Cryptocurrency in India: Regulation Rather Than a Ban

Vidhi Goel

The late 20^th century has seen an exceptional ascent in science and innovation and barely left a space of human life immaculate. It has gone into human life as well as the working of the state apparatus. Essentially, it has additionally affected the nation’s economy. The present nation’s development and improvement is decided on the qualities and endurance of its economy. Science and innovation has placed their engravings in the economies also as the ascent of different virtual monetary standards. One such creation was crypto money, which turned into reality in the year 2008 with the publication of Satoshi Nakamoto’s paper titled “Bitcoin – A Peer to Peer Electronic Cash System”. Subsequently, the development of Bitcoin and other digital currencies incited nations to discover approaches to regulate the market. Thailand announced exchanging bitcoin as unlawful. Germany’s Ministry of Finance dismissed it as a lawful entity yet prepared for burdening exchanges including bitcoin by remembering it as a “unit of account”. The People’s Bank of China disallowed financial institutions from utilizing bitcoins.

In India, the Reserve Bank of India (RBI) observed the danger presented by VCs in its Financial Stability Reports of 2013, 2015, and 2016. They featured the concern over the volatileness and anonymous nature of these digital currencies. These concerns converted into a Statement and Circular issued by the RBI in 2018, which precluded all entities regulated directed by it, from offering its assistance to any individual or entity trading in VCs.

Before this Circular, the entities that managed VC trades worked in an administrative vacuum. Upon challenge, the Supreme Court of India (SC) in the case of Internet and Mobile Association of India v. Reserve Bank of India^[i] (“Cryptocurrency Judgment”) struck down the said Statement and Circular for being unconstitutional. The judgment was invited and celebrated by the industry and the experts working in the digital money market.

Corresponding to the RBI Circular, an Inter-Ministerial Committee (“Committee”) was comprised by the Ministry of Finance in 2018 to look into the administrative structure for cryptographic forms of money. The Committee distributed its report in February 2019 alongside the Draft Banning of Cryptographic money and Regulation of Official Digital Currency Bill, 2019 (“2019 Draft Bill”) which, as the name proposes, presented a total prohibition on cryptocurrencies. The fate of VCs in India, nonetheless, is as yet unsure.

MEANING OF CRYPTOCURRENCY

A cryptocurrency is virtual cash that depends on blockchain innovation. This kind of money chips away at cryptography. It is decentralized implying that no authority is there behind it to direct and control it. Cryptocurrency is a subset of virtual cash which is decentralized and ensured by cryptography. Bitcoin is an illustration of cryptographic money.

RBI CIRCULAR 2018

The Reserve Bank of India (RBI) vide its circular dated 6^th April 2018 (“RBI Circular 2018”) pressed a ban on the establishments regulated by the RBI, from trading in virtual currencies or offering types of assistance for working with any individual or element in managing virtual currencies. While the RBI Notification didn’t force any prohibition on virtual currencies essentially, it raised specific misgivings about the fate of virtual currencies in India.

INTER-MINISTERIAL COMMITTEE AND THE INTRODUCTION OF THE 2019 DRAFT BILL

On 02^nd November, 2017, a high-level Inter-Ministerial Committee (IMC) was comprised to concentrate on the issues identifying with virtual currencies in India and to propose explicit moves to be made in connection thereto. In light of the far-reaching examination of the multitude of issues identifying with virtual currencies in India, the IMC in its report dated 28^th February 2019 (IMC Report) prescribed a law to boycott cryptocurrencies in India. Appropriately, the Government of India presented the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (Cryptocurrency Bill, 2019).

THE ANALYSIS OF THE 2019 DRAFT BILL

The 2019 Draft Bill provides for a total prohibition on cryptocurrencies and condemns exercises related to cryptocurrencies in India. The fundamental highlights of the 2019 Draft Bill are mentioned herein below:

‘Cryptocurrency Meaning’: Section 2(1) (a) of the Draft Bill provides the of the cryptocurrency as “any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”

‘Prohibited Activities’:

1. Utilization of cryptocurrency as legal tender/currency in India is not allowed^[ii].
2. Further, mining, purchasing, holding, selling, managing in, issuance, removal or utilization of cryptocurrency in the nation is precluded.

