INDIA’S REGULATION ON CRYPTOCURRENCY & BLOCKCHAINS

Cryptocurrency and the Blockchain technology that underpins it are often seen as innovative and disruptive. However, not only the governments of various nations, but also the people of various sections and groups, have responded differently to this unique phenomenon, and everyone has observed Cryptocurrency through their own lens.

Cryptocurrency is a virtual or digital money that is protected by encryption, making double-spending and counterfeiting nearly difficult. The term “cryptocurrency” comes from the encryption technology that is utilised for network security. Cryptocurrency is supported by the conviction of its users in a market that will hold its worth. The majority of cryptocurrencies are decentralised networks built on blockchain technology, which is a distributed ledger system that records and verifies transactions via a peer-to-peer consensus method.

A cryptocurrency, sometimes known as a virtual currency, is a digital asset meant to function as a means of exchange, with transaction records kept in a digital ledger. It does not exist in the form of paper currency. It is not centralized, which means it is not issued by a government or central bank (for example in India, the currency is issued by the Reserve Bank of India). This property of cryptocurrencies makes them theoretically impervious to government intervention or control.

It functions as a public transaction database in a decentralised system using distributed ledger technology, most often a blockchain. In 2009, the first cryptocurrency, known as Bitcoin, was published. There are more than 4000 cryptocurrencies that are accessible presently.

Purpose of cryptocurrency:-

Cryptocurrency is designed to make it easier for two people to transfer cash without the use of a trusted third party like a bank or credit card firm. Instead, these transactions are protected by the use of public and private keys, as well as other types of incentive systems like as Proof of Work and Proof of Stake. In current cryptocurrency systems, a user’s “wallet,” or account address, has a public key, but the private key is only known by the owner and is used to sign transactions. Fund transfers are performed with low transaction costs, allowing users to avoid the exorbitant fees charged by banks and financial institutions for wire transfers.

Due to the semi-anonymous nature of cryptocurrency transactions, they are ideally suited for a wide range of illegal activities, including money laundering and tax evasion. Cryptocurrency supporters, on the other hand, place a high importance on anonymity, citing benefits such as whistleblower protection and demonstrators living in harsh regimes. Some cryptocurrencies have a higher level of security than others. Bitcoin, for example, is a comparatively poor option for doing criminal business online owing to forensic examination of the Bitcoin blockchain, which has helped authorities to capture and prosecute perpetrators. There are, however, more privacy-oriented cryptocurrencies like Dash, Monero, and ZCash, which are far more difficult to track.

Cryptocurrency regulations:-

Cryptocurrency is currently uncontrolled. Historically, under Section 35A[i] read with Section 36(1)(a)[ii] and Section 56[iii] of the Banking Regulation Act, 1949, and Section 45JA[iv] and 45L[v] of the Reserve Bank of India Act 1934, the RBI issued a notification titled ‘Prohibition on Dealing in Virtual Currencies (the ‘Crypto Ban Notification’) on April 6, 2018 and Section 10(2)[vi] of the Payment and Settlement Systems Act of 2007 was amended to prohibit all banks and financial institutions from offering services connected to cryptocurrency transactions, as well as from having any type of contact with those who already provide those services. Besides that, it has issued several cautionary statements about investing in it. Cryptocurrency, according to the RBI, are “stateless digital currencies” that trade via encryption methods and are protected from government intervention since they are not backed by a central bank. As a result, they may be often utilized in illegal transactions.

The crypto sector was virtually hamstrung as a result of the banking service, which needed exchanges to send and receive money in order to convert cash into cryptocurrency and pay employees, suppliers, and office space, among other things. Cryptocurrency customers were compelled to cash out immediately, and the sector was impacted on two fronts as a result of the loss of both banking services and fewer transactions.

Judicial approach to cryptocurrency:-

The Supreme Court knocked down a long-standing circular prohibiting cryptocurrency circulation in the nation on the following grounds in the case of Internet and Mobile Association v. RBI, a 180-page lengthy ruling by Justice V Ramasubramanian:

1. The Reserve Bank of India (RBI) must not abuse its regulatory authority over virtual currencies.
2. Any trade that supports the use of cryptocurrency is prohibited, which is disproportionate.
3. It is also against the law under Article 19(1) (g)[vii] of the Constitution, which stipulates that businesses engaged in legal commerce are protected by the basic right to engage in any vocation, trade, or business.

