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This post is authored by Milind Rajratnam and Srishti Bhargav, fourth-year students of B.A.LL.B.(Hons.) at Dr. Ram Manohar Lohiya National Law University, Lucknow.
Image Credits: Reuters
1. INTRODUCTION
In today’s era of rapid technological advancements, the Fintech sector is at the forefront due to the popularity of cryptocurrencies, and the advent of cryptocurrencies has revolutionized the realm of monetary transactions. A cryptocurrency is a digital form of value that can be possessed and exchanged digitally. The term originates from the encryption mechanism used to safeguard its network. It is driven by blockchain technology and has evolved into a peer-to-peer issuance and transaction framework that secures transactions through the use of public and private keys for encryption and authentication. A distinguishing characteristic of cryptocurrencies is that they are usually not issued by any centralized authority, making them immune to government intervention.
Being an untapped and unregulated economy with a potential worth of over a trillion dollars, India has also seen a major increase in cryptocurrency exchanges. A recent report by Quartz revealed that India accounts for one out of every ten bitcoin transactions worldwide. Moreover, according to Paxful, a multinational cryptocurrency trading platform, India is the world’s sixth-largest and Asia’s second-largest Bitcoin market.
Over the past few years, there have been multiple attempts towards prohibiting and regulating cryptocurrency in India. The most recent being the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is yet to be tabled in the parliament. Although the outlines of the bill are not public yet, the Finance Minister has indicated that the government will not impose a complete ban on cryptocurrency and will allow certain options for people to explore and experiment with cryptocurrencies and blockchain technology.
Against this backdrop, this article first examines the debate surrounding the prohibition and regulation of cryptocurrency in India. Thereafter, it highlights the drawbacks of banning cryptocurrency in India and compares it with the measures that are taken up in other nations to deal with similar issues. Following that, in light of the regulatory models adopted by other nations, it recommends a forward-looking policy on cryptocurrency in India.
2. THE PROHIBITORY TUSSLE
In India, there exists a trend of apprehension against cryptocurrencies, as evidenced by a set of circulars issued by the Reserve Bank of India (“RBI”). The first instance of such apprehension dates back to December 24, 2013, when the RBI issued a press release warning users, traders and holders of virtual currencies, including cryptocurrencies, regarding the possible legal, operational, financial, and other security-related risks that they might face. Moreover, on February 1, 2017, and December 5, 2017, the RBI issued two more cautionary press releases, wherein it reiterated such risks and clarified that it has not issued any license or authorization to any agency or corporation to deal with any form of virtual currency.
Subsequently, on November 2, 2017, the Ministry of Finance constituted an Inter-Ministerial Committee to study the future of cryptocurrencies in India. The Committee submitted its report along with a Draft Bill in July 2019. The said Bill, i.e., the Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 attempted to prohibit the use of cryptocurrency as a legal tender and criminalize its possession in India. However, it was not tabled in the Parliament.
These prohibitory measures took a steep incline when the RBI issued a circular titled ‘Prohibition on dealing in Virtual Currencies’ (“Circular”) on April 6, 2018, effectively imposing a ban on dealing in virtual currencies. With an immediate effect, the Circular directed that entities regulated by the RBI shall refrain from dealing in virtual currencies or providing services to assist any individual or organization in dealing with virtual currencies.
The tide once again shifted on March 4, 2020, when a three-judge bench of the Hon’ble Supreme Court ("SC"), in Internet and Mobile Association of India V. Reserve Bank of India (IMIA), lifted the ban imposed by the Circular. In this case, the court considered the issue primarily through the lens of the doctrine of proportionality under Article 14, and the right to practice any profession, or to carry on any occupation, trade, or business under Article 19(1)(g) of the Indian Constitution. The court observed that the Circular had a detrimental effect on businesses that are engaged in the exchange of virtual currencies and found it to be violative of Article 19(1)(g) of the Indian Constitution.
3. POTENTIAL CONSEQUENCES OF PROHIBITION
More recently, the Central government has revealed that it is considering the introduction of a new bill on cryptocurrencies, i.e., the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the next session of Lok Sabha. The Bill is projected to prohibit all private cryptocurrencies in India and to create a facilitative framework for the creation of an official digital currency that will be issued by the RBI. However, a blanket ban on private cryptocurrencies will have certain repercussions on not only the investors, but also on honest businesses, employment of thousands of people, and the overall economy of our country. This is because in today’s world, cryptocurrencies are creating employment in a number of sectors both in India and overseas, and there are over 300 startups generating tens of thousands of jobs as well as hundreds of millions of dollars in revenue and taxes. Besides, an absolute ban has the potential of creating panic among 10 million private cryptocurrency investors in India with holdings worth over Rs. 10,000 crores.
