LAW GOVERNING VIRTUAL DIGITAL ASSETS – INDIA GUIDE, 2022

March 6, 2023 > India > Cryptocurrency

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The popularity of digital currency and virtual digital assets are on the rise in India. As per the United Nations Conference on Trade and Development’s report in 2022, India ranked 7th on the  list of countries ranked as per digital currency adoption with 7.3% of India’s population owning digital currency in 2021. However, the regulations in this sector are still in their nascent stages, with no law currently in place, dedicated to regulation of crypto assets in India. This article sets out the latest laws and developments in the crypto sector in India.

Legal Status

Unregulated. While there is no law explicitly prohibiting the use and trade of virtual digital assets (“VDAs”) in India, currently, all forms of VDAs, including cryptocurrencies are unregulated in India and hence, currently, trading in the same is at the asset holder’s own risk.

However, the Indian Government has demonstrated a clear intention of regulating VDAs through several recent regulations and decisions, in particular, the proposal of the Reserve Bank of India (“RBI”) to introduce the digital Rupee in the form of a Central Bank Digital Currency (“CBDC”). The CBDC is a digital form of currency which is proposed to be backed by the RBI. The RBI, in its Concept Note on Central Bank Digital Currency dated October 07, 2022, set out the key factors that would be taken into account to roll out CBDCs in India. The RBI has, since issuing this concept note, launched pilots of both wholesale CBDCs (restricted for use by financial institutions ) and retail CBDCs (available to the private sector as a substitute for cash-backed retail transactions) as on December, 2022.

Major Stakeholders

  • Owners/end-consumers of crypto assets
  • Miners
  • Crypto trading platforms/crypto exchanges
  • Payment systems and payment system participants
  • Banks

Primary Regulators

  • The Reserve Bank of India(“RBI”): The RBI is the central bank of India with the primary function being to manage and govern the financial system of country. It regulates the issue and management of Indian currency. Thus, cryptocurrencies also, if regulated, would fall within the ambit of the RBI. The RBI can be contacted by completing this form.
  • Registrar of Companies (“RoC”), The Ministry of Corporate Affairs: Companies, sole proprietorships and limited liability partnerships that undertake any business, including in the virtual digital asset space are handled by the RoC. The RoCs for various states may be contacted via email IDs set out at this link.
  • Income Tax Department (“IT Department”), Government of India: The Income Tax Department is the authority that undertakes and controls collection of direct taxes in India. The IT Department may be contacted via the contact numbers and email IDs available at this link.
  • Securities Exchange Board of India (“SEBI”): SEBI is the body that regulates the securities and commodities market in India. Crypto-exchanges, if regulated would fall within the purview of SEBI. SEBI can be contacted by completing this form.
  • The Advertising Standards Council of India (“ASCI”): ASCI is the advertising industry’s self-governing body. It regulates all forms of advertisements in India and has issued guidelines regarding the advertising of virtual digital assets in India. ASCI can be contacted at [email protected].

Industry Associations

India’s initial industry advocacy body, the Blockchain and Crypto Assets Council, was disbanded in mid-2022 by its parent organization, the Internet and Mobile Association of India due to the uncertainty of the regulation of VDAs in India, as per reports. However, in November, 2022, a new association – the Bharat Web3 Association (“BWA”) was formed by leading industry members such as Polygon, Hike, CoinDCX, Zebpay, CoinSwitch Kuber and WazirX. The BWA aims to spread awareness about the crypto sector in India and liaise with regulators regarding regulations pertaining to VDAs.

