'Another NSEL Scam Is Brewing': Plea Before Bombay High Court Seeks Regulation Of Cryptocurrency Market In India

The petitioner has approached the High Court to issue directions to the respondent state for formulating law/ rules governing the use of cryptocurrency within India, preparing a robust mechanism for monitoring international crypto transactions, overseeing the registration of crypto exchange platforms, instituting a proper grievance redressal mechanism against trading platforms, and putting in place a foolproof taxation scheme for such transactions.

The petitioner blames the government for the lack of initiative in formulating comprehensive legislation for crypto regulation after the Supreme Court Judgment in 2020. Due to the absence of legislative intervention, unregulated crypto trade in the way of drug trade, terror financing, money laundering and other unlawful activities are burgeoning. Lack of clarity on taxation of cryptocurrency trade has resulted in huge exchequer losses, the petitioner says.

The petitioner submits that the investment in cryptocurrencies has reached the threshold of $ 6.6 Billion and will only increase further. Information about the number of online platforms providing exchange services of cryptocurrency is unavailable even when the number of investors is on the rise. Union of India, subordinate Ministries and departments, and the banking regulatory bodies are unaware of the vastness of the crypto tech market and startups in India today, the petition states.

There's no central authority to manage or control the value of cryptocurrency, unlike the normal currencies. The absence of laws/ regulatory bodies in the realm of crypto trade might result in a scam of the magnitude of the 2013 NSEL Case, the petition notes. The petitioner has also annexed an analytical study of cryptocurrency with the petition.

The petitioner relies on his personal experience with cryptocurrency online platforms to elucidate the need to protect the larger interests of Indian citizens who invest in virtual currencies.

The petitioner alleges that a fraud has been committed on him by the 'Buyucoin' Cryptocurrency trading website. According to him, the website only approves crypto transactions of a smaller number of coins from the Buyucoin wallet to maximise their revenue from flat transaction and exchange fees of each such process. When the petitioner tried to withdraw a substantial number of 'Doge' coins at once from his wallet when the market value of the said currency was at an all-time high, the transaction was stuck in the gateway and illegally rescinded by the platform itself. He further alleges that Buyucoin unlawfully withheld his investments till the market was no longer favourable, despite repeated assurances to resolve the issue by the support staff and Buyucoin officials. Afterwards, the coins were restored to his wallet but the act of withholding the coins, without any prior notice regarding the suspension of services has incurred him huge losses, the advocate asserts.

As per the petitioner, when the deficiency in services and the evasive attitude of the support staff were called out, the accused website shifted the blame to the petitioner advocate stating that he has already agreed to the Website's 'Terms And Conditions'.

The petitioner submits that Buyucoin has indulged in unfair trade practices by forcing its customers to make small transactions and denying approval to larger transactions. The petitioner states that he has not impleaded the website as a respondent/ approached the consumer commission to obtain the compensation that he is duly entitled to.

The only underlying intention, according to the petitioner, is to make the respondent authorities falling under the definition of 'State'  take notice of the illegalities in the crypto trade, and take necessary steps for its strict regulation. He also mentions that the representation he made to the respondent authorities outlining these issues has not been replied to.

In the Internet Association case, RBI has referred to a few practical difficulties in regulating crypto markets, namely, i) Lack of structured mechanism in handling customer grievances, ii) its immense potential to be utilized for illegal activities due to the pseudo-anonymity/ anonymity offered, iii) KYC norms ineffective since the anonymity of VCs cannot be remedied, iv) Cross border nature of trade in VCs and lack of accountability

The Petition notes that the Reserve Bank of India has repeatedly cautioned the users and traders in virtual currencies about the risks involved via public notices in 2013 and 2017. The petition also points out that the regulatory authority was well aware of the risks involved in cryptocurrency dealings if it is permitted to go on without any statutory restraints in place. Even then, beyond the precautionary advisories, RBI has shied away from issuing any conclusive rules to regulate the crypto market, says the petition. After the SC judgment quashing the ban on virtual currencies (VCs), the 2021 RBI circular to apply customer due diligence won't protect the interests of crypto investors, the petition elaborates by comparing the market to NSE and BSE Trading platforms monitored by RBI.

"It is a widespread practice among these crypto exchanges to restrict services when market price of coins is high in order to benefit from the price arbitrage by using the coins held in customers' account for themselves and then restore the service when price has fallen", the petition lists out the malpractices faced by customer investors.

The petition also compares the 'Terms and Conditions' of popular Crypto-Currency exchanges to try and establish that the business is conducted as per the whims and fancies of each website due to the lack of regulations.

"Such agreement terms fall under the meaning of Click-Wrap agreements which ask consent through 'I Agree' or 'I Disagree' Buttons… In several of the cases, these e-contracts which are agreed by the user are often one-sided giving more advantage to the e-commerce websites without any checks. It is established law that one-sided terms constitute unfair trade practice under Consumer Law."

The petitioner also suggests that adopting a similar structure like that of stock trading can help the investors and government in tracking the crypto transactions and its legality. Advocate petitioner also make remarks about the loss of revenue on crypto exchanges worth crores due to the dearth of clarity in the Income Tax Act or Goods And Services Tax Act. Any person gaining from crypto transactions will only be taxed once the original money is transferred to the respective bank accounts. As per the general principle, these transactions can be taxed based on the purpose for which they are used to report the gains and losses in the Income Tax Return.

Regarding the illegal activities perpetrated in the form of frauds as well as drug and terror financing, the petitioner says:

"While it is easy to launch a trading platform and receive money from customers in return for cryptocurrency, there is no guarantee that the amount paid to exchange platform for acquiring crypto is truly purchased in the user's name or is only an illusion to siphon off funds."

The petitioner fears that unchecked and unregularized transactions that don't leave any trail facilitate embezzlement and money laundering. Due to the anonymity of transactions and a web of shell companies, it is next to impossible to bring such transactions within the ambit of the Prevention of Money Laundering Act though the non-recording of transactions violates Section 12 of PMLA.

The petition also makes reference to a news report on the drugs on cruise case, which says that NCB suspected the drugs recovered were brought from the 'dark web' using cryptocurrencies.

Even when India has the world's highest number of crypto investors, the country hasn't enacted any statutory provisions to regulate crypto trade, unlike other prominent countries, says the petitioner advocate.