1 Legal and enforcement framework
1.1 In broad terms, which legislative and regulatory provisions govern virtual currencies in your jurisdiction?
There is no specific legislation governing virtual currencies or cryptocurrencies in India. However, there are some regulations and guidelines that govern certain aspects of virtual currencies in India, in addition to the existing laws which may apply to virtual currencies based on use or type of business.
The Finance Act 2022 introduced amendments to the Income Tax Act 1961 by defining 'virtual digital assets' (VDAs) as:
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.––For the purposes of this clause,––
(a) "non-fungible token" means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions "currency", "foreign currency" and "Indian currency" shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.
The amendments also imposed:
- a flat 30% tax on income generated from the transfer of VDAs; and
- a 1% tax deductible at source (TDS) on the transfer of VDAs from one person to another.
Through its Circular 13/2022, the Central Board of Direct Taxes has issued guidelines to address difficulties in implementing the revisions to the Income Tax Act, 1961 in relation to cryptocurrencies/VDA exchanges and peer-to-peer transactions.
1.2 In broad terms, which legislative and regulatory provisions govern entities that provide services relating to virtual currencies? Must they be registered or licensed by a regulatory authority?
There is no specific regulator of entities that provide services relating to virtual currencies in India. The applicable regime governing entities that provide services relating to virtual currencies will be determined by the nature, size and scale of the business that they operate.
The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 is pending introduction to Parliament and, once enacted, should regulate virtual currencies in India. However, the bill is yet to be made public, so its content as yet remains unknown. The government is also working on a consultation paper on digital assets which will pave the way for the regulation of Web3, blockchain and the virtual currency industry. In the meantime, the Indian government and self-regulatory industry bodies have recently introduced new laws and guidelines on entities that provide services relating to virtual currencies/cryptocurrencies/VDAs.
National Strategy on Blockchain: The Ministry of Electronics & Information Technology issued an updated version of its National Strategy on Blockchain in December 2021. The strategy involves the development of a National Blockchain Framework which will include contributions from all stakeholders. It also addresses the creation of infrastructure as a national resource and blockchain as a service. The strategy further focuses on the security and privacy of data, and recommends data localisation. With respect to the legal and regulatory framework for blockchain, the strategy suggests that existing regulations and policies be updated as the national blockchain framework evolves.
Reserve Bank of India (RBI) on anti-money laundering (AML) and know-your-customer (KYC) requirements: An RBI notification dated 31 March 2021 clarified that its earlier notification dated 6 April 2018 prohibiting regulated entities from dealing with virtual currencies was struck down by the Supreme Court of India on 4 March 2020 in Internet and Mobile Association of India v Reserve Bank of India (IMAI vs RBI), and can no longer be quoted when cautioning clients. The notification further provided that regulated entities may carry out customer due diligence processes in line with the regulations governing standards for KYC, AML, counter-terrorist financing (CTF) and obligations of regulated entities under the Prevention of Money Laundering Act, 2002 (PMLA), in addition to ensuring compliance with the relevant provisions of the Foreign Exchange Management Act (FEMA) for overseas remittances.
Indian Computer Emergency Response Team (CERT-in) Guidelines: On 28 April 2022, CERT-in issued directions under Section 70B(6) of the Information Technology Act, 2000 relating to information security practices, procedures, prevention, response and reporting of cyber incidents. The directions require virtual asset service providers, virtual asset exchange providers and custodian wallet providers to mandatorily maintain all information obtained as part of their KYC processes. It also requires these entities to maintain records of financial transactions for a period of five years, to ensure cybersecurity in payments and financial markets for citizens while protecting their personal data, fundamental rights and economic freedom in view of the growth of virtual assets. The directions also mandate all service providers, intermediaries, government organisations and bodies corporate to report any attacks or malicious/suspicious activities affecting systems, servers, networks, software or applications relating to big data, blockchain, virtual assets or virtual asset exchanges within six hours of learning of such incidents.
