With the popularization of internet technologies, virtual currency – called cryptocurrency has also been invented. A popular form of cryptocurrency is bitcoin. As cryptocurrency became popular, people started investing and trading in bitcoins across the globe even though the trade was not regulated. Trading in an unregulated sector can lead to money laundering, fraud and even terrorist funding. This popularly growing new sector also requires tax reforms to account for the incomes being generated by the consumer. However, there was no existing protection - neither for consumers nor for the business runners in India.
Acting in the interest of consumers, the government cautioned people about the risks in dealing with virtual currencies stating that virtual currencies are not a valid legal tender in India and even made clear that virtual currencies do not have a regulatory protection in India1 . The Reserve Bank of India (RBI) through its notification dated 06.04.2018 prohibited dealing of virtual currencies in India. As per notification, the central bank, while exercising its power, stated that the entities regulated by RBI will not deal in virtual currencies. Therefore, consumers could neither process nor settle their cryptocurrency transactions as the bank entities of the RBI cannot deal in purchase/ sale of virtual currency2 .
There is now a small hope for consumers in India that the cryptocurrency trading may start again. As per the latest judgement by the hon'ble Supreme Court of India in case of Internet and Mobile Association of India v. Reserve Bank of India3 , the court set aside the RBI notification dated 06.04.2018 on the grounds of proportionality. The judgement by the apex court was regarding the future of cryptocurrency in India, as the court highlighted that "In case the said enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/Central Government would have had a monopoly."4 The 2019 draft enactment Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 20195 prohibits mining, holding, selling, trade, disposal and use of cryptocurrency in the country. However, the said draft bill allows the government, in consultation with the RBI, to issue digital rupee as legal tender.
We raise a question here, whether it is possible for the policy-makers to regulate the virtual currency in India. The Supreme Court judgement highlights the RBI statement regarding the fraud of Rs.2,000 crores (Rupees Two Thousand crores) that took place in India masterminded by Gain bitcoin which promised return on investment, but no return ever happened and also a similar event which happened in a country like Japan where theft of 850,000 bitcoins had occurred. But instead of banning virtual currency, Japan regulated its virtual currency business by amending the Payment Services Act which regularises the cryptocurrency business in Japan.6
Like Japan, there are many other countries which have regularised cryptocurrency in their respective jurisdiction. For instance, Canada does not treat virtual currency as a valid legal tender but allows trade of these currencies in the country by making few amendments in Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This not only allows virtual currencies by legalising as a money service business for protection from money laundering7 . However, there are many countries which are recognizing and legalising this activity and are successfully able to tax the traders under various laws. For example, Israel taxes it as an asset, 8 while United Kingdom taxes it under various branches like Corporation pay or Corporate Tax while individuals pay capital gain tax9 .
The above instances from various countries show that there are many ways to regulate this business activity which could be a success, though admittedly, there are many challenges ahead in regulating this business activity. The 2019 enactment introduced by China prohibits the trading of cryptocurrency and introduction of Digital Rupee step is similar to what China did. The Chinese government banned virtual currency and is planning to introduce its own first digital currency10.
From India's perspective, a major point for consideration is that introduction of Digital rupee as a legal tender may be a point of conflict as by way of banning other virtual currency and introduction of Digital Rupee, the government may have monopoly in this business. The hon'ble Supreme Court of India has noted this aspect while discussing this issue but evaded discussion on it by stating that such a situation has not yet arisen11 as enactment is still in a bill shape.
This further brings focus on a big question that why can't India not regulate these currencies similar to other countries by amending taxation laws, Foreign Exchange Management Act (FEMA), 2016 etc, and also appointing an authority like RBI or (Securities and Exchange Board of India) SEBI over this business, as just the introduction of digital rupee does not guarantee that there will be no frauds or laundering. The future of cryptocurrency lies totally in the hands of legislature, whether to ban the currency or not. Apart from this, we need to take a decision for the way forward - the introduction of digital rupee or to regularize the sector. This is the need of the hour to make it a viable opportunity for investors and consumers.
1. Government Cautions People Against Risks in Investing in Virtual 'Currencies'', Press Information Bureau, Ministry of Finance, December 29, 2017.
2. Prohibition on dealing in Virtual Currencies, Notification, 6th April,2018.
4. Internet and Mobile Association of India v. Reserve Bank of India (MANU/ SC/0264/2020), para 6.171
5. https://www.prsindia.org/billtrack/draft-banning-cryptocurrencyregulation-official-digital-currency-bill-2019 (last visited on 19/06.2020)
6. Regulation of Cryptocurrency in Japan, Library of Congress
7. Regulation of Cryptocurrency in Canada, Library of Congress
8. Regulation of Cryptocurrency in Israel, Library of Congress
9. Regulation of Cryptocurrency in United Kingdom, Library of Congress
10. Regulation of Cryptocurrency in China, Library of Congress
11. Supra note 5
Originally published on May 2020. Vol. XIII, Issue V
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