INTRODUCTION & BACKGROUND
In the era where technological advancements are happening at an exponential rate, the Fintech sector has found itself at the forefront of this boom. From mobile banking and online stock trading platforms to unequivocally the most coveted one – cryptocurrency. The popularity of Virtual Currencies ("VCs") such as Bitcoin, Ethereum, etc. has considerably increased in the recent past – globally and in India. As per some media reports, the three largest crypto-exchanges in India - WazirX, Unocoin and CoinDCX - claim that there are anywhere between 60 lakhs to one crore cryptocurrency holders in the country with holdings of over Rs 10,000 crore.1 Further, the growth potential of this sector was highlighted in a Nasscom and KPMG Report2 which estimated that transactions in the Indian fintech sector (FinTech) grew 121% from 2018 to 2020 and India's GDP will increase from FinTech by an additional $730 million by 2025.3
A cryptocurrency is a form of digital cash that is non-state administered, decentralized ("peer to peer") and open source based. An open-source software provides a platform where users can produce a private currency and make payments in this currency without recourse to banks and central banks, based on encryption technology.4 Blockchain is the technology behind cryptocurrency and essentially enables its existence. The Government of India Ministry of Electronics and Information Technology (MEITY) has drafted the National Strategy on Blockchain in January 2021, which describes Blockchain technology as a distributed ledger technology suitable for decentralized and transactional data shared across a large network of untrusted entities. It is a technology allows new type of distributed software architecture capable of finding concurrence on their shared states without need to establish online trust with any central entity/participant. This technology eliminates the requirement of central entity / third party to validate the transactions over the peer-to-peer network. Transactions are validated by considering the history of transactions stored at each node of the network and the consensus of the participants.5
With the present article, the researcher aims to analyse the framework, or a lack thereof – of cryptocurrencies in India. The article is divided into various parts viz. Part I, which examines the legal position in India and chronology of legal events with respect to VC's. Part II examines the road ahead, in light of the newly proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, with emphasis laid on the concerns around it. Part III contains the concluding remarks wherein the need for a holistic law is stressed upon along with recommendations drawn from the international framework and overall need for cryptocurrency laws.
SECTION I: LEGAL POSITION IN INDIA
The pattern of reluctance exhibited by India is evident through the series of either cautionary or prohibitory circulars issued by the Reserve Bank of India ("RBI"). An Inter-Ministerial Committee was also formed which proposed two bills which were, in essence, contrary to each other. The RBI has maintained that there is a high risk of money laundering, terror financing, hacking and frauds. However, the Hon'ble Supreme Court in 2020, passed a landmark judgement that examined and interpreted the issue, giving a rather pro-cryptocurrency perspective as opposed to the previous RBI circulars and Inter-Ministerial Committee bills.
It is important to understand the chronology of events to determine its interplay with what the future holds.
A. RBI Press Releases
The first instance of reluctance towards cryptocurrency can be traced back to December 24, 2013 when the RBI vide a press release6, cautioned the users, holders and traders of VCs, including Bitcoins, litecoins, bbqcoins, dogecoins etc., inter alia, about the potential financial, operational, legal, customer protection and security related risks that they are exposed to. The primary concerns highlighted were that –
- there was no authorised central agency which regulates such payments and, there is no established framework for recourse to customer problems / disputes / charge backs etc. from the lack thereof
- digital wallets are susceptible to losses arising out of hacking, loss of password, compromise of access credentials, malware attacks etc.;
- the gravity of risk associated with the high volatility in the value of VC's;
- scope for illicit and illegal activities and unintentional omittance to comply with antimoney laundering and combating the financing of terrorism (AML/CFT) laws.
Additionally, two cautionary press releases were made on February 1, 20177 and December 5, 20178, respectively, through which RBI reiterated the risks and clarified that it has not given any licence or authorization to any entity or company to operate schemes or deal with Bitcoin or any other VCs.
B. Bills proposed by Inter-Ministerial Committee
On November 2, 2017, the Centre constituted an Inter-Ministerial Committee ("IMC"), which introduced two bills. However, neither of these bills came into fruition.
