This article has been authored by Ritik Jain, a Second year students Nirma Law University.
A cryptocurrency is a form of digital cash that is decentralized, non-state administered and an open-source software platform where users can produce a private currency and make payments, on the basis of encryption technology, without the interference of banks and other entities. Blockchain is the technology which enables the existence of cryptocurrency. It is a distributed ledger technology and allows new type of distributed software platform capable of finding concurrence on their shared states without need to establish any trust with central entity. In other words, this technology eliminates the third-party interference to validate the transactions over the peer-to-peer network.
The growth of technology has not only impacted the economy but also creates its own economy and due to this, cryptocurrencies gained so much interest or popularity in India but also began to intrigue and attract suspicion from governments and regulators. Regulations and suspicion from government has cleared that cryptocurrency cannot be given the status of legal tender. The Parliament, is proposing to introduce the New Bill “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” in the new Lok Sabha Session. The Bill seeks to prohibit all private cryptocurrencies and create a facilitative framework for creation of the official digital currency in India.
Many countries have imposed rules and regulations on cryptocurrencies. However, the range of regulations has varied significantly, with countries like Germany, Japan and the Netherlands taking a lenient regulatory approach, but countries such as China and India effectively banning cryptocurrency dealing.
As the regulatory stance in various jurisdictions continues to evolve, we will discuss some conceptual questions about the current stance of the government in context of the scope of cryptocurrencies and its regulation in India.
(2) Scope of Cryptocurrency In India–
The popularity of Cryptocurrencies such as Bitcoin, Ethereum etc., has considerably increased in India. Crypto-exchanges organisations such as Unocoin and CoinDCX - claim that there are approximately one crore cryptocurrency holders in the country. In other words, India accounted for around 10% (ten percent) of the global cryptocurrency trade. However, certain regulations and restrictions have been imposed by the Reserve Bank of India (RBI) and other government entities on the trade and dealing in virtual currency which are given below:
(A)Warnings of RBI-
RBI had issued a series of warnings regarding the risks involved in trade and dealing in virtual currencies (VCs), before imposing any restrictions on providing services that facilitated the dealing with or settling of VC. The first warning was issued by the RBI on December 24, 2013, cautioning the users, traders and holders of VCs stating that entities providing such services have not taken any regulatory approval or authorisation. The primary concerns highlighted by RBI were that –
· there was no authorised central agency which regulates such payments in India and, there is no established framework to consider disputes and customer problems;
· high volatility risk associated in the value of VC’s and these digital wallets are susceptible to losses arising from fraud and hacking;
· create a scope for illicit and illegal activities such as money laundering and promote financial terrorism in the country.
Subsequently, on February 1, 2017, the RBI highlighted the risks stated in its earlier 2013 Circular and further clarified that it has not given licences or approval to any entity to deal in VCs and the users who are dealing in VCs are dealing so at their own risk. Further, the RBI showed concern over increasing valuations of many VCs.
(B) Inter Ministerial Committee Recommendations- After considering the RBI concern over dealing in VCs, the Centre constituted an Inter-Ministerial Committee (IMC), which introduced two Bills.
Firstly, “Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018” (Crypto Token Regulation Bill) was introduced to regulate cryptocurrencies. This Bill proposed to: (i) regulate VC exchanges and holders to sale and purchase, (ii) prohibit persons dealing with crypto tokens from falsely posing the crypto tokens as not being securities or investment due to gaps in the existing regulatory framework, and (iii) maintained to register of transactions on the recognised exchanges by depositories.
Secondly, “The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” (Second Draft Bill) was introduced. The Bill provides for a complete ban on the trade of cryptocurrencies and criminalises activities which are associated with cryptocurrencies in India. However, neither of these bills executed.
(C) RBI Circular and Imposition of Ban-
In 2018, RBI being the authority for the regulation and supervision of payment system issued a circular directing the entities not to provide any service and deal in virtual currencies. Services include registering, opening an account for exchanges dealing in virtual currencies, maintaining accounts, and trading were being restricted by the RBI. When the 2018 Circular was issued, entities that were providing services, were given three months to cease all such activities and services. Hence, this Circular brought trading of and dealing in cryptocurrencies to a standstill. However, it was challenged before the Supreme Court in India with separate writ petitions filed by the Internet and Mobile Association of India and companies running cryptocurrency exchanges.