Advertising Standards Council of India (ASCI) guidelines: ASCI – a membership-based, self-regulatory body for the advertising industry in India – has published guidelines for the advertisement of VDAs and linked services. The guidelines require advertisers to display a disclaimer for all ads relating to VDAs and related services stating: "Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions." The guidelines further prohibit the use of the words 'currency', 'securities', 'custodian' and 'depositories' in ads for VDA products or services. The guidelines also require advertisers to clearly display the name of the advertiser and provide an easy way to contact it (phone number or email).
Companies Act, 2013: The latest amendment to Schedule III of the Companies Act, 2013, dated 24 March 2021, stated that as from the new financial year, all companies must disclose their investments in cryptocurrencies and state all profits and losses resulting from such transactions. The holder of any virtual currencies must also declare the number of holdings and details of deposits and advances from any person for the purpose of trading or investing in cryptocurrency.
Income Tax Act, 1961: The Income Tax Act, 1961 was amended by the Finance Act, 2022 and further guidelines have been issued for VDA exchanges on how to respond to these amendments (see question 1.1). In terms of the amendments read with the guidelines, VDA exchanges must deduct TDS in certain circumstances for transactions undertaken on their platforms. The guidelines further clarify the responsibilities of VDA exchanges where they either own or do not own the VDAs being transferred. Further details on taxation are set out in question 10.1.
There are no specific licensing or registration requirements for entities that provide services or products relating to virtual currencies. The general and industry-specific registration and licensing requirements for such entities will depend on the type, scale and size of the business that they operate. For instance, tax-related registrations are required for all entities that provide products or services.
1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
While there is no exclusive regulatory body that oversees virtual currencies in India, the RBI has issued numerous circulars and notifications concerning the risks involved in virtual currencies. After issuing multiple circulars cautioning consumers about the risks involved with virtual currencies, the RBI has prohibited regulated entities from dealing in virtual currencies or providing services to support any person or entity in dealing with or settling virtual currencies through a circular dated 6 April 2018.
That RBI circular was challenged before the Supreme Court by writ petition WP (C) 373 of 2018 and others, questioning the RBI's authority to issue a circular that effectively prohibited activities relating to virtual currencies. While acknowledging various characteristics of virtual currencies, the Supreme Court held that the RBI has the requisite power to regulate or prohibit activities of this nature. However, the Supreme Court set aside the circular on the grounds of proportionality through a judgment dated 4 March 2020. The RBI thereafter issued another circular on 4 March 2020 clarifying the implications of this judgment and directing regulated entities to continue carrying out customer due diligence processes in line with the regulations governing standards for KYC, AML and CFT, the PMLA and the FEMA.
Apart from the RBI, other regulatory and enforcement agencies may play a role based on the type of business and the activities conducted. The Enforcement Directorate has recently been active in investigating VDA exchanges and companies dealing in virtual currencies for alleged AML and FEMA violations. Further, relevant agencies – such as the Securities and Exchange Board of India, the Central Board of Direct Tax, the Competition Commission of India and the Ministry of Corporate Affairs – will have exclusive jurisdiction to take enforcement actions as and when necessary.
1.4 What is the regulators' general approach to virtual currencies?
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.
1.5 Has there been any notable enforcement action relating to virtual currencies?
Investigations by the Directorate of Enforcement have uncovered various scams relating to virtual currencies, involving money laundering, Ponzi schemes and FEMA violations. Enforcement actions against the GainBitcoin Ponzi scheme scam and the Morris coin fraud have not yet concluded.
Recently, during the winter session of Parliament, the minister of state in the Ministry of Finance stated the following:
The Directorate of Enforcement is investigating several cases related to Crypto frauds wherein a few crypto exchanges have also been found involved in money laundering. Necessary action as per provisions of the Prevention of Money Laundering Act, 2002 (PMLA) has been taken by the Directorate of Enforcement. As of 14.12.2022, proceeds of crime amounting to Rs. 907.48 crores have been attached/seized, 03 persons have been arrested and 04 Prosecution Complaints have been filed before the Special Court, PMLA, in these cases.