The IMC first recommended the Crypto-token Regulation Bill of 2018 ("First Draft Bill"). The initial approach of the IMC did not lean towards an outright ban and it was not opted for on the pretext of it being an extreme tool. It recommended (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted.9
However, these progressive proposals recommended through the First Draft Bill did not get executed. Instead, the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 ("Second Draft Bill") was introduced. It proposed to ban usage of VC's as legal tender. Further, mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency in the country would be prohibited. The use of cryptocurrency: (i) as a medium of exchange, store of value or unit of account; (ii) as a payment system; (iii) for providing cryptocurrency related services to customers/investors such as registering, trading, selling or clearing; (iv) for trading with Indian currency or foreign currencies; (v) for issuing cryptocurrency related financial products; (vi) as a basis of credit; (vii) as a means of raising funds; and (viii) as a means for investment10; was proposed to be prohibited. The strictness of the Second Draft Bill was evident from the provisions that provided for penalties and offences. It also proposed a digital rupee which would be introduced by RBI and serve as a legal tender.
C. Imposition of a ban
The cautionary measures took a steep incline when the RBI vide circular dated April 6, 2018 - Prohibition on dealing in Virtual Currencies11 ("RBI Circular"), imposed a substantial ban on dealing with the VCs.
The RBI Circular, with immediate effect, directed that entities regulated by the RBI shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.12 Therefore, the private individuals or businesses dealing with VCs that required assistance from such entities were virtually precluded from continuing their operations.
It was further provided that regulated entities which already provided such services shall exit the relationship within three months from the date of the RBI Circular.
As a result of this prohibition, the VC exchanges suffered a massive blow, and they could not sustain their already established businesses.
D. Landmark judgement by Supreme Court
The tide shifted when the Hon'ble Supreme Court on March 4, 2020 in Internet and Mobile Association of India V. Reserve Bank of India13 ("Judgement"), with a three-judge bench comprising of Justices Rohinton Nariman, Aniruddha Bose and V. Ramasubramanian, lifted the ban imposed by the RBI Circular. The court predominantly examined the matter from the perspective of Article 19(1)(g) of the Indian Constitution, which is the freedom to practice any profession, or to carry on any occupation, trade or business, and the doctrine of proportionality.
It was contended by the Internet and Mobile Association of India that RBI lacked jurisdiction to forbid dealings in cryptocurrencies. It was argued that cryptocurrencies could not be equated with money or as legal tender and that they were not currency in the strict sense.
As regards the first contention, the Court analyzed the definition given to cryptocurrencies by various regulators, governments and judiciaries, and examined four functions of money viz. (a) a medium of exchange; (b) a unit of account; (c) a store of value; and (d) final discharge of debt or standard of deferred payment. The Court held that VCs were not a widely accepted mode of exchange and they could also not be regarded as a final discharge of debt. Therefore, as they did not confirm to all four of the above-mentioned functions, they are not a legal tender. However, it was acknowledged that VCs have the potential to create a parallel system even if they could not strictly be equated to currency and therefore, in such a scenario the RBI can invoke its power to regulate it.
It was further contended that the RBI Circular did not protect the interests of the public in general and also violated the right to practice any profession, or to carry on any occupation, trade or business which is granted under Article 19(1)(g) of the Indian Constitution. Hence, it disproportionately affected the livelihoods of people dealing in cryptocurrencies. It was argued that the measure by RBI was extreme and does not pass the test for proportionality. Proportionality is a principle where the court is concerned with the process, method or manner in which the decision-maker has ordered his priorities, reached a conclusion or arrived at a decision.14
The Court acknowledged that the RBI Circular adversely impacted the business of the exchanges that dealt in VC. Since the RBI Circular substantially wiped out the VC exchanges out of the industrial map of the country, it infringed Article 19(1)(g) of the Indian Constitution. The VC exchanges, prima facie, had no financial recourse.
To put the doctrine of proportionality in perspective, the Court referred to the case of Modern Dental College and Research Centre v. State of Madhya Pradesh and the five parameters laid by it based on which the proportionality was to be examined. The parameters laid out by the judgement are –
- that the measure is designated for a proper purpose;
- that the measures are rationally connected to the fulfilment of the purpose;
- that there are no alternative less invasive measures; and
- that there is a proper relation between the importance of achieving the aim and the importance of limiting the right.
