Cryptocurrency In India : Legality, Challenges And Sustainability

What are cryptocurrencies ?

Cryptocurrencies are a specific type of digital virtual currency, which can be traded as an asset or used as a currency through an online distributed ledger, commonly known as 'blockchain', which keeps a record of all the transactions that have ever been conducted in relation to the Crypto Currencies and is shared and agreed upon by the entire network of individual node/user, or computer maintaining a copy of the ledger. The transactions of Crypto Currencies through 'blockchains' are decentralised and protected by cryptographic encryption techniques. Typically, in a transaction involving Crypto Currencies, each newly generated block in the 'blockchain' is to be verified and approved by each node/user before being confirmed, which makes it almost highly improbable to forge entries made in any transaction.

For providing expeditious, decentralised and anonymous transactions, over the years, the Crypto Currencies have gained immense popularity across world and have become one of the most widely used, accepted and intriguing digital currency/asset. Decentralisation would presume that there is no central authority where records of transactions are maintained and instead transaction data is recorded and shared across multiple distributor networks via a distributed ledger technology (commonly known as block chain).

Developments over the years

Being contentious and speculative in nature, the Crypto Currencies have been viewed with microscopic eye by governments of various jurisdictions and India being no exception to this drive, in November 2017, a high level inter-ministerial committee ("IMC") was constituted by constituted by the Ministry of Finance, Government of India, under the chairmanship of the Secretary of the Department of Economic Affairs ("DEA") under the Ministry of Finance, Government of India to examine the policy and legal framework for regulation of Crypto Currencies in India.

Thereafter, in April 2018, the Reserve Bank of India ("RBI"), vide a notification^[1] ("Notification"), has directed all entities regulated by RBI to not deal in Crypto Currencies or provide 'services' for facilitating any person or entity in dealing with or settling Crypto Currencies. The said 'services' include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges, dealing with them and transfer or receipt of money in accounts relating to purchase or sale of Crypto Currencies ^[2].

Prior to the Notification, the banks in India were providing current account facilities and investors were transferring money to exchange platforms or receiving money from them using banking channels. Jolted by the Notification, the exchanges dealing with Crypto Currencies, the blockchain enthusiasts and individuals holding Crypto Currencies have filed writ petitions before various High Courts in India and the Supreme Court of India, which are pending adjudication, challenging the constitutional validity of the Notification on the grounds that the Notification violates the fundamental rights of Right to Equality^[3], Right to carry out 'Trade or Business'^[4] and Right to Life and Personal Liberty^[5] as recognized under the Constitution of India. The persons backing the proliferation of dealing in Crypto Currencies contend that based on the principle of 'intelligible differentia' they cannot be differentiated, without any reasonable basis, from other individuals engaged in the business, including that of pre-paid wallets and other electronic/digital dealing in money, purely because they are engaged in the use, trade or dealing of Crypto Currencies and that the Notification infringes upon the right to carry out trade and business and impairs the right to life and liberty.

On the other hand, the primordial concerns of RBI that make Crypto Currencies speculative and question their acceptability, are the anonymity of transactions and the volatility and fluctuation of the value of Crypto Currencies. Since the identity of participants is not revealed in the transaction, it may give rise to cybercrimes, money laundering, terrorism financing, illicit activities, misinformed investments by consumers and market frauds without any trace of offenders. Also, the trading of Crypto Currencies remains largely unregulated, as there are no banks facilitating and regulating the transaction. Furthermore, till date there has been no law in India, regulating the usage, dealing and trade of Crypto Currencies or according it status of "legal tender".

In July 2019, the IMC has released its report and proposed a bill^[6] ("Said Bill") criminalizing carrying on any activity connected with Crypto Currencies in India, including mining, buying, selling or storing Crypto Currencies, and their use as a means of raising funds or for investments. The Said Bill proposes to impose a fine of an amount upto Rs. 25,00,00,000/- or an imprisonment up to 10 years.