Further, under the Foreign Exchange Management Act, 1999 (FEMA), assets amounting to Rs. 289.68 crores have been seized under section 37A of FEMA and 01 Show Cause Notice to crypto exchange Zanmai Labs Pvt Ltd, known as WazirX, and its Director under FEMA for transactions involving crypto assets worth Rs. 2,790.74 crores has also been issued
It was also announced that several cases of goods and services tax evasion by crypto exchanges had been detected. Of the 12 crypto exchanges investigated, four have been shut down and hit with penalties due to non-payment of taxes; the other investigations remain ongoing.
2.1 How are 'virtual currencies' defined in your jurisdiction? Have there been any judicial decisions which have helped to define virtual currencies or their interplay with the existing body of laws (eg, contracts law, property law)?
The Finance Act, 2022 introduced some amendments which provide a definition of 'virtual digital assets' (VDAs). The distinction between virtual currencies, digital assets, cryptocurrencies, VDAs and e-rupees or central bank digital currencies is clear from the definition provided in the Finance Act, 2022. This definition unambiguously excludes Indian currency and foreign currencies from consideration as a VDA or virtual currency. The Finance Act, 2022 also amended the definition of 'bank note' in the Reserve Bank of India Act to include bank notes in digital form. Therefore, e-rupees may be issued by the RBI as a digital form of bank note.
Investigation and enforcement actions are pending in various cases; however, we are yet to see any judicial pronouncements that could help to determine how virtual currencies and other components of Web3 will be defined.
2.2 How are 'initial coin offerings' and 'security token offerings' defined in your jurisdiction?
The current legal framework does not define 'initial coin offerings' or 'security token offerings'.
2.3 Are stablecoins treated as virtual currencies in your jurisdiction or do they fall under an existing category (eg, electronic money)?
The definition of a 'VDA' as amended under the Income Tax Act, 1961 provides for a broad scope of interpretation. It leaves little if no room to exclude stablecoins from this definition, especially as the central government reserves the power to include any type of coin within the definition. At present, only e-rupees are excluded from the definition of a 'VDA'.
3 Virtual currencies market
3.1 Which virtual currencies have become most embedded in your jurisdiction? Does this vary depending on the specific use?
According to a recent annual investor report by CoinSwitch and WazirX, Bitcoin is the top virtual currency in India, with an average allocation of 12.12%, followed by Dogecoin at 11.54% and Ethereum at 9.43%. Allocation in virtual currencies by Indians varies depending on various factors; but according to WazirX's report, most first-time investors on the platform have bought memecoin Shiba Inu, followed by Tron and Bitcoin.
3.2 What different products and services are offered?
The Indian virtual currency market offers an extensive list of products and services, ranging from blockchain as a service to Layer 1 solutions. However, the most recognised service providers in the virtual currency market in India are cryptocurrency exchanges. The virtual currency market in India also caters to service providers in the industry, along with markets for:
- non-fungible tokens;
- decentralised applications;
- Layer 2 solutions;
- decentralised finance;
- play-to-earn games; and
- metaverse-based products and services.
In addition to the virtual currency market, blockchain has found its way into various industries, including:
- supply chain;
- securities market;
- property registration; and
- banking finance.
3.3 How are virtual currency service providers generally structured? How are they generally financed?
There is no 'one size fits all' structure that can be used for industry participants. The structure usually depends on the product or services offered. However, the most common structure used by market participants is a company limited by shares. During the initial stages, some market participants raise funding through grants provided by the government or non-profit organisations. As the company grows, financing is obtained from venture capital firms and/or angel investors, and sometimes through initial coin offerings.
3.4 Are virtual currency trading platforms subject to a specific regulatory regime in your jurisdiction? Must they be registered or licensed by a regulatory authority? Does this vary depending on whether the platform accepts legal currency or whether the platform is custodial? Are virtual currency trading platforms subject to any form of 'market abuse' regulation?
Virtual currency trading platforms and cryptocurrency exchanges are not governed by any specific regulatory regime. The Central Board of Direct Taxes, in a circular dated 22 June 2022, defined an 'exchange' as "any person that operates an application or platform for transferring of VDAs, which matches buy and sell trades and executes the same on its application or platform". While there are no specific regulations governing such exchanges, the recent amendment of the Income Tax Act, 1961 (see question 1.1) has imposed new obligations specifically on these exchanges. In addition to income tax obligations, exchanges must comply with anti-money-laundering and know-your-customer obligations.
