Since its inception, cryptocurrencies have seen a surge in its prices just re-asserting their highly volatile nature. The cryptocurrency paradigm continues to boom despite the global pandemic impacting economies across the globe. During the past year alone, many other cryptocurrencies have come into foray fueling the interest in cryptocurrencies. The price of one Bitcoin (one of the legacy cryptocurrencies) has increased by six times over the past 12 months. Due to the positive volatility in the cryptocurrencies, it is being viewed as an investment asset which promises to provide quick returns providing a lucrative trading market. Today, WazirX, one of India’s most trusted cryptocurrency exchanges, estimates the investment of around 7 million Indians in crypto-assets worth USD 1 billion. Considering the volatility of the cryptocurrencies, it may be susceptible to risks and misuse. Of late, such concerns have resulted in the need for regulating the cryptocurrency market in India.
Legal Development in India
As of now, there is no legislative framework that governs cryptocurrencies in India. In the past decade, India has generally held a cautious position towards use and transactions involving cryptocurrencies. In 2013, the Reserve Bank of India had first issued a press release cautioning users and investors of virtual currencies, and indicated that they were reviewing the legality of such assets under the prevailing regulatory frameworks. The first formal restriction on the use and transaction involving cryptocurrencies was affected by circular issued by the RBI in 2018. The circular specifically barred banks and other financial institutions from dealing with cryptocurrencies based platforms and any form of virtual currencies. This dealt a major blow to the cryptocurrencies industry in India. Though the order of the RBI was appealed, a Finance Ministry Committee on virtual-currencies recommended banning crypto-currencies in India and proposed a draft Bill, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 for regulating cryptocurrencies in India. The Bill proposed an absolute ban on private cryptocurrencies on one hand, and on the other proposed establishing a ‘digital rupee’ instead. Later, the Supreme Court struck down the 2018 RBI circular banning all the regulated entities from using cryptocurrencies in Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC Online SC 275). The Supreme Court in reaching their decision applied the principle of proportionality and held that even though the RBI is empowered to regulate the financial sector, its act of banning the use of cryptocurrencies as per the 2018 circular is not proportional to the alleged ‘mischief’ or harm caused to the RBI regulated entities (such as banks) that it aimed to address. The order resulted in a revival for cryptocurrency-based platforms in India. The Lok Sabha Bulletin for the present Parliamentary Session indicates that a new bill, namely, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is likely to be tabled before the Parliament.
What is the proposed Bill likely to hold?
Since the text of the Bill is not yet available, it is still not clear how the cryptocurrency platforms are likely to be affected. Only limited information is available in this regard. For example, the Lok Sabha Bulletin Part-II indicates that the Bill will establish a ‘facilitative framework’ for creation of an official digital currency to be issued by the Reserve Bank of India. The digital currency, which is termed as Central Bank Digital Currency (CBDC), is not a novel concept. A CBDC uses a blockchain-based token to represent a digital form of a fiat currency. The value of such a CBDC is linked and is equal to the fiat currency and may be free from the volatility that is generally associated with typical cryptocurrencies. CBDCs have been mooted by the Indian government, which have pushed for establishing such a digital cryptocurrency equivalent to the Indian rupee.
The Bill also proposes to prohibit all private cryptocurrencies, and related activities in India (such as mining, buying, holding, selling, dealing in, issuance, disposal or use). It is still not clear as to what will constitute such ‘private cryptocurrencies’ and how cryptocurrencies other than such private cryptocurrencies would be regulated. The 2019 Bill gave a very broad definition to the term ‘cryptocurrency’ which raised apprehensions that it may even include tokens, or other such digital issues generated through non-cryptographic means. Similarly, other related issues like tax implications and the scope of the Bill’s applicability to Indians holding crypto-assets outside India are still unknown. The exact implications of these can only be assessed once the Draft of the new Bill is laid before the Parliament.
What is expected from the proposed Bill?
Regulation rather than ban
One of the reasons as to why India perhaps has been leaning towards banning cryptocurrencies is the possibility of the cryptocurrencies being used for financing illegal activities (such as funding terror, money laundering, tax evasion, etc.). It may be noted that curtailing such activities may not be possible by banning cryptocurrencies in India. Other concerns include investor protection, consumer protection (in case of purchase/sale of goods in lieu of cryptocurrencies), lack of oversight or control by any regulatory authority. Such concerns may be practically addressable through a regulatory framework while at the same time ensuring that the intrinsic value from cryptocurrencies is available to all. Suggestions towards implementing such a regulatory framework has also been proposed by NASSCOM.
Similar approaches are being explored in other jurisdictions. On the 24th September 2020, the EU Commission has officially released the Proposal for a Regulation on Markets in Crypto-assets (“MiCA”). The proposed regulation is intended to bridge the gap in financial services regulations in the EU in relation to crypto-assets (which includes cryptocurrencies).
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