The following ways of utilization of cryptocurrency are prohibited:

1. as a medium of exchange, store of value or unit of account^[iii];
2. as a payment system^[iv];
3. for providing cryptocurrency-related services to customers/investors such as registering, trading, selling or clearing^[v];
4. for trading with Indian currency or foreign currencies^[vi];
5. for issuing cryptocurrency-related financial products^[vii];
6. as a basis of credit^[viii];
7. as a means of raising funds^[ix]; and
8. as a means for investment^[x]

Offences and Penalties:

1. Fine or Imprisonment upto 10 years or both – Mining, holding, selling, dealing, transferring, disposing, issuing or using cryptocurrency.^[xi]
2. Fine or Imprisonment upto 7 years or both – . Issuing any advertisement, soliciting, abetting or inducing participation in use of cryptocurrency.^[xii]
3. Fine- Acquiring, storing or disposing of cryptocurrency with intent to use.^[xiii]
4. Fine and Imprisonment of 5 – 10 years – Any subsequent conviction for any offence.^[xiv]
5. 50% of the maximum term of imprisonment for the offence or the fine or both – Attempting to commit an offence.^[xv]

DRAFT OF CRYPTOCURRENCY BILL, 2021

The Lok Sabha Bulletin dated 29^th January, 2021 mirrored Parliament’s aim of presenting the Cryptocurrency Bill, 2021 for consultations. While the Cryptocurrency Bill, 2021 is yet not available in the public domain, it is perceived that the target of the Cryptocurrency Bill, 2021 is to make an empowering system for the authority advanced currency to be given by the RBI and to deny all private cryptocurrencies accessible in India. As of now, the meaning of the expression “private cryptocurrencies” needs clarity. Nonetheless, specialists trust it to incorporate any cryptocurrency, which has not been given or perceived institutionally, by the RBI

MCA NOTIFICATION, 2021

On 24^th March, 2021, the Ministry of Corporate Affairs issued a notice (2021 MCA Notification) ordering companies to make specific revelations regarding the virtual currency/cryptocurrency exchanges embraced by them during a financial year. The MCA Notification mandates companies to make disclosures in their financial statements with effect from 1^st April, 2021, pertaining to:

1. “the profit earned/loss incurred during a financial year on transactions involving virtual currencies/ cryptocurrencies;
2. the amount of virtual currencies/cryptocurrencies held as on the reporting date; and
3. the deposits or advances received by companies from any person for the purpose of trading or investing in virtual currencies/cryptocurrencies”

RECENT NEWS REPORTS AND THE CONCUSION

The Cryptocurrency Bill, 2020 along with the recent news reports reflect that there will no ban on cryptocurrencies (except private cryptocurrencies) and only the regulations will be brought in place. It is set up that there exists a lack of clarity concerning cryptocurrency guidelines in India. A cryptocurrency guideline requires a system with a very much organized and nuanced approach. It is intriguing to take note that the advantage of cryptocurrency was featured in the Draft of National Strategy on Blockchain published by the Ministry of Electronics and Information Technology (MEITY). It is said that blockchain innovation provides transparency, security and efficiency in business operations and enables a layer of trust over the Internet in a unique way, which was first tried for cryptocurrency application, Bitcoin. However, the RBI policies are plainly not the same as the perceptions made by MEITY.

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[i]2020 SCC Online SC 275.

[ii] Section 6 (2) of the 2019 Draft Bill.

[iii] Section 6(1) (a), (b) and (c) of the 2019 Draft Bill.

[iv] Section 7 (1) (a) of the 2019 Draft Bill.

[v] Section 7 (1) (c) of the 2019 Draft Bill.                   

[vi] Section 7 (1) (d) of the 2019 Draft Bill.

[vii] Section 7 (1) (e) of the 2019 Draft Bill.

[viii] Section 7 (1) (f) of the 2019 Draft Bill.

[ix] Section 7 (1) (g) of the 2019 Draft Bill.

[x] Section 7 (1) (h) of the 2019 Draft Bill.

[xi] Section 8 (1) of the 2019 Draft Bill.

[xii] Section 8 (3) of the 2019 Draft Bill.

[xiii] Section 8 (4) of the 2019 Draft Bill.

[xiv] Section 9 (1) of the 2019 Draft Bill.

[xv] Section 9 (2) of the 2019 Draft Bill.