcoin as an asset class in the future. Those who might believe that crypto deserves to have a transactional value might not be too satisfied nevertheless ones who think it has nothing but a stored asset value might appreciate the decision if implemented. An asset class is nothing but a mere collection of financial products with comparable financial attributes in the market. Just like one holds an asset such as real estate or precious metals, people might be able to hold money in crypto as an asset. It is no secret that cryptocurrencies such as bitcoins have outperformed all the conventional assets.

If India classifies cryptocurrency as asset class then the step can set a departure from its previous harsh posture against cryptocurrencies. The investors have always been on the lookout for such resolves on the cards from the end of the Government. The global developments in the cryptocurrency have the calibre to escalate the Government’s view to recognise the potential that exists in blockchain technology as a decentralised system.

Though the idea of India accepting cryptocurrency as a legal tender seems to be minute considering it has the propensity in devaluation of the Indian rupee. In an intercontinental view as well, accepting bitcoin or any other cryptocurrency as a legal tender is a concept more suitable to those countries that does not have a currency of their own. In upcoming days embracing cryptocurrency if not as a legal tender but a presumptive asset class seems to be more pragmatic. The step no matter how trivial in nature will certainly get the ball rolling and stimulate the market.

Explicitly, there exist numerous poles opposite theories in the market. As the story of crypto in India remains half-cooked none stands the test of time.

The way forward

We should not compare crypto to a fiat currency because it is a contemporary asset class. Cryptocurrency is simply one of many conceivable applications. Its potential must not be undermined by the Indian Government.

The Financial Action Task Force (FATF) standards say unequivocally that cryptocurrency poses no harm to the global economy and can be adequately controlled. It is also interesting to note that FATF has presented a Crypto Standard Regulatory Report in G20 countries to which India a member. Crypto and fiat can both be synchronised in one ecosystem and crypto can even assist banks in resolving current issues for millions of unbanked individuals.

The market anticipates further guidelines from Indian authorities in the future and an expansion in enforcement. While it is unclear whether a new regulatory framework will emerge in India, ICO issuers, trading platforms, and other businesses that deal with cryptocurrencies should start improving their anti-money laundering, anti-fraud, cybersecurity, and reporting initiatives at the earliest to regulate the market. Though the self-regulation will be a precaution but not a permanent cure, the Government needs to step in at the earliest to combat the wrongdoings.


Managing Associate, L&L Partners, New Delhi. Author can be reached at chatterjeeaor@swarnendu.co.

†† BA LLB (Hons.) 3rd year student,  Amity Law School, New Delhi. Author can be reached at   yashikabhardwaj06@gmail.com.

1 The Economic Times, “Are Your Crypto Investments Legal? Here is Everything You Need to Know”, available at <https://economictimes.indiatimes.com/markets/forex/forex-news/are-your-crypto-investments-legal-heres-everything-you-need-to-know/articleshow/82259869.cms> (last visited on 8-6-2021, 10.40 a.m.).

2 (2020) 10 SCC 274.

3 Reserve Bank of India, Customer Due Diligence for Transactions in Virtual Currencies (VC), DOR. AML.REC 18/14.01.001/2021-22, (Issued on 31-5-2021).

4 Prevention of Money-Laundering Act, 2002. <http://www.scconline.com/DocumentLink/RE7jhkh0>.

5 Foreign Exchange Management Act, 1999.  <http://www.scconline.com/DocumentLink/pIrl0KB8>.

6 Ministry of Corporate Affairs, Gazette of India, Extraordinary, Part II, S. 3, sub-s. (i) (Issued on 24-3-2021).

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.

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.