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Introduction
With the exponential development and unprecedented advancements in the field of technology in India, especially with the emergence of COVID-19, the fintech sector has been on a path of constant rise. With the gaining popularity and awareness amongst the people of India with respect to cryptocurrency such as Bitcoin, Ripple, Dogecoin, etc., many have started investing most part of their time and money in these virtual currencies, to ride amongst many others the present global wave in anticipation of profits. In India, the apex financial authority i.e., the Reserve Bank of India, has understood cryptocurrency as a form of digital/ virtual currency generated through a series of written computer codes that rely on cryptography which is encryption and is thus independent of any central issuing authority per se. It is facilitated through blockchain technology and has emerged as a person-to-person issuance and transaction system that uses private and public keys that enable authentication and encryption for secure transactions.
Being an untapped, unregulated market with a capability of over a trillion dollars, India also saw a massive surge of cryptocurrency exchanges. Witnessing the massive popularity of the crypto market, its usage within a year, and potential revenue loss the Government of India, the regulators and authorities began to take notice and as a consequence, in 2013 the Reserve Bank of India (“RBI”) issued a press release, cautioning the public against dealing in virtual currencies including Bitcoin. In November 2017 the Government of India constituted a high-level Inter-Ministerial Committee to report on various issues pertaining to the use of virtual currency and subsequently, in July 2019, this Committee submitted its report recommending a blanket ban on private cryptocurrencies in India.
Despite the fact that report from the Inter-Ministerial Committee was pending, at the beginning of April 2018, the RBI issued a circular preventing all commercial and co-operative banks, small finance banks, payment banks and NBFC from not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies[1]. This essentially broke down the crypto industry as exchanges needed the banking services for sending and receiving the money necessary for converting it into cryptocurrency and for paying salaries, vendors, office space etc. However, the circumstances prevailing around cryptocurrencies and their usage completely changed on 4th March 2020, when the Apex court of India i.e. Hon’ble Supreme Court of India, in a well-conceived judgment passed a decision quashing the earlier ban imposed by the RBI[2]. The Hon’ble Supreme Court of India predominantly examined the matter from the perspective of Article 19(1)(g) of the Indian Constitution, which specifies the freedom to practice any profession or to carry on any occupation, trade or business, and the doctrine of proportionality.
Development ahead
The Indian government is now considering the introduction of a new bill titled “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021”(“New Bill”) which is similar in spirit to its previous versions, however, intends to ban private cryptocurrencies in India with certain exceptions to promote the underlying technology and trading of cryptocurrency and provide a framework for creating an official digital currency which will be issued by the RBI. The New Bill recognizes the grey area of cryptocurrency laws and proposes to ban all the private cryptocurrencies in their entirety, however, it is still a grey area pertaining to which all kinds of cryptocurrency will fall under the purview of private cryptocurrency.
The RBI has cautioned the general public regarding the possible misuse of private cryptocurrencies in different possible ways. However, if the New Bill imposes a complete ban on private cryptocurrencies, it shall lead the cryptocurrency investors to invest and deal in cryptocurrency in unmonitored markets. Further, the objective of introducing a law related to virtual currency/ cryptocurrency is to simplify the process of trading and holding in a safer technological environment. However, even with the introduction of state-owned cryptocurrency which shall be regulated by the RBI, the risk factor involved in investment and holding of cryptocurrency shall remain the same.
Further, recently in the last week of March 2021, according to the latest amendments to the Schedule III of the Companies Act, 2013, the Government of India has directed that from the newly begun financial year, the companies to disclose their investments in cryptocurrencies. That is to say, the companies have to now disclose profit or loss on transactions involving cryptocurrency/ virtual currency, the amount of holding, and details of deposits or advances from any person for the purpose of trading or investing in cryptocurrency/ virtual currency[3]. This particular move has been welcomed with open arms by the people dealing in the crypto sector, as it is understood the same would open the door for all Indian companies to have Crypto on their balance sheets.
Conclusion
Based on the inference that can be drawn from the aforementioned facts and present scenario revolving around the world of cryptocurrencies, it is evident that there is a lack of clarity with respect to cryptocurrency regulation in India. A well-structured cryptocurrency regulation with respect to crypto trading exchanges, blockchain technology, investors, and the people employed in such sector is the need of the hour and thus such regulation needs more attention.
It is interesting to note that the benefits of cryptocurrency were highlighted in the Draft National Strategy on Blockchain, 2021, published by the Ministry of Electronics and Information Technology. Therefore, banning global virtual currency which has created an impact in many countries is not the best possible solution for the development of our nation. The government is required to take an effective step towards regulating cryptocurrency as a way forward to have the confidence of investors and the general public in the developing nation. Though it has been affirmed by the Union Finance Minister Nirmala Sitharam that there shall not be a complete ban on cryptocurrency – “we will allow a certain amount of window for people to experiment on blockchain, bitcoins and cryptocurrency.”, it will be crucial to sit back and review the Government formulated regulations with respect to cryptocurrencies before spearing ahead in that direction.
[1] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), (April 6th 2018), www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0
[2] Internet and Mobile Association of India V. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018
[3] http://www.mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf
Contributed by:
Amanraj Singh Chadha – Senior Associate, Ahlawat & Associates
Sarthak Chawla – Senior Associate, Ahlawat & Associates