Law regarding cryptocurrency in India

Reading time: 8-10 minutes.

Central banks around the globe have had a busy pandemic. From injecting large amount of money into the financial system to clearing large amount of potentially contaminated notes, they have regulated the flow of market in the last few weeks efficiently. With this hassle, the emerging of a digital currency is sure to make them more interested as it can potentially change how the central banks manage both liquidity and physical cash.

Amidst the coronavirus outbreak came the news of the testing of China’s official cryptocurrency. In the month of May, China’s central bank started testing the official digital currency in China with a design of rolling out the virtual money payment system. In a statement by the Digital Currency Research Institute of the People’s Republic of China, it has been reported that the research and development work of China’s digital currency is proceeding steadily. China’s cryptocurrency is called the DC/EP (Digital Currency/Economic Payment) and is being tested in four cities. Amongst the few banks which are testing China’s cryptocurrency and determining its fate of whether it can be combined with 5G and sim cards in the near future is the Agricultural Bank of China. The ABC is one of the biggest of the four state-owned banks in China.

While much deliberation goes on about which domains of the market would this currency function in, it has been recorded that the two most potential market players for China’s cryptocurrency would be the banks and the telecommunication companies. Researches by the Citi Securities, China suggest that DC/EP would be made official by the end of the year 2020.

Significance of the development

The very concept of issuing of crypto-currency in a country holds the potential of bringing about a massive change in the monetary framework of its economy and the PRC isn’t expected to be any different. The introduction of the crypto-currency in the Chinese economy is expected to subsume all M0 money (i.e. the cash in-transaction) while leaving the M2 forms of money untouched.

After the push made by Facebook.Inc with the creation of its patent crypto-currency which goes by the name of ‘Libra’ many economies, all over the world, have displayed great concerns towards the same and the PBOC was no different from the lot. Mimicking ‘Libra’ the PRC also went on to patent its crypto-currency but unlike all the other decentralized block-chain offerings the one made by the PRC seems to be centralized as its whole jurisdiction lies in the hands of Beijing.

According to the patents registered by the PBOC, the individuals in China will be in possession of a mobile wallet wherein they can exchange their Yuan for the digital money. In addition to this, the PBOC will be able to have a direct surveillance over all sorts of monetary transactions made by the individuals.  

The issuing of the crypto-currency does give the Chinese government an upper-hand in foreign trade as it prevents any and every kind of malpractice which exists in the ambit of the same. Alongside that, the crypto-currency also aims to protect the Forex reserves of the country thus making the economic stature of the PRC: protected and yet, massive.

What is Cryptocurrency?

“Cryptocurrency is money for the digital age” is what many scholars who have studied the cryptocurrency across the world say. It is an internet-based medium of exchange which uses cryptographical functions to establish networks to conduct financial transactions. These are irreversible and pseudonymous transactions that follow the online medium.

In the year 2009, a group of people who o by the of Satoshi Nakamoto invented cryptocurrency in the wake of the 2008 global financial crisis. The main object behind cryptocurrency was to enable people to control their money themselves and not rely on companies, banks, and government. Cryptocurrency has come to be known as digital gold; a form of money which is secured of any political influence and promises to increase its value over time. These are high comfortable and fast means of payment with a worldwide scope. While these make our daily transactions easy, what comes as a drawback of cryptocurrency is its anonymous nature which also enables people to involve in prohibitory transactions such as payment for black markets or any other outlawed economic activity. 

With the emergence of the concept of cryptocurrency, in 2008, Satoshi Nakamoto also published a paper titled “Bitcoin – a peer to peer electronic cash system.” Since, then Bitcoin is the first and the most popular cryptocurrency which attracted many to invest in bitcoins, soon making them a part of the bandwagon. In the subsequent years, many other cryptocurrencies have been trying to replicate the success of bitcoin, however, they have failed. In the recent years came the altcoins in the market which do not seem to be slowing down. Thus, giving a competition to the bitcoins.

Law regarding Cryptocurrency in India

In India, cryptocurrency is not a legal tender, however, exchanges are legal while they are monitored by the government, making it difficult to operate. Taxes in our country are regulated by the Income Tax Department and while ascertaining the tax status of cryptocurrency is still difficult, the Income Tax Department says that anyone who makes profit by means of cryptocurrency is liable to pay tax for it, making them capital gains.

The various laws which regulate cryptocurrency in India are enlisted below:

  • Securities Contract (Regulation) Act, 1956

The Securities Contract (Regulation) Act of 1956 regulate those cryptocurrencies which fall under the ambit of securities.

  • Companies Act, 2013

In scenarios wherein the cryptocurrency is in type of tokens, the regulation is done through means of Companies Act, 2013 along with which the regulations issues by the Reserve Bank of India are to be followed. The applicability of the Companies Act is further assisted by the Companies (Acceptance of Deposits) Rule, 2014 which specify when the receipt of money, by way of deposit or loan or in any other form, by a company would be termed as a deposit.