It will not be an easy task for the Indian government to wipe out the wealth of such a large number of people as it may lead to an economic crisis in the country. As a result, if the Indian government does not find a way to reimburse these people holding crypto assets, it will create favourable circumstances for the formation of an underground economy (wherein transaction of goods and services occurs outside government authorized channels) dealing with the exchange of crypto assets to Indian Rupees (INR), which will also facilitate the entry of black money in the economy. Furthermore, these activities will be hard to trace as cryptocurrency payments are structured to keep the identity and location of the sender anonymous, and as of now, the Indian government does not have access to the global network of computers that are used for mining cryptocurrency and maintaining blockchain ledgers. Hence, an outright ban on private cryptocurrencies cannot be the right way to deal with the risks that are associated with them.
Additionally, an absolute ban on cryptocurrencies would have a detrimental effect on investment in Indian blockchain startups, forcing them to either shut down or move overseas. As a result, Indian investors would be unable to take advantage of the investment opportunities available to their foreign counterparts. Previously, in 2018, when the RBI ban on cryptocurrencies was in place, most of the crypto-investors, exchangers and blockchain startups moved to crypto-friendly countries which resulted in a 99% decline in trading volume and an approximate 95% loss in jobs. Therefore, it can be said that an absolute ban would result in a similar or even worse scenario than 2018.
Nonetheless, a regulatory framework is required to ensure that cryptocurrencies are not used for illegal purposes and to protect unwary investors from excessive market volatility and potential frauds. However, like all effective regulations, it should be unambiguous, transparent, and driven by a vision of what it seeks to accomplish. If the government fails to do so, India will be missing out in the global race of cryptocurrency.
4. EFFORTS IN OTHER NATIONS
Several nations across the world have taken positive steps toward the use of cryptocurrencies and have adopted a regulatory approach towards them. For instance, Japan has one of the most prominent virtual currency markets in today’s world. They regulate cryptocurrencies as crypto-assets under the Financial Instruments and Exchange Act, 1948. In 2014, even after the collapse of Mt. Gox, the world’s largest bitcoin trading exchange, they did not ban crypto-exchanges and instead established a working group to recommend measures to curb the risk of using virtual currencies. In the light of the recommendations given by the working group, an exhaustive definition of cryptocurrency was added to Japan’s Payment Services Act, 2009 and now the Financial Service Agency of Japan regulates and provides licenses to cryptocurrency exchange businesses in the country. In addition, these businesses are obligated to verify customer identities and maintain transaction records, along with keeping a check on any suspicious activity and informing the concerned authority.
Among others, Singapore is considered to be the most crypto-friendly country because of its regulatory framework to deal with virtual currencies. They have enacted the same anti-money laundering and combating the financing of terrorism ("AML-CFT") regulations for cryptocurrencies as they had for traditional currencies. Moreover, as per their policy, businesses dealing in cryptocurrency are required to obtain a license from the government, which helps the government to keep an eye on any suspicious activity.
The regulatory framework of the United Kingdom (UK) is also very similar to that of Singapore. Here, businesses dealing in cryptocurrencies have to obtain a license and get themselves registered with the UK’s Financial Conduct Authority, and they are also required to conform to the AML-CFT regulations under UK law. Moreover, in the UK, crypto businesses can apply for an ‘Authorized Payment Institutions’ license.
5. CONCLUSION AND THE WAY FORWARD
According to the ongoing trends, it is clear that there exists a reluctance towards regulating cryptocurrency in India. Nevertheless, in light of the foregoing analysis, it is evident that several nations across the world are moving towards a pro-crypto approach by adopting regulatory frameworks. On a comparative analysis of these frameworks, similarities can be found in terms of dealing with the risks associated with crypto-transactions, such as the issuance of a license, registration of crypto businesses, and the obligation to comply with the domestic AML-CFT regulations. In this regard, the authors opine that a similar approach can also be followed by India instead of putting a blanket ban on private cryptocurrency as the benefits of regulation outweigh those of prohibition.
It is worth mentioning that a forward-looking crypto policy will have a significant impact on improving our overall financial infrastructure, strengthening our monetary policy, deterring financial frauds, enhancing national security, attracting international capital, creating more employment opportunities, and retaining our tech talent to accelerate technological development, thereby driving India towards becoming a global powerhouse.
As per the latest reports, some officials within the government are of the view that the prohibitory approach followed till now is outdated and they are stressing on the formation of a new panel to reexamine the possibility of regulating cryptocurrency in India. Moreover, recently the Finance Minister also made a public comment that the government is considering taking a “calibrated approach” towards regulating cryptocurrency rather than imposing an outright ban. She also stated that this time, inputs from industry stakeholders will also be taken into account by the government. Therefore, we can say that there is still a ray of hope that the regulatory approach may be considered by the new panel and India also joins the league of crypto-friendly nations.