Exchanges need not be registered to conduct virtual currency trading business. However, they must register for tax purposes and observe other business-specific compliance rules. Further, tax compliance under the recent amendments will vary depending on whether the exchange platform accepts legal tender, provides custodial services, facilitates peer-to-peer transactions or similar. Market abuse regulations are not generally applicable to virtual currency trading platforms; however, certain exchanges have undertaken to protect users from any market abuse.
4 Crossover with banking
4.1 How are virtual currencies positioned within the broader banking landscape in your jurisdiction?
The Reserve Bank of India (RBI) – the financial regulator and the central bank of India – is not in favour of regularising virtual currencies in the financial or banking system, which suggests that virtual currencies will not be integrated within the banking system anytime soon. Further, the RBI has cautioned against the use of virtual currencies and their impact on India's financial and macroeconomic stability. By contrast, the RBI has already launched pilot projects for wholesale and retail central bank digital currencies in India, which will help to reduce the shadow economy by bringing greater transparency and efficiency.
4.2 What impact could mainstream adoption of virtual currencies have on the ability to control inflation in your jurisdiction?
At the Business Standard BFSI Insight Summit on 21 December 2022, RBI Governor Shashikanta Das said: "Our view is that it should be prohibited because if you try to regulate it and allow it to grow, please mark my words the next financial crisis will come from private cryptocurrencies." It is arguable that virtual currencies – especially Bitcoin – are a good hedge against inflation because of their limited supply, portability, fungibility and easy accessibility when compared to traditional assets such as real estate or gold. However, its actual impact on the ability to control inflation will depend on the applicable monetary policy and how is it perceived once the regulations governing virtual currencies have been put in place.
4.3 What other implications could the mainstream adoption of virtual currencies have for the banking system in your jurisdiction (eg, with respect to payment services)?
Although India is a world leader in terms of the adoption of virtual currencies, it is too early to determine what the implications will be for the banking system. As the RBI and the Indian government have made it very clear that virtual currencies will never be legal tender in India, their adoption in the payment services sector remains questionable.
On the other hand, if virtual currencies ever become a recognised payment system in India, anyone establishing or operating a virtual currency-based payment system will need authorisation from the RBI and will be required to comply with the Payment and Settlement Systems Act, 2007. In Internet and Mobile Association of India v RBI, the regulator argued that the virtual currencies do not amount to a payment system under the act (see question 1.2).
4.4 Regarding decentralised finance, do the banking regulations in your jurisdiction apply to loans of virtual currencies or interest-bearing deposits of virtual currencies? Does this vary depending on whether stablecoins are loaned or deposited?
India is in the process of revamping its regulations on digital lending. In November 2021, the RBI Working Group on Digital Lending issued its report on digital lending, including lending through online platforms and mobile apps. On 10 October 2022, the Recommendations of the Working Group on Digital Lending – Implementation were issued, expressing concerns about unregulated entities providing lending services to consumers and suggesting specific legislative and institutional interventions for consideration by the central government to curb illegitimate lending activities by such entities.
Although the current framework may apply to digital lending and staking platforms dealing in virtual currencies, officially such platforms are not authorised by the regulators to provide such services. Further, since there is no distinction between virtual currencies and stablecoins in India, the applicability of existing laws governing lending and borrowing will not vary based on whether stablecoins are loaned or deposited.
5.1 Is blockchain technology in itself regulated in your jurisdiction and what specific legal issues are associated with its use?
India has no exclusive laws governing blockchain technology, despite its wide adoption in various governmental institutions. The legal issues associated with blockchain technologies will depend on its use in different industries and industry-specific laws will apply to organisations that utilise distributed ledger technology. Further, India is in the process of restructuring its laws governing the Internet, big data, cybersecurity and data protection, which will affect all entities that are active in the blockchain or virtual currency industries.
5.2 What other implications could the mainstream adoption of virtual currencies have from a technological perspective?
Blockchain as a technology has the potential to change the future of almost all industries. Private blockchain has significantly affected industries such as supply chain, healthcare, telecommunications and retail. While the mainstream adoption of virtual currencies is still under question, blockchain technology is already playing a prominent role in many government institutions. It is too early to say how distributed ledger technology will shape the future while regulators around the world are still seeking to regulate virtual currencies, which are an essential part of the blockchain ecosystem.