Key Regulations, Case Law and Guidelines

  • Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“2021 Bill”): The 2021 Bill is currently tabled before the Indian Parliament for approval. While not yet available in the public domain, the 2021 Bill is reported to set up an enabling framework for official digital cryptocurrencies to be issued by the RBI, and to prohibit private cryptocurrencies not issued by the State, based on news reports. There is no clarity on the definition of private cryptocurrencies. However, this 2021 Bill has not yet been notified and does not have the effect of law. Prior to the 2021 Bill, the Inter-Ministerial Committee, Government of India had proposed the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. However, this bill did not materialize into law.
  • Amendment of Schedule III of the Indian Companies Act, 2013: The Ministry of Corporate Affairs has recently issued a notification amending Schedule III of the Companies Act, 2013 and requiring companies to disclose their profits/loss and amount of virtual currencies held, in their financial statements from April 4, 2021.
  • Union Budget 2022 – 2023: The Union Budget announcement of 2022-2023 specifies that (i) income from VDAs is proposed to be taxed at 30% and loss from transfer of VDAs cannot be set off against any other income; (ii) ‘tax-deducted-at-source’ of 1% of consideration is proposed to be levied on any payments made in relation to transfer of VDAs, subject to a monetary threshold (this was later included in S. 194 S of the Income Tax Act, 1961); and (iii) recipients of virtual assets as gifts are also proposed to be taxed.
  • Guidelines for the advertising of Virtual Digital Assets and linked services: The Advertising Standards Council of India, the advertising industry’s self-governing body issued ‘Guidelines for the advertising of Virtual Digital Assets and linked services’ (“Guidelines”), a first of their kind in India in 2022. The Guidelines came into effect on April 1, 2022 and are applicable to all new advertisements on virtual digital assets released or published after this date. The Guidelines set out standards for advertising of VDAs such as the type of disclaimers to include, information that may be advertised/relied on and details to be shared, among other things.
  • Other Applicable Regulations: Other Indian legislations that may apply to VDAs and the entities that deal in them would include the Prevention of Money Laundering Act, 2002, the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961.
  • Internet and Mobile Association of India v. Reserve Bank of India (Writ Petition (Civil) No.528 and 373 of 2018): On April 6, 2018, a circular was issued by the RBI which imposed a prohibition on dealing in virtual currencies (“Circular”). However, in March 2020, the Supreme Court of India quashed this Circular on the grounds of proportionality as the RBI was unable to show semblance of any damage suffered by its regulated entities due to such virtual currencies. This judgment of the Supreme Court does not in itself contemplate whether cryptocurrency ought to be banned in India or not. In light of the Supreme Court’s decision, the RBI issued a clarification in May 2021 that the Circular was no longer in effect.

Key Players

  • WazirX – This is an India-based cryptocurrency exchange launched in 2021 which allows users to buy, sell and trade in crypto assets such as Bitcoin, Ethereum, Ripple, Litecoin etc. across platforms.
  • CoinDCX – This crypto investment app was established in India in 2018 and currently lists 200 + coins. The app provides various features for different categories of investors.
  • CoinSwitch – CoinSwitch is one of India’s biggest crypto companies, backed by investors such as Tiger Global and Sequoia Capital.
  • Apart from the crypto exchanges mentioned above, other prominent players in the virtual digital sector in India include gaming companies harnessing blockchain technology such as Hike, founded by Kavin Bharti Mittal and the blockchain platform Polygon.

Significant Reports

  • One of the earlies reports on VDAs was the Inter-Ministerial Committee Report of 2017, available here. This report was drafted to analyze the potential application of VDAs and distributed ledger technologies in the trade and finance sectors in India and propose actions to be taken with regard to VDAs.
  • The SG Garg Committee Report of 2019, available here, set out the many issues (regulatory and otherwise) related to cryptocurrency and legalizing the same in India.
  • More recently, the RBI’s Financial Stability Report of 2021-2022, accessible here, analyses crypto assets and their possible impact on the Indian economy. The report states in its preamble that “Cryptocurrencies are a clear danger. Anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name.
  • The RBI on October 07, 2022 issued a Concept Note on Central Bank Digital Currency, available here. This note sets out a detailed proposal by the RBI regarding the rollout of CBDCs in the form of a digital Rupee, the key features of CBDCs and the potential impacts, negative and positive, that the introduction of CBDCs could have in the Indian economy. The note also references cryptocurrencies, commenting on how the proliferation of crypto assets can pose significant risks related to money laundering and financing of terrorism, be a threat to monetary policy objectives and lead to creation of a parallel economy. The note also states that cryptocurrency could adversely affect the enforcement of foreign exchange regulations, especially the circumvention of capital flow measures.

(Originally published by Elliptic Enterprises Limited)

Authors

Rohan K George, Partner, Samvad Partners

Sushma Sosha Philips, Senior Associate, Samvad Partners

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