  • Payment and Settlements Systems Act, 2007

Payment tokens under cryptocurrency are regulated by the PSSA. This act suggests that there is nothing in this act “to exclude virtual currency, since only the term payment is referred to, as opposed to currency, legal tender or money. This also suggests that the constitution of a payment system for the functioning of the cryptocurrency activity would require the issuer to need an authorization from the RBI under the PSSA and compliance with KYC norms. A day to day example of this is a widely used payment method in India, Paytm.

  • Prevention of Money Laundering Act, 2002

Under this act, the use of cryptocurrency is regulated. This act has statutory penalties which include a prison term for up to 10 years in cases of money laundering. However, the applicability of this act to wallet operators or third-party bitcoin services is still uncertain due to the fact that these platforms of crypto asset trading are self-regulatory in nature and comply with the KYC norms.

On the touchstone of these events the businesses fueled by crypto-currencies took a backseat until 2017 and in addition to that, RBI issued a circular (dated 06 April 2018) which substantially blocked the usage of crypto-currencies in India. It ordered all the RBI regulated entities to withdraw all trading done by crypto-currencies and gave a three-month window to these entities in order to clear the clutter.

The incumbent government, on the other hand, seems to have turned a blind eye towards defining the ‘legality of crypto-currency’ and seems to uphold the concept of “pre-paid” instruments. However, the government set up a committee (pursuant to Late Shri Arun Jaitley’s budget speech of 2018) which included representation from the RBI and the committee aimed to ponder upon issues like:

  1. Domestic and international status of crypto-currencies.
  2. Legal framework surrounding crypto-currencies.
  3. Issues to be incorporated in order to prevent money laundering.

The probable reason which led RBI to put a wholesale ban on the crypto-currencies in India was that the inclusivity of anonymity in the ambit of crypto-currencies. The aspect of anonymity and decentralization can led to several severe trade malpractices like: money laundering and can also endanger the consumer protection. Thus, in that regard the RBI seems to be overtly suspicious towards crypto-currencies. Several stakeholders in this case went for judicial help and filed certain petitions in the Supreme Court of India in order to churn out clarity from the government over the issue of crypto-currencies.

Probable future

In the year 2009, the emergence of bitcoin as the first cryptocurrency also sparked a debate questioning its future. The future of cryptocurrency as seen by the economic analysts is its emergence as an institutional money that would enter the market. It is also seen that some of the limitations faced by the cryptocurrency – such as the losing and erasing of data due to a computer crash or a vault being ransacked by a hacker may come to an end in the near future. With increasing number of merchants accepting cryptocurrencies these days, the fact that growing popularity would in turn result into more regulation and government scrutiny.

With cryptocurrency aspiring to become a part of the mainstream economy and financial system in the near future, there is a wide range of criteria which it needs to satisfy. It would need to be both mathematically complex as well as easy to understand at the same time for its growing success.

The probable future of cryptocurrency in India has also been largely dependent on the recent Hon’ble Supreme Court judgement which lifted the ban which came in force in April 2018. This ban had crippled the Indian cryptocurrency industry and was challenged by the Internet & Mobile Association of India in the Hon’ble Supreme Court. The way forward is seen in a way which suggests than the need of the hour is not to impose bans on cryptocurrency, but to be more pragmatic to spread awareness to alert the potential investors of specific allied risks, and to monitor trade for fraud and scams.

Conclusion

Cryptocurrency market is a fast and wild place with a new cryptocurrency emerging every day. With this emergence, the old cryptocurrency dies which means that the investors lose their money in this process. The cryptocurrency will gain legitimacy in the coming years as a means of transaction for businesses, micropayments, etc. It is seen that despite all risks, cryptocurrency is perhaps the most exciting asset we have in the 21st century.

It is pertinent to understand that a vibrant cryptocurrency segment is also a way to add value to our financial sector which as of today is facing a major downfall. Thus, in the face of growing technological advancement in the financial sector, it is critical to strengthen the regulatory frameworks that deal with cryptocurrency in India.

Authors: Yashassvi Periwal from Symbiosis Law School, NOIDA and Kalhan Safaya from Hidayatullah National Law University, Atal Nagar, Naya Raipur.

Editor: Anmol Mathur from Symbiosis Law School, NOIDA.

Cryptocurrency: A Legal Analysis

 Reading time: 4-5 minutes.

Since time immemorial, money’s form has been changing in the world. In 7th Century BC, Turkey was the first civilization to use minted silver or gold coins during that era. Nevertheless, it has always been important in a trade relation that some sort of payment method is involved, be it bartered goods or coined money. The first kind of fiat money was used in China in 1000 AD. And until the end of Bretton woods system most of the money was convertible to some precious metal or the other.