6 Data security and cybersecurity
6.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for virtual currencies?
As mentioned in question 5.1, India is in the process of restructuring its data protection laws. To this end, it has released the proposed Digital Personal Data Protection Bill, 2022 and invited comments and feedback from the public as part of its public consultation exercise. Currently, the Information Technology Act, 2000 and the rules framed thereunder – including the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 ('SPDI Rules') – set out the security practices and procedures that a body corporate or any person that collects, receives, possesses, stores, deals with or handles information on behalf of a body corporate must observe to protect the personal data of users.
The applicability of the SPDI Rules to virtual currencies or blockchain-enabled projects might raise some issues because of the quality of distribution of data to all nodes. Further, the absence of any centralised agency or organisation also raises issues with respect to accountability, as there is no single person that can be held accountable for any violations.
6.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for virtual currencies?
While India has no specific cybersecurity law, the directions issued by the Indian Computer Emergency Response Team on 28 April 2022 list certain compliance obligations that must be met by virtual currency product and service providers.
The directions require virtual asset service providers, virtual asset exchange providers and custodian wallet providers to mandatorily maintain all information obtained as part of their know-your-customer requirements. They also require such entities to maintain records of financial transactions for a period of five years, to ensure cybersecurity in payments and financial markets for citizens while protecting their personal data, fundamental rights and economic freedom in view of the growth of virtual assets. The directions further mandate all service providers, intermediaries, government organisations and bodies corporate to report any attacks or malicious/suspicious activities affecting systems, servers, networks, software or applications relating to big data, blockchain, virtual assets or virtual asset exchanges within six hours of learning of such incidents. Further, the National Security Council Secretariat has formulated a draft National Cyber Security Strategy 2021, which looks holistically at addressing issues of national cybersecurity.
In general, the Information Technology Act, 2000 read with the rules and regulations framed thereunder governs cybersecurity compliance and standards. Entities that handle personal data must follow reasonable industry standard practices and procedures for maintaining a security programme. The SPDI Rules set out the minimum standards to be followed for such security programmes, which are essential in order to provide services to customers. The new data protection bill is open for public consultation (see question 6.1) and is expected to change the dynamics of personal data protection in India – especially because the last personal data protection bill was withdrawn from Parliament.
7 Financial crime
7.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for virtual currencies?
Prevention of Money Laundering Act (PMLA): Money laundering in India is governed by the PMLA, which defines offences relating to money laundering and the proceeds of crime.
Section 3 of the PMLA defines 'money laundering' as follows:
whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of the offence of money-laundering.
Further, through an amendment dated 1 August 2019, an explanation was added to the above clause to clarify that a person involved in one or more of the following processes or activities connected with the 'proceeds of crime' is also guilty of money laundering:
- projection as untainted property; or
- claiming as untainted property.
The 'proceeds of crime' are defined in Section 2(u) as:
any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.
The amendment dated 1 August 2019 added an explanation of the abovementioned clause, clarifying that the 'proceeds of crime' include not only property derived or obtained from the scheduled offence, but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence. The schedule includes offences under various statutes, such as:
- the Penal Code, 1860;
- the Information Technology Act, 2000;
- the Trademarks Act, 1999;
- the Copyright Act, 1957; and
- the Securities and Exchange Board of India Act.
Reserve Bank of India (RBI): Through its notification dated 31 May 2021, the RBI advised regulated entities to:
- carry out customer due diligence processes in line with the regulations governing standards for know-your-customer, anti-money laundering and counter-terrorist financing activities and obligations of regulated entities under the PMLA; and
- ensure compliance with the relevant provisions of the Foreign Exchange Management Act (FEMA) for overseas remittances concerning all virtual currency product and service providers.
The Enforcement Directorate is currently investigating various cases pertaining to money laundering and FEMA violations.