In the aforementioned case, it was held that a mere ritualistic incantation of "money laundering" or "black money" does not satisfy the first test and that alternative methods should be explored.
The Court went on to examine that the trading in VCs and the functioning of VC exchanges are sent to comatose by the RBI Circular by disconnecting their lifeline namely, the interface with the regular banking sector. The Court discussed that the RBI could not show substantial empirical data of the actual harm suffered by it. Till date, the RBI had not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs had suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them. The Court essentially stressed on the importance of determining and establishing the loss suffered by the RBI on account of the existence of VC and vividly stated that there was none.
The Court also noted that despite a committee being formed that proposed the First Draft Bill and Second Draft Bill, no final call could be taken, and both the bills contradicted each other and advocated opposite propositions.
SECTION II: THE ROAD AHEAD
A. Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
The Parliament, in the next Lok Sabha session, is proposing to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 ("New Bill"). The New Bill seeks to create a facilitative framework for creation of the official digital currency to be issued by the RBI. The New Bill also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.15
B. Key concerns with the New Bill
While the New Bill takes due cognizance of what has been a long-standing grey area in VC laws and fosters the advent of digitalization, it proposes to ban private cryptocurrencies in its entirety. To put this in perspective, it is important to note that the Indian population has shown significant interest in virtual currencies, with India until recently being estimated to contribute to between 2 and 10 per cent of the US$430 billion virtual currency market worldwide.16 Considering the huge number of VC investors in the country, it is bound to cause a certain sense of panic. The New Bill will hopefully provide a six-month period for them to liquidate their assets. However, the manner and mode of such liquidation remains a question. The most probable consequence will involve complete disposal of VC units.
The RBI has time and again, laid emphasis on the possible misuse of VCs for terror-financing, money laundering etc. However, if the New Bill imposes a ban on private cryptocurrencies, it can in fact lead to the formation of an underground market wherein genuine investors may be forced to operate in unmonitored environments. Additionally, the key goal of introducing a law is to facilitate a relatively safer technological environment for dealing with VCs. However, as the state-owned cryptocurrency will be developed to perform the same functions as other cryptocurrency, it will be exposed to the same risks too. Therefore, even the introduction of a national digital currency may not substantially mitigate the risk.
Further, it is pertinent to note that with only one digital currency, the RBI will have complete monopoly on it. There will also be a question of whether foreign investors can invest in the Indian digital currency and how it will be regulated. Thus, the looming possibility of foreign investors being allowed to invest in the Indian digital currency while the freedom of Indian investors to invest in foreign cryptocurrencies is essentially curbed, leaves room for further complications. Introduction of a policy which holistically considers the benefits and drawbacks is the need of the hour.
CONCLUSION: NEED FOR HOLISTIC REGULATION AND RECCOMENDATIONS
It is established that there exists a lack of clarity with respect to cryptocurrency regulation in India. A cryptocurrency regulation requires a framework with a well-structured and nuanced approach, with due regard to the interaction of law with its subjects – in this instance, the crypto-exchanges, investors, and most importantly, the people employed in that sector. A regulation with such a far-fetched impact needs more consideration.
It is crucial to understand that cryptocurrency has gained global momentum. In the year 2020, Bitcoin saw a huge boost in valuation, as a result of which many new investors exhibited a strong inclination towards it. Further impetus was given by the 1.5 Billion Dollar investment into Bitcoin by Tesla and their announcement to recognize it as a mode of payment. Coinbase, a digital currency exchange based in United States, has announced that it will be going public. Therefore, it is imperative to examine whether a ban is really the answer to curb a possible misuse of cryptocurrency when several notable developments are taking place in that sector on a global level.
The initial receptiveness to VCs by the IMC, demonstrated through the First Draft Bill goes to show that although the merits of VCs were subsequently disregarded with the introduction of the Second Draft Bill – there is still room for discussion. Revisiting the initially proposed Crypto-token Regulation Bill of 2018 would be helpful. Its recommendation (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted; can be a good head start.
