Banning Or Regulating Cryptocurrency-Where Is India headed?

The bill was created with the mindset to create a facilitative framework for creation of official digital currency to be issued by the RBI and to prohibit all private cryptocurrencies in India while allowing certain exceptions to promote the underlying technology of cryptocurrency and its uses.

However, the Government has now chosen to take a back seat for a while, debating on the need for a wider consultation including comments from the public. They are now keen to align their legislation in India at par with the global standards, which are also perhaps at a nascent stage and evolving continuously. According to the speculations of the industry experts, the bill might be re-shaped and re-launched by May,2022.

The last decade saw the growth of cryptocurrencies and the same started mushrooming in India with a number of cryptocurrency exchanges. Since these digital transactions bypass a trusted authority like a financial institution or a trusted bank and allows people to transact only on the basis of their digital identities, the Reserve Bank of India through a circular in 2018 passed direction preventing banks, NBFCs and payment system providers from dealing in virtual currencies and providing services to entities dealing with them. This circular was challenged before the Hon'ble Supreme Court of India in (Writ Petition (Civil) No.528 of 2018) in the case of Internet & Mobile association of India v Reserve Bank of India & Ors. The Hon'ble Court struck down the circular deciding the writ petition on 20^th March 2020, on the ground that the cryptocurrencies are unregulated but not illegal in India. The reasoning that helped the Hon'ble Court reach this conclusion was consistent stand of RBI that they have not banned Virtual Currencies.

Amongst the long-drawn debate between the banning and regulation of cryptocurrencies the Government of India recent announcement in Budget Session of 2022-2023 announcing a thirty percent tax on income from transfer of crypto or digital virtual assets and the TDS at the rate of one percent has added to the chaos further. It has also been announced in this year's session that a Blockchain-based and RBI backed Central Bank Digital Currency (CBDC) will also be introduced by 2023.

In a way this announcement could be an indication from the Government on implementing its earlier stated plan of recognising cryptocurrencies as assets and not currencies. The Finance Minister during the budget has made it clear that the move should not be seen as the Government legalising or recognising virtual and cryptocurrencies. Though some investors may find the tax implication to be high, but this might help the government track its users and holders.

Unlike China, who imposed a ban on cryptocurrency which in turn led to diversion of crypto mining to the United States, India thus can be seen adopting an approach similar to UK and Singapore where this currency might not be considered as a legal tender, but its exchanges are to comply with the financial regulations and such regulations are yet to be notified across jurisdictions.

Understanding Cryptocurrency and the Regulatory Challenge

As we generally know Cryptocurrency is created through a process of crypto mining which involves solving cryptographic equations with the help of high-powered computers. This solving process involves verifying data blocks and adding transaction records to a public record or ledger which is known as a blockchain. This is then secured by applying complex encryption techniques. Since the cryptocurrencies take help of cryptographic algorithms and use decentralised methods for verification and distribution of transactions, there is no central authority involved nor a centralised ledger.

While the information of each transaction is recorded on blockchain, the data is not linked directly to names, addresses and other identifying information. This makes all transactions anonymous and untraceable thereby raising a doubt as to the identity of the user who could be functioning in the capacity of a hacker or digital coder behind a cryptographic pseudonym to conceal his/her identity.

There are many potential AML/CTF risks associated with cryptocurrencies as highlighted by Financial Action Task Force (FATF) research:

• Anonymity - anonymous transfers between buyers and sellers enable transactions to take place under the radar. There are no names, no account numbers and no verification checks, with the source of funding never identified. This makes Know Your Customer (KYC) checks a challenge.
• Source/destination of funds - lack of identification and verification checks, with no names, account numbers, checks on the source or destination of funds, or historical records of transactions potential for increases the potential for abuse.
• Cross-border transactions - with a global reach to any jurisdiction (all you need is a mobile phone), the AML/CTF risks are increased.
• Lack of oversight - suspicious trading activity goes undetected if there are no AML systems. Law enforcement is complex as there is no central administrator and asset seizures are difficult.

Neither any government across jurisdictions nor any financial institutions has been able to assess the risks associated with such investments in cryptocurrencies. The lack of a sound regulation across the globe has paved way for the creators of these digital assets to dupe the investors. The investors have mindlessly fallen into the trap without realising the fact that a cryptocurrency cannot be valued. There is hardly any protection to the investor or buyer, who enters into a cryptocurrency transaction to avail certain goods and services and the same are not delivered to him as promised. The investors can lose their cryptocurrency if the digital file is corrupted, and they will no means to recover the same. Additionally, the value of cryptocurrencies may plummet down at any time as they are not underpinned by an asset and extremely volatile. The investors have not thought of further scenarios of what shall happen if the promoter of the cryptocurrency stops its trading activity. The latest example of this was the Squid Game Crypto Scam, where it is estimated that the promoters scammed an estimated $ 3.38 million, by drawing in buyers and thereafter stop trading, leaving the buyers with tokens which have no financial value.

No third-party interference, anonymity of transaction, no regulatory interference and easy to make cross border payments are the few advertisements gimmicks that have lured the investors/buyers of cryptocurrencies. The former RBI Governor Mr. Raghuram Rajan, rightly said in an interview with CNBC-TV18 on the 24 November 2021 that out of the six thousand odd cryptocurrencies in existence today, only a handful will survive, as they are like unregulated chit funds which take money from people and go bust and the regulators do not have the capability to monitor cyber risk in crypto exchanges. He said, "If things have value only because they will be pricier down the line, that's a bubble," adding that "a lot of cryptos have value only because there is a greater fool out there willing to buy." Though at the end of this while ending his interview he concluded by saying that cryptocurrencies cannot completely be eliminated but can only be prevented from being a bigger part of the payment system.

The situations mentioned do rings a bell that it is time and an immediate requirement to set a global regulatory frame for the dealings in cryptocurrencies. There is however, no doubt that the governments of various countries have identified this issue to be grave and have been working towards enacting stricter checks and balance. The Securities and Exchange Commission (SEC) in United States, one of the bodies that regulates cryptocurrencies, have pursued more crypto cases than ever last year. Binance Holdings Ltd., world's biggest cryptocurrency exchange is currently under investigation for by U.S. Securities and Exchange Commission.

Authored by Poorvi Aswani Bhardwaj and Snidha Mehra, Senior Associates with Century Maxim India. Views are personal.