There are various other statutes and regulations that might be applicable to market participants depending on how virtual currencies are treated by the governing law. If virtual currencies are treated as commodities or securities, the Securities and Exchange Board of India will become the principal regulator. Otherwise, if virtual currencies are treated like utility tokens as a pre-paid payment instrument, the RBI will be in a position to claim regulatory oversight of the industry.
8 Consumer protection
8.1 What consumer protection provisions apply to virtual currencies in your jurisdiction?
The Reserve Bank of India and the Ministry of Finance have been issuing warning statements about the risks associated with virtual currencies, including in relation to money laundering, consumer protection, market integrity, cybersecurity and volatility. After the self-regulatory body of the advertising industry published guidelines on the advertisement of virtual digital assets (VDAs) and linked services, requiring advertisers to display a disclaimer on all ads relating to VDAs and associated services (see question 1.2), consumers have been cautioned about the risks associated with the virtual currencies and non-fungible tokens.
The Consumer Protection Act, 2019 (CPA) protects consumers against unfair trade practices, deficiencies in services and defects in goods. The act defines 'e-commerce' as "buying or selling of goods or services including digital products over digital or electronic network". The inclusion of digital products in the definition of 'e-commerce' is likely to encompass the purchase and sale of VDAs – in which case it will become incumbent upon market participants to adhere to the CPA and the regulations therein.
Further, the Consumer Protection (E-commerce) Rules, 2020 impose certain duties and obligations on e-commerce entities to appoint a nodal officer or a senior designated functionary who is resident in India to ensure compliance with the CPA, among other obligations. The Department of Consumer Affairs is also in the process of releasing FAQs on cryptocurrencies to guide consumers in making informed decisions.
8.2 What other implications could the mainstream adoption of virtual currencies have from a consumer perspective?
The mainstream adoption of virtual currencies could prove helpful for consumers by increasing competition and access to international platforms with abundant commercial possibilities. Potential implications could include the following:
- Increased convenience: Virtual currencies could make it easier for consumers to make purchases and transfer money, as it can be easily accessed and transferred digitally.
- Increased security: Virtual currencies can offer increased security for consumers, as they use blockchain technology, which makes it difficult for transactions to be tampered with or reversed.
- Increased accessibility: Virtual currencies could make financial services more accessible to those who are unbanked or underserved by traditional financial institutions.
- Increased competition: The adoption of virtual currencies could lead to increased competition among financial institutions and merchants, potentially leading to lower fees and better rates for consumers.
- Increased risk: While virtual currencies offer some benefits, they also come with increased risk, such as the potential for price volatility and the risk of fraud or cyberattacks. Consumers should be aware of these risks and take steps to protect themselves when using virtual currencies.
9.1 Do virtual currencies present any specific challenges or concerns from a competition perspective?
Prima facie, the key challenge which raises concerns from a competition perspective concerns the identity of the perpetrator. Decentralised organisations that provide anonymity and pseudo-anonymity complicate the law enforcement process. Any enterprise could join the blockchain network to communicate or use information to manipulate the market by indulging in anti-competitive practices. The complexity of information accessibility will also pose a challenge for competition regulators in determining whether action taken by an industry participant was independent or was based on a consensual decision between industry participants.
The Competition Commission of India, under the Competition Act, 2002 and the regulations made thereunder, has the power to deal with anti-competitive activities in the virtual currencies industry. It will be interesting to see whether the virtual currency/ blockchain market will be considered a different market from physical and e-marketplaces.
10.1 How are transactions in virtual currencies treated from a tax perspective in your jurisdiction?
The Indian government through the Finance Act, 2022 introduced amendments to the Income Tax Act, 1961 which include virtual currencies within the ambit of taxation in India. The amendments and the regime governing the taxation of virtual digital assets (VDAs) can be summarised as follows:
- Definition: The definition of 'VDAs' has been kept wide and open ended, with the government reserving its right to include other digital assets within the ambit of VDAs. The definition covers a wide range of attributes of virtual currencies, as it includes 'digital representation of value', 'inherent value', 'store of value' and 'unit of account'. The definition provides a broad scope of interpretation to include different kinds of digital assets within the definition of a 'VDA'. Non-fungible tokens have also been included in the definition of a 'VDA'. Through a notification dated 30 June 2022, the central government excluded from this definition "a nonfungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable".