(D) Supreme Court Ruling In Case Of Internet And Mobile Association of India v Reserve Bank Of India –
The Internet and Mobile Association of India (IMAI) in 2018, filed a petition questioning the legality of the RBI Circular. “The main issue raised by the IMAI was that the power of RBI prohibiting the activity of trading and dealing in virtual currencies were outside the regulatory framework of the Banking Regulation Act, 1949, because it does not fall under the PSS Act (Payment and System Settlement Act). It was also contended that the blanket ban on the activities through subordinate legislation is a violation of Article 19(1)(g) of the Constitution of India.”
The Supreme Court observed that the cryptocurrencies or virtual currencies are to be considered as a digital representation of value that is capable of functioning as a medium of exchange. The cryptocurrencies are capable of performing all functions of real money though not given a status of legal tender. Further, the court noted that, the argument of the IMAI is not acceptable because the RBI has the requisite power to regulate the currency system of the country. However, it was held that, a complete ban on the right to access the banking system, which is an integral part to the right to carry on any trade or profession would therefore be considered as a violation of Article 19(1)(g) of the Constitution of India. Thus, it was emphasized by the SC that, any measures adopted by the RBI must pass the test of proportionality.
The Court referred to the case of Modern Dental College and Research Centre v. State of Madhya Pradesh to test the proportionality parameters. The parameters are:
· the measures adopted by any authority must be designated for a proper purpose;
· it must be rationally connected to the fulfilment of any purpose;
· if there are no less evasive measures can be taken; and
· that there is a proper relation between the importance of limiting the right and achieving the aim.
Hence, the Supreme Court concluded that the measures taken by the RBI were not proportionate according to these parameters and accordingly, the said circular was set aside.
(E)About The Current Stance of Government– The Parliament is proposing to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the next Lok Sabha session. The Bill takes due cognizance of long- standing uncertainties and indistinctness of VC laws and fosters the advent of digitalization. It proposes to ban private cryptocurrencies in India except any virtual currencies issued by the state. The Bill seeks to create a framework for creation of the official digital currency which will be issued and regulated by the RBI. Further, the Bill proposed by the government will provide a six-month time period to liquidate such assets.
(3) Scope in Context of Other Countries-
Various developed and developing countries are moulding their legal system towards legalising the cryptocurrencies. Countries like the US, and China are recognising the cryptocurrency while Japan is in the process of recognising it. China recognises crypto-currency as ‘Virtual currency’ but does not recognise it as a regular currency. In the same way, the US considers bitcoins as property but it has not been bestowed legal tender. Similarly, Japan became the first country to recognise bitcoins as a legal method of payment and defines it as ‘assets.’ While in the UK, bitcoins are considered as private currency but not subject to any tax charges. Russia also recognises it as ‘Virtual currency’ but does not carry the same status as regular currency. India is imposing certain restrictions on the trade and dealing in the virtual. Therefore, the Indian government needs to choose between regulation of cryptocurrencies, as is being done complete ban in countries such as china, and Pakistan etc. and recognising the currency such as in Japan, South Korea, or Russia, after the required demonstration using data and research.
(4) Conclusions and Suggestions-
After considering these issues, it is clear that there exists a lack of clarity in India with respect to cryptocurrency regulation. The major dilemma of the government is that the use of virtual currency can create money laundering and terror financing problems in the country, and due to this, the government wants to impose complete ban on private currencies but it can lead to the formation of a black marketing in the country. Hence, it is necessary to understand that the issues are there with all the countries and they have enacted proper methodology and framework to curb such activities.
Now, it is the time to examine whether a ban is the only outcome to curb a possible misuse of cryptocurrency when several developments are taking place on a global level in this sector. Therefore, the lifting of the ban by the Courts and making a new Bill for regulation, without any proper date and research will not solve the problem, there is a need for a proper framework to make this work.
Further, there are some suggestions and measures which can be adopted by the government for better framework, which are: (A) setting up the qualification criteria for the companies involving in the cryptocurrencies. This will sort out the consumer grievance and will maintain certain records to avoid illegal use and development of high-tech software to provide good facilities. (B) the regulators need to categorize cryptocurrency with caution since it will define its legal nature. For example, USA has not recognized cryptocurrency as legal tender but as 'commodity.’ (C) to enforce an approach that relies on economic instruments.