Answer ... Given that there are no laws or regulations that specifically govern the use of blockchain/DLT, there is no dedicated administrative body in India that monitors the use and deployment of blockchain /DLT.
However, as mentioned in questions 1.1 and 1.3, the RBI, which regulates the financial services sector, has been proactive in issuing advisories in the form of press releases to users, holders and traders dealing in virtual currencies, cautioning them about the potential financial, operational, legal, customer protection and security-related risks associated with virtual currencies. The RBI also issued a directive to entities regulated by the RBI prohibiting them from dealing in virtual currencies or providing any services to facilitate any person or entity from dealing in or settling virtual currencies, including maintaining accounts, giving loans against virtual tokens, accepting virtual tokens/currencies as collateral and opening accounts with exchanges that deal with them.
This directive was challenged before the Supreme Court of India by the Internet and Mobile Association of India (IAMAI) – a not-for-profit organisation which represents the interests of the online and digital services industry – shareholders and founders of crypto-asset exchange platforms, and individual crypto-asset traders, among others. On 4 March 2020 the Supreme Court set aside the RBI directive on the grounds of proportionality, holding that the RBI had failed to establish how regulated entities have suffered loss or otherwise been adversely affected, directly or indirectly, on account of their interactions with virtual currency exchanges. It reached this conclusion on the grounds that there is nothing in Indian law that prohibits trading in virtual currencies.
As a result of this judgment, regulated entities are no longer restricted from providing banking services relating to the purchase or sale of virtual currencies.
While the judgment struck down the RBI directive, it nonetheless recognised the extensive powers of the RBI to regulate financial systems under the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007.
The Supreme Court held that the RBI is akin to any other statutory regulator and its decisions – including circulars – in the economic domain are supplemental to the statutes, including as regards its power to regulate anything that may pose a threat to or have an impact on the financial system. It held that the RBI has the power to regulate or restrict virtual currencies, which have the potential to interfere with matters within its regulatory domain.
In addition, the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (as discussed in question 1.1), in its current form, empowers ‘investigating authorities’ to undertake searches and seizures to investigate offences that are contemplated under the bill. The bill defines an ‘investigating authority’ as a police officer not below the rank of deputy superintendent. The activities that are punishable under the bill include selling, issuing, transferring and using cryptocurrencies for investment, purchase, sale or storage.