Examining the models successfully adopted by other countries and implementing them, without having to impose bans could be a more beneficial solution that keeps the interests of all the stakeholders in mind. Various international jurisdictions such as Japan, Australia, Russia have made constructive regulations towards the usage of cryptocurrencies. When Mt. Gox, the world's largest bitcoin trading exchange, collapsed in early 2014, more than 24,000 customers around the world lost access to hundreds of millions of dollars' worth of cryptocurrency and cash.17 The exchange faced a theft of 850,000 bitcoins that it was holding for itself and on behalf of its customers and claimed insolvency.18 After this debacle, Japan did not opt to ban cryptocurrency but instead – decided to make it a well-regulated space. Owing to this, it has one of the most prominent VC markets in the world today. They established a working group which recommended (i) the introduction of a registration system for cryptocurrency exchange businesses, (ii) making cryptocurrency transactions subject to money laundering regulations, and (iii) the introduction of a system to protect cryptocurrency users.19 As a result, the Payment Services Act of Japan ("Japan Act") added a definition of cryptocurrency and only business operators registered with a competent local Finance Bureau were allowed to operate cryptocurrency exchange business with due checks in place. Thus, if corresponding rules were implemented in India with the help of committees of unbiased experts, cryptocurrencies could be efficiently regulated.
It is interesting to note that the benefit of cryptocurrency was highlighted in the Draft National Strategy on Blockchain, 2021, published by the MEITY. It said that blockchain technology provides transparency, security and efficiency in business operations and enables a layer of trust over Internet in a unique way, which was first tried for cryptocurrency application, Bitcoin. Cryptocurrency was also recognized among the potential applications of Blockchain. Thus, there is also a need for Indian authorities to unify their stand in this regard. The RBI policies are manifestly different than the observations made by MEITY.
As we are in a generation where more and more technological advances are bound to take place, each advancement will invariably entail certain threats. It is important to keep upgrading the law to keep it consistent with modern developments. As pointed out in the Judgement by the Supreme Court, there must be empirical data to justify the ban and demonstrate an actual need for it – in the absence of which, there is a high possibility of a multitude of litigations where the right granted under 19(1)(g) will be invoked again. Therefore, the aim of any proposed law should be to circumvent the risks associated with VCs through efficient regulation as opposed to a ban.
1. Ridhima Saxena, India's Crypto Investors Weigh Options Ahead Of Impending Ban, Bloomberg Quint, February 14, 2021, https://www.bloombergquint.com/business/indias-crypto-investors-weigh-optionsahead-of-impending-ban
2. KPMG, Fintech in India – Global Growth Story, June 2016, https://assets.kpmg/content/dam/kpmg/pdf/2016/06/FinTech-new.pdf
3. Volume 3, 2020, Volodymyr Ustymenko, Nataliya Polishchu, Visegrad Journal on Human Rights, The genesis of the formation and development of legal regulation of cryptocurrencies in India and Ukraine http://vjhr-journal.sk/wp-content/uploads/2020/12/Vyshegrad-2_2020_Tom-3.pdf#page=164
4. Christian Beer and Beat Weber, Bitcoin – The Promise and Limits of Private Innovation in Monetary and Payment Systems, Research Gate, 54, 55, January 2015
5. National Strategy on Blockchain in January 2021, Government of India Ministry of Electronics and Information Technology, https://negd.gov.in/sites/default/files/NationalStrategyBCT_%20Jan2021_final_0.pdf
6. Press Release: 2013-2014/1261, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247
7. Press Release: 2016-17/2054 https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435
8. Press Release: 2017-2018/1530, https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462
9. Internet and Mobile Association of India V. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018
10. Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currencybill-2019
11. DBR.No.BP.BC.104/08.13.102/2017- 18, https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF
13. Internet and Mobile Association of India V. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018
14. Coimbatore District Central Coop. Bank v. Employees Assn, (2007) 4 SCC 669.
15. Lok Sabha Bulletin Part – II, General Information relating to Parliamentary and other matters, http://loksabhadocs.nic.in/bull2mk/2021/29012021.pdf
16. The Virtual Currency Law Review, Law Business Research Ltd, ISBN 978-1-912228-77-5, November 2018
17. Alexandra Harney and Steve Stecklow, Twice burned - How Mt. Gox's bitcoin customers could lose again, Reuters, November 16, 2017
18. Library of Congress, Regulation of Cryptocurrency: Japan
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