By: Aman Kumar Yadav
Cryptocurrencies are digital representations of value that can be stored and transferred digitally. Simply put, it is a type of digital currency or a medium of exchange just like the US dollar. They function autonomously, unencumbered by traditional banking and government oversight. Countries have repeatedly attempted to implement measures to regulate Cryptocurrency or ban it altogether. This article analyzes India’s stance on Cryptocurrency and will also look as to how the Cryptocurrency is regulated in various jurisdictions.
Timeline of Events
Since 2012 there have been a large number of Cryptocurrency exchanges operating in India, including the likes of Zebpay, CoinDCX, or Unocoin amongst others. These crypto exchange platforms managed to provide much needed depth and volume to the Indian crypto market until 2013 when Reserve Bank of India (hereinafter ‘RBI’), the Central Bank of India, issued a Press Release to caution the common populace against dealing in virtual currencies. However, its transaction volume and popularity in general public skyrocketed when the Central Government announced demonetization of high denomination notes in November 2016 to promote digital payment services over traditional payment processing systems. This growing popularity of Cryptocurrencies compelled RBI to issue regular Press Releases in February 2017 and December 2017 reiterating concerns regarding virtual currencies and cautioning the general public about the risks associated with it.
In November 2017 the Government of India constituted a high level Inter-ministerial Committee (‘the Committee’) under the chairmanship of Shri Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance, to study concerns pertaining to Virtual Currencies and to propose specific actions that may be taken in relation thereto. The Committee in its report of February 2019 recommended a blanket ban on private Cryptocurrencies in India. After regular cautions via Press Releases in the previous year, The RBI in 2018 issued a circular thereby prohibiting banks and financial institutions from dealing in and from providing services that facilitate dealing in virtual currencies. However, in March 2020, this circular was struck down by a three-judge bench of the Supreme Court of India (‘SC’) in Internet and Mobile Association of India v. Reserve Bank of India, (2020 SCC Online SC 275), observing that since Cryptocurrencies are not banned in India and pose no discernible risk, the deprivation of Cryptocurrency exchanges from accessing banking and payments channels would be disproportionate.
Countries that have not banned the Virtual Currency
Some of the notable jurisdictions that have a comprehensive legislative framework to regulate Cryptocurrency include Australia, Japan, Singapore, United Arab Emirates (‘UAE’) amongst others. Australia has been one of the most progressive jurisdictions when it comes to the adoption of Cryptocurrency. Both Cryptocurrencies and exchanges are legal in Australia and are subject to capital gains tax. Similarly, Japan, in 2020, amended its regulation governing ‘virtual currency exchange services’ thereby necessitating the businesses offering virtual currency exchange services to register with the Financial Services Agency in Japan. Moreover, Central Bank of Japan, i.e., Bank of Japan on July 2, 2020, released a report entitled “Technological Challenges in Having Central Bank Digital Currencies Function as Cash Equivalents”, acknowledged the possibility of using central bank digital currencies as cash equivalents and issues involved in the same. In Singapore, Cryptocurrency is legal and any kind of digital payments tokens are regulated by the Monetary Authority of Singapore under the Payments Services Act, 2019. Similarly one of the financial free market zones, Abu Dhabi Global Markets (ADGM) of UAE uses the term ‘digital assets’ as an umbrella expression to regulate digital securities, crypto assets, utility tokens and fiat tokens etc. Here, crypto assets are regulated by the Financial Services Regulatory Authority (FSRA) which provides certain mandatory requirements for operating crypto asset business.
Countries that have banned Cryptocurrency
In Latin America, Cryptocurrency regulations vary greatly. Countries like Bolivia have effectively banned crypto while others, like Brazil, and Mexico have implemented regulations to govern crypto. In jurisdictions like the United Kingdom (UK), although crypto is not considered to be legal tender, Cryptocurrency exchanges are legal. Moreover, gains or losses on crypto are subject to capital gains tax. The UK has been proactive in its approach concerning Cryptocurrency, in July 2019, The U.K.’s Financial Conduct Authority (‘FCA’) released a guidance report on crypto assets clarifying which tokens fall under its jurisdiction. Following this, the U.K. Treasury in January 2021, released a consultation paper to gather feedback from stakeholders concerning the government’s regulatory approach to cryptocurrencies. Canada allows the use of Cryptocurrency and the same is regulated under securities laws. Furthermore, digital currency transactions are subject to tax laws as the Financial Consumer Agency of Canada treats it as a commodity. Primary concerns that nations have regarding Cryptocurrency is that they believe it facilitates criminality, including money laundering and terror financing. However, progress has been witnessed as private firms can now help in de-anonymising Bitcoin transactions to trace the illicit activity facilitated by Cryptocurrency.
The way forward
While countries like South Korea are planning to put a legislative framework to regulate the Cryptocurrencies and Crypto exchanges, on the other hand, countries like India are considering imposing an effective ban on digital assets and digital currencies. The Lower House of the Parliament in its bulletin, released on January 30, 2021, indicates that Indian parliament is planning to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (‘the Bill’) to ban ‘private’ Cryptocurrencies such as Bitcoin and introduce its own digital currency which is often termed as ‘Central Bank Digital Currency’ (‘CBDC’) like Tunisia’s eDinar (launched in 2015), Senegal’s eCFA (2016), Venezuela’s Petromoneda (2018) or the most recent China’s digital Yuan (2020). Some notable jurisdictions that are experimenting with the CBDC, include France, Canada and Sweden.
India’s stance of regulating the Cryptocurrency by introducing the state backed digital currency which will be regulated by the RBI is worrisome, however, it doesn’t come as a surprise as both, the Committees’ report of June 2019 and the Draft Bill, Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 were indicative of the same. The approach similar to that of China, also indicates that India acknowledges the potential application of the virtual currency going forward. Since, there wasn’t any sui generis legislation to govern Cryptocurrencies, this Bill will provide clarity as to how it should be regulated, however, uncertainty exists as to (i) what exactly is ‘private’ Cryptocurrencies, (ii) whether Cryptocurrencies will be treated as a ‘currency’ or a ‘stock’ or there will be an outright ban on dealing with them, and (iii) whether there will be any tax mechanism in place to check Crypto trading as previously speculated in December 2020.
Furthermore, assuming that the CBDC issued by the Indian government works on a two tier model, i.e. it would have two layers of protection, with one layer through the Distributed Ledger Technology (DLT) technology and another through its centralized system then the concerns relating to security in dealing with Cryptocurrencies can be suitably dealt with. Going forward, it is paramount to have an effective dialogue on the Bill that includes taking note of the stakeholder’s comment and addressing their concerns, otherwise banning the Cryptocurrency in a hurry would only invite prolonged litigation in the apex court of the country leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India. A campaign (#Indiawantscrypto) is being shared across social media in response to government’s proposed plan of banning Cryptocurrency which has draft templates pointing out the positives of the Cryptocurrency trading as to how it is innovative and can help India in archiving the goal of $5 Trillion economy that too with Self Reliant India campaign.
(Aman is currently a law undergraduate at the National Law Institute University, Bhopal. He may be contacted via mail at email@example.com)
Cite as: Aman Kumar Yadav, ‘Cryptocurrency in India: To ban or not to ban’ (The RMLNLU Law Review Blog, 2 March 2021) <https://rmlnlulawreview.wordpress.com/2021/03/02/cryptocurrency-in-india-to-ban-or-not-to-ban/> date of access