CRYPTOCURRENCY AND ITS LEGALITY IN INDIA

WHAT IS CRYPTOCURRENCY?

A cryptocurrency is a digital asset that functions as a medium of exchange where the individual ownership of coin records is stored in a ledger which exists in the form of a database which is computerized using a strong cryptography to secure the records of transfer, to verify the ownership of coins and to control the creation of additional coins.^[1] Cryptocurrencies are usually not issued by the central authority and do not exist in a physical form like in the case of paper money.^[2] The first open-source decentralized cryptocurrency was released in 2009 and other cryptocurrencies have been created thereafter.

CRYPTOCURRENCY TRADING / EXCHANGE

A software called the cryptocurrency wallets help in sending the cryptocurrency transactions. The wallet is used to transfer the balances from one public address to another by the person who creates the transaction. In a digital public ledger called the blockchain all the transactions and balances are recorded.

IS CRYPTOCURRENCY LEGAL IN INDIA?

There has always been a contention regarding the legality of the use of cryptocurrency. Cryptocurrencies are usually a target of several concerns such as it being a channel for black money or anonymously funding terrorism due to the lack of a traditional government or bank-backed system to regulate its use.

Various warnings have been issued by the Reserve Bank of India (RBI) through its press releases regarding the potential risks of the use of cryptocurrencies to the financial system of the nation, since 2013. A report has also been released by the Inter-Ministerial Committee on February 28, 2019, which recommended certain measures concerning cryptocurrencies, which includes a complete ban on the use of private cryptocurrencies.^[3]

RBI has issued a circular in 2018, April, banning the regulated financial institutions from providing services to businesses dealing in exchanging/ trading of cryptocurrencies, which has led to a complete turmoil in the trading industry of the Indian Cryptocurrency.^[4] The crypto-trading entities have led to various writ petitions challenging the validity of the circular before the Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India in the year 2020.^[5] In this case, the supreme court had deliberated on the legality of cryptocurrency and has struck down the circular issued by the RBI as being unconstitutional.^[6][7]

In this case, the role of RBI as a central bank to manage currency, money supply, and interest rates in the economy has been analysed by the Supreme Court. The SC has also recognized the maintenance of price stability as an objective of RBI. It has observed that cryptocurrency is competent to be accepted as a valid payment for the purchase of goods and services, and that the RBI can regulate the payment systems.

The circular issued by RBI was also challenged on the grounds that it denies access to those who trade in cryptocurrency would be similar to a denial of their constitutional right to carry on any trade or profession and hence, would be violative of Article 19(1)(g) of the Constitution of India^[8]. This contention was upheld by the Supreme Court. A clear distinction has been drawn by the SC between the three categories of persons as those who trade in cryptocurrency as a hobby as opposed to those who engage in trading in cryptocurrency as their occupation/ business. It held that the first category who sell and buy cryptocurrency as a mere hobby cannot support their claim on the Article(1)(g) as it only covers occupation, trade, profession, or business. The SC concluded by saying that since cryptocurrencies are not banned in India, depriving them of accessing banks and payment channels would be disproportionate.

CURRENT LEGAL STATUS OF CRYPTOCURRENCY IN INDIA

Currently, there is an absence of an absolute regulation on the cryptocurrency market in India although the judgement has provided a temporary relief. It is very much unlikely to think that the financial institutions would be inclined towards investing in such virtual currencies, considering such a vacuum.^[9] There is no regulation of cryptocurrencies in India. However, purchasing/ selling cryptocurrencies is completely legal in India and there is no law prohibiting Indians to do the same.^[10] There had been a banking ban due to which the exchanges of cryptocurrencies were not able to hold bank accounts between July 2018 to March 2020. Nevertheless, the Supreme Court has quashed the ban in 2020.^[11]

THE FUTURE OF CRYPTOCURRENCY IN INDIA

The future of Cryptocurrency is questioned over its murky structure and also due to the absence of any kind of a legislative/regulatory framework confirming the status of them till date. It remains uncertain as to whether they would be treated as a “stock” or a “currency” or they will be an outright ban on dealing with them.^[12]

Reference 

[1] Cryptocurrency, DAILY FINANCE, https://df.media/category/cryptocurrency/.

[2] Matteo D’Agnolo, All You Need To Know About BitCoin, ECONOMICTIMES, [26 Oct. 2015], https://web.archive.org/web/20151026140555/http://economictimes.indiatimes.com/news/international/business/all-you-need-to-know-about-bitcoin/articleshow/48910867.cms.

[3] Abigail Johnson Hess, India might ban private cryptocurrencies like bitcoin and develop a national digital coin, CNBC, [JAN 30 202112:14 PM], https://www.cnbc.com/2021/01/30/the-indian-government-may-ban-cryptocurrencies-like-bitcoin.html.

[4] Nupur Anand ,Arun Jaitley has just killed India’s cryptocurrency party, QURTZ INDIA, [Feb. 1, 2018 12:32 PM], https://qz.com/india/1195316/budget-2018-busts-bitcoin-arun-jaitley-has-just-killed-indias-cryptocurrency-party.

[5] Internet and Mobile Association of India v. Reserve Bank of India (2020)3MLJ541.

[6] Aneesha Mathur, Supreme Court quashes RBI ban on cryptocurrency trade, INDIA TODAY, [March 4, 2020], https://www.indiatoday.in/business/story/supreme-court-quashes-rbi-ban-on-cryptocurrency-1652254-2020-03-04.

[7] Supreme Court Lifts Ban on Cryptocurrency Trading in India, THE QUINT, [04 Mar 2020, 3:09 PM], https://www.thequint.com/tech-and-auto/supreme-court-strikes-down-rbi-ban-on-cryptocurrency-trading-in-india.

[8] INDIA CONST. art. 19, cl. 19(g).

[9] Vaishali Basu Sharma, Will 2021 Be the Year When India Finally Clarifies Laws Around Cryptocurrencies?, THEWIRE, [23 DEC. 2020], https://thewire.in/tech/will-2021-be-the-year-when-india-finally-clarifies-laws-around-cryptocurrencies.

[10] Rajeev Kumar , Investing in Cryptocurrency? Risks, Safety Legal Status, Future in India – All you need to know, FINANCIAL EXPRESS, [February 15, 2021 7:19 PM], https://www.financialexpress.com/money/investing-in-cryptocurrency-risks-safety-legal-status-future-in-india-all-you-need-to-know/2195319.

[11] India bans crypto-currency trades, BBC NEWS, [6 April 2018], https://www.bbc.com/news/world-asia-india-43669730.

[12] Bijin Jose, Crypto conundrum: Digital Currency future seems vague in India, THE ECONOMIC TIMES, [Feb 22, 2021], https://economictimes.indiatimes.com/markets/stocks/news/crypto-conundrum-digital-currency-future-seems-vague-in-india/articleshow/81146253.cms?from=mdr.