- Income from VDAs: A flat 30% income tax is payable on any income from VDAs, in addition to the income tax payable on all other income earned. Apart from the cost of acquiring the VDA, no deductions can be made to income generated from VDA; even losses incurred in the trading of VDAs cannot be offset against income generated from the VDAs.
- Withholding tax: The amendment imposes withholding tax on the payment for transfer of a VDA. The purchaser of the VDA, at the time such sum is credited to the account of the seller or at the time of payment of such sum by any method, whichever is earlier, must deduct an amount equal to 1% as tax deductible at source. The amendment also provides for exemptions and thresholds to benefit certain transactions.
- Gift tax: Tax on VDAs (fair market value exceeding INR 50,000) received as a gift will be deductible in the hands of the receiver under the head 'income from other sources'. Further, if the recipient transfers or sells the VDA received as a gift, the income received from such transfer will be taxed at a rate of 30%, as applicable to income from a VDA.
- Mining operations: Mining of VDAs will be taxed based on income and the infrastructure cost of setting up the mining operations will not be allowed as a deduction. Further, the operational costs of the mining operations, such as electricity bills or computer costs, will not be allowed as business expenditure.
11 Trends and predictions
11.1 How would you describe the current landscape and prevailing trends in your jurisdiction as regards virtual currencies? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
India has abundant potential to become a global leader in the virtual currency industry. Indians are some of the top adopters of virtual currencies around the world and this number is only expected to grow. The sole hurdle that the Indian market currently faces is on the regulatory front. The uncertainty in the regulatory space and the inclusion of a flat 30% income tax, along with a 1% tax deductible at source, are hindering the progress of mainstream adoption. Further, the current bear market and recent events in the industry which have seen major players file for bankruptcy have left consumers somewhat on the backfoot.
Regulatory agencies around the world are trying to develop a robust regulatory framework for the virtual currency industry and the Indian government is in consultation with various stakeholders in this regard. The Indian government has made it clear that global participation and consensus are key to the effective regulation of virtual currencies, and is working towards this end. Despite the bear market and various events that have caused a downward trend in the virtual currency market, innovation continues and new use cases are being developed to harness the power of virtual currency. New tech entrepreneurs are enthusiastic about blockchain technology and if the ecosystem continues to develop at its current pace, India has the potential to become a market leader in this space.
As time passes, we expect the regulatory landscape to become much clearer than it is today; and with greater certainty regarding the applicable laws, virtual currency providers may be expected both to integrate and to compete with financial institutions in various industries. Consumer and investor protection, along with data protection and privacy, will remain the primary concerns of the regulatory bodies and the Indian government while reaching a consensus on the regulation around virtual currencies in India.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is the most hotly anticipated law that is likely to be introduced to Parliament during the next 12 months, along with the consultation paper. India is also restructuring its internet policies by introducing:
- the Digital India Bill, which is set to repeal the Information Technology Act, 2000;
- the Data Protection Bill; and
- the National Cybersecurity Strategy.
These are all likely to affect the virtual currency industry in India.
12 Tips and traps
12.1 What are your top tips for virtual currency providers seeking to enter your jurisdiction and what potential sticking points would you highlight?
In the absence of any specific laws governing virtual currencies in India, it is incumbent upon virtual currency providers seeking to enter the Indian market to stay up to date on the latest developments and ensure that their operations are compliant with all applicable laws and regulations. The regulatory framework around virtual currencies is in its infancy and will evolve with time; therefore, market participants should be ready to adapt their businesses according to regulatory needs.
Compliance with anti-money laundering, counter-terrorist financing and know-your-customer regulations has become the norm when doing business in any sovereign nation. Anonymity is one of the crucial issues that is being debated between governmental institutions and stakeholders; it is thus vital for the government to get past the anonymous nature of virtual currencies from various economic and national security points of view. Foreign investors in the Indian market will need to be mindful of the existing regulations in this regard before any such investments are made, because as long as there are no specific guidelines on foreign direct investment in the virtual currency industry, there will be uncertainty regarding the application of the existing laws.
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