But recently this kind of fiat money has been tried to be converted into virtual decentralized money like bitcoins and other cryptocurrencies. Cryptocurrencies such as Bitcoin consist of a peer-to-peer network of nodes which jointly maintain a common tamper-resistant record of historical transactions without relying on a central authority or trusted third party. The key innovation is a novel transaction-recording mechanism known as the blockchain.

The latter is made up of blocks – that is, batches of validated transactions – which are chained together – that is, logically linked or tied to each other in such a way that any attempt to edit or otherwise corrupt the historical record is either prohibitively expensive or becomes immediately evident. Cryptocurrencies have popularly been used as a catch-all synonym for what is actually a broader term, namely crypto assets. Crypto assets include any digital asset that utilizes cryptography.

 What are the dangers associated with cryptocurrency?

There are several dangers and security threats associated with cryptocurrencies. Some of the major problems that are there in the usage of cryptocurrencies are: –

  • Security Threats
  • Collapse concerns in cryptocurrency systems
  • Impact on real monetary systems
  • Fluctuation in virtual currency value
  • Money Laundering
  • Anonymity risks
  • Black marketing for cryptocurrencies

What is the international Opinion on Cryptocurrency?

Cryptocurrency is considered to be a heated debate in the field of E-business and E-commerce in the present times. Trading of cryptocurrencies for cash is either banned and prohibited in some countries or is allowed or not regulated in others. A lot of countries are welcoming towards cryptocurrencies while several others are still cautious and have their inhibitions.

 While there are several countries who have showed a friendly approach towards this new form like United States, Canada, Japan, Singapore, Russia, Switzerland etc., there are several others like China, Vietnam, Brazil etc., which are still being extremely cautious and hostile in a way towards cryptocurrencies. Also, there are certain countries around the globe like Germany, Poland, Britain, Thailand etc., who have opted for a neutral approach.

What is the legal Status in India?

The legal status of cryptocurrency in India is difficult to be determined. The main problem with determining the legal status of how bitcoins should be handled is whether they are a currency, security, commodity, or something completely different.

While cryptocurrencies are commonly referred to as a “currency” as they have many common characteristics of one, the legal definition requires a currency to be issued, used and accepted by a country, which is not the case with virtual currency. Another problem with bitcoins and the likes is that not all the countries have legalized its use.

There are several definitions of cryptocurrencies that can be read to understand the legal meaning of the term. It can be concluded that there is enough scope for legalizing cryptocurrency after studying various definitions of it. One has to wait and watch as to which approach the Indian government takes.

Even in the Union Budget 2018, Finance Minister Arun Jaitley reiterated that the cryptocurrencies are not recognized as legal tender. During his budget speech, the then Finance Minister said, “The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”

However, Jaitley also added that the government would try and explore the blockchain technology, which drives bitcoin and other crypto-currencies. The recognition of blockchain technology for future use in the digital economy has received positive reactions from the industry. Though the budget did not specifically talk about how blockchain was to be explored, it should be noted that in digital economy the major use for this has been around crypto-currencies like Bitcoins.

What is the probable future of cryptocurreny?

If a SWOT analysis of the cryptocurrencies is done it can be deduced that it definitely has a stable future ahead in the world market. But before that it has an economical and legal battle to win. It is also important to still be noted whether various countries and their governments will still resist cryptocurrencies as a pan-global asset since it is outside their reach and operates beyond it or rather accept its usage and advantages.

There are still several challenges being faced by cryptocurrencies and thus it still would take time to gain the required popularity in the E-Business and E-Commerce market. Lack of awareness.no place to go for in case of complaints or queries are troubles that are just adding to the disadvantages of cryptocurrencies.

Bitcoin and some more cryptocurrencies have also succeeded in attracting investors, and are getting more and more attention, but they have not succeeded yet as currencies. On the other hand, they definitely can be used for immediate investments. Thus, if we go by pure facts ‘Bitcoin is a potential investment-worthy crypto-commodity, which promises extremely high returns in the future with a possibility of huge risks.’

In conclusion…

Every new currency has to face an uphill battle legally and technically. Though cryptocurrency is a huge step towards decentralized digital currency but it is not a fiat currency. Any currency in the world has government or its institution’s backing which cryptocurrency lacks. The value of these cryptocurrencies has also been highly volatile in nature.

The head of the Bank for International Settlements, Augustín Carstens, also said bitcoin threatened to undermine public trust in central banks and posed a threat to financial stability, and he signaled a global clampdown. In India the finance minister in 2018 government, during his budget speech on February 01, 2018 had cleared that the cryptocurrencies are not recognized as legal tender in India. Moreover, the various government has issued tax notices to the investors of the cryptocurrencies and has also warned its people to be aware while investments in digital currencies. Thus, the cryptocurrencies are not legal tender in India.

This article is brought to you in collaboration with Aprajita Jha from National Law University and Judicial Academy, Assam.