Treatment of Crypto Currencies in other jurisdictions

The IMC report has studied the status of crypto assets/currencies on various factors like, regulation, as an exchange token, legal tender or mode of payment, enforceability and investment options in various jurisdictions. It may be noted that globally, countries have accorded different legal treatment to virtual currencies. In some case countries like Russia and Canada allow Crypto Currencies to be traded or bartered for other goods or services and be used for investment purposes, whereas, countries like Switzerland, Thailand and Japan allow it to be used as a mode of payment and jurisdictions like Russia, Switzerland, Thailand, etc permit its usage for investment purposes.

The New York (State) allows crypto assets to be dealt as mode of payments subject to the registration and licensing requirements of superintendent and compliance of federal laws and as investment options, subject to the regulations and monitoring Securities and Exchange Commission, which has indicated that it considers Crypto Currencies to be securities. Also, in USA, Commodity Futures Trading Commission has regulated and may continue to regulate virtual currencies as commodities.

However, China prohibits any and all kinds of transaction in such Crypto Currencies. Interestingly though, China passed a cryptography law o tackle emerging regulatory and legal challenges in commercial cryptography use-cases. Broadly, the said law requires that all state secrets be stored and transmitted using "core and common" encryption, and that institutions working on cryptography have to establish "management systems" that guarantee the security of that encryption^[7].

It is to be noted that as of date no country across the world treats virtual currencies as legal tender.

Observations and Conclusio

It seems that the issuance of the Notification was largely influenced due to absence of laws and regulations for dealing in Crypto Currencies and their treatment as legal tender. Similarly, the findings, proposition and suggestions of the IMC are suggestive of the fact that there lies a dearth of cogent and evidentiary database and reasoning to address the issue of regulating the Crypto Currencies and in such dearth or absence, the IMC has proposed to a restrictive and banning measure rather than a regulatory measure.

Over the years, the Indian citizenry have delved themselves into the use, trade and sale of Crypto Currencies and have established highly successful business in the form of crypto exchanges and blockchain driven start-ups and therefore one cannot completely sign off Crypto Currencies. The same needs to be evaluated on the touchstone of state security, financial stability, consumer interests and commercial viability. Deriving analogy from the global trends, it may be noted that even the Declaration passed at G20 Leaders' meet at Osaka in June 2019, has acknowledged that the crypto-assets do not pose a threat to global financial stability and that there is a need to monitor the developments and remain vigilant to the emerging risks.

The cacophony of unrest created due to the uncertainty of legality of Crypto Currencies and the tussle between RBI/Government and dealers of Crypto Currencies has been a matter of significant concern. A substantive legislation by Parliament or regulation by RBI should come up for regulating and facilitating the dealings in Crypto Currencies and their recognition as a "legal tender", ensuring the following inclusions, amongst other;

• The mandatory reporting of sale, trade and usage of Crypto Currencies to RBI to ensure the identity of participants and the amounts transacted, thereby preventing anonymity in cryptocurrency transactions;
• Since fluctuation in the value of a currency is not good for an economy, a range or a band width of fluctuation in value of Crypto Currencies be considered by RBI for a specific period, from time to time, so as to recognize Crypto Currencies as currency with definitive value;
• The Master Circular issued by RBI for Know Your Customer ("KYC") norms, Anti-Money Laundering ("AML") standards and combating Terrorism Financing^[8], can be applied mutatis mutandis to transactions related to Crypto Currencies to curb the potential risks identified by RBI in relation to Crypto Currencies;
• An affirmative obligation be imposed on crypto exchanges to self ­ regulate and comply with KYC/AML regulations and make quarterly filings to RBI intimating the necessary information of all transaction in Crypto Currencies; and
• An independent unit be set up by RBI to study, address and deliberate on emerging technologies and market trends governing Crypto Currencies and advise RBI on regular basis.

It may be noted that adoption of a regulatory rather than prohibitory approach would do better justice to Crypto Currencies adopted in India. Even the IMC report and the Said Bill do not ban Crypto Currencies in absolute sense, rather, they suggest that Crypto Currencies in their present form are illegal and prohibited, however, and official digital currency backed by the government will be a legal tender and acceptable for trading/investments. Further, the IMC has recommended that the government may establish a Standing Committee to take into account the global and local technological developments in the field and revisit the issues related to virtual currencies, as and when required.

I believe that the above measures, if implemented, will be pioneer towards providing legal recognition and endorsement to Crypto Currencies in India.

Views Are Personal Only.