Answer ... The Indian regulators have adopted a cautious approach towards cryptocurrencies. In 2018, the RBI prohibited banks and other regulated entities from dealing with cryptocurrency exchanges, citing concerns over money laundering and financial stability. However, the Supreme Court overturned this ban in 2020, stating that the RBI had not provided sufficient evidence to justify it.
The approach of the Indian government and the regulators towards virtual currencies will become clearer once the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 and the associated consultation paper have been made public. However, it will be necessary to look at the steps taken by the Indian government through its various ministries, departments and agencies to understand its general approach towards virtual currencies.
After various meetings with stakeholders, the government concluded that virtual currencies should not be banned but rather regulated. Consequently, the words ‘banning of’ were removed from the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which was listed for introduction during the winter session of the Parliament in 2021. However, it did not come up during the session and the discussions were thus postponed.
During various parliamentary sessions, the government was asked about the status of virtual currencies in India. Some of the questions raised were as follows:
- “Has the government taken any steps to implement the recommendations of the Inter-Ministerial Committee recommendations?”
- “Does the government propose to define cryptocurrencies as securities or other financial instruments?”
- “Has the government undertaken any steps to formulate a transparent regulatory framework for digital currencies/cryptocurrencies?”
- “Has the RBI made recommendations for framing suitable legislation to restrict the flow of cryptocurrencies in India?”
In answering these questions in Parliament, the Indian government clarified that the virtual currency sector is still an evolving unregulated sector, and that issues connected with this sector require careful examination, consultation with experts and stakeholders, together with international coordination. During Parliament’s 2022 winter session, the government also confirmed that any legislation regulating virtual currencies will be effective only with significant international collaboration on the evaluation of the associated risks and benefits, and on the development of a common taxonomy and standards.
The government also responded to the suggestions of the RBI and stated that, in light of the concerns expressed by the RBI on the destabilising effect of cryptocurrencies on the country’s monetary and fiscal stability, the RBI has recommended framing legislation on this sector. The RBI is of the view that cryptocurrencies should be prohibited.
The government has further stated:
Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.
During the 2022 Budget Session, the government introduced new taxes for VDAs (see question 1.1). While taxation brings a certain legitimacy to virtual currencies in India, it does not affect their legality. The finance minister held a media briefing at which she said her agency is “collecting inputs on regulation for crypto assets ... I don’t wait till regulation comes in for taxing people who are making profits.”
By contrast, the RBI has always been a great supporter of central bank digital currencies (CBDCs). The Reserve Bank of India Act, 1934 was amended by the Finance Act, 2022 to include CBDC as a digital form of bank note, empowering the RBI to issue digital currency. Pursuant to the amendments in the RBI Act, the RBI, through a press release dated 31 October 2022, launched its first pilot in the Digital Rupee – Wholesale segment, to commence on 1 November 2022. While the wholesale pilot was running, the RBI, through a press release dated 29 November 2022, also announced the launch of the first pilot for the Digital Rupee – Retail segment from 1 December 2022, to test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time.
It goes without saying that there are ongoing uncertainties with respect to virtual currencies in India. However, the government is working towards achieving a global consensus on the regulation of virtual currencies. As the proposed cryptocurrency bill and the consultation paper are still pending release in the public domain, it is difficult if not impossible to comment on the regulators’ approach towards virtual currencies at this stage. However, it appears from the latest developments that they might not be prohibited completely in India, and that the Securities and Exchange Board of India might emerge as a regulator of virtual currencies in India.