The key elements of the decision are worth noting since the court and petitioners conducted significant worldwide benchmarking in defining cryptocurrencies, their identity, the instrument they entail, and who has the jurisdiction to regulate them. Many organisations across the world see cryptocurrency as having money-like characteristics, despite the fact that none of them have recognised it as legal tender, thus the RBI has the authority to regulate virtual currencies in this situation. The RBI has spoken in the past about confronting its entities and enterprises to avert harm to the banking industry and the economy, but there is no factual evidence to support this claim. It is critical to pay attention to these points listed below:

1. The actions of the virtual currency function have not caused any harm to the RBI in the last five years or more.
2. Virtual currencies were outlawed.
3. Even the Inter-Ministerial Committee, which was formed in 2017 and proposed a particular legislative framework as well as the adoption of a new law, the Crypto-taken Regulation Bill 2018, had the goal of regulating rather than prohibiting the actions.

The court stated that RBI did not establish alternative procedures to protect against the aforementioned dangers. The court stated to the president of the European Union Parliament that the European Central Bank and Parliament had looked into not abandoning the cryptocurrency business, but instead recommended strengthening the financial system and regulatory schemes, and that the RBI had overlooked alternative measures in this case. The court also considered the four-prong criteria provided by the petitioners to assess the proportionality of the action that the RBI measures should pass, as stated in the case Modern Dental College and Research Centre v. State of Madhya Pradesh, 2016, as follows:

• Measures taken by the RBI should be used for a specific purpose
• Reasonably related to the goal
• There are no less intrusive alternatives
• The importance of goal and the limitation of rights should be linked

The court stated that the RBI’s use of terms like as “money laundering” or “black money” does not qualify as a valid purpose, and that other options should have been examined. The most important takeaway from this decision is that the Supreme Court chastised politicians, multiple committees, and two draft bills for failing to take a clear stance on cryptocurrencies.

Regulation of Cryptocurrency trade:-

Because cryptocurrency is an inalienable part of any state, and because cryptocurrencies are encroaching on this domain, regulating cryptocurrency would necessitate oversight from a variety of agencies as well as stringent laws, such as:

1. The Reserve Bank of India (RBI) is in charge of regulating cryptocurrencies as legal money.
2. The Directorate of Enforcement has issued a statement prohibiting the usage of cryptocurrencies in the case of economic crimes.
3. The Department of Economic Affairs is in charge of regulating cryptocurrency’s involvement with the state’s economic policy.
4. SEBI has approved the use of cryptocurrency in security contracts.
5. Tax implications of cryptocurrency trade, according to India’s tax authorities.

As a result, putting together a complete framework to regulate every element of cryptocurrency trading appears to be a difficult undertaking. To establish an administrative presence in the crypto area, the RBI may rely on the blockchain system. It may also contemplate issuing licenses to cryptocurrency exchange, which would only be granted after a thorough review of records and the fulfillment of crucial compliance criteria.

Furthermore, a structure that, among other things, requires the reporting of exchange data to the RBI within a certain time frame may be established, which not only ensures the safety of exchanges and limits illegal usage, but also helps to increase consumer protection.

The tax authorities may tax the income made from purchasing and selling cryptocurrency as capital gains. The Securities and Exchange Board of India (SEBI) has the authority to regulate the trading elements of cryptocurrency transactions as well. This would boost traders’ morale since they will know that sufficient due diligence is being performed on crypto transactions, decreasing the danger of embezzlement in such transactions. Furthermore, businesses can sell initial coin offers (ICOs), which are similar to initial public offerings (IPOs), through which they may be able to obtain cash by releasing tokens in exchange for cryptocurrencies. To ensure the safety of customers and investors, SEBI may supervise the entire process and provide a return mechanism if delivery fails.

Blockchain Introduction:-

Blockchains are a sort of network chain (a way of assembling information and values) that generates “trust” in networks by providing audibility and consensus. Blockchain technology fosters trust by providing stakeholders with relevant records that have a low failure rate. It ensures security since no one can edit or alter a blockchain network, and no one can possess it without the consensus of its peers. In layman’s terms, it is the technology that stores information in a public database.

The blockchain is a technology that allows users to send information from one person to another in a secure and automated manner in the digital world. By forming a chain, one person has the ability to transfer information.

Pros and Cons of Blockchain:-

There are certain pros and cons of the technology. They are as follows:

Blockchain pros:-

• Security & Durability

Blockchain technology ensures the highest level of transaction security and durability. This technology’s general management makes it more durable. Furthermore, the system distributes information blocks throughout the network, which improves durability by eliminating the possibility of transaction failure. It also offers strong security to consumers by providing “public key infrastructure.”

• Integrity

Another significant feature of blockchain technology is that it provides users and stakeholders with a high level of integrity and confidence. When compared to other networks, blockchain has been found to provide high levels of data safety and integrity. It implies that it protects the data by ensuring that the data is always correct and that no one can change or add anything to the ledger once it has been posted.

• Transparency & Immutability

This is the most important aspect of blockchain technology. The immutable characteristic of the technology or system offers a system in which users cannot remove or change the data saved in the network. It is secure because each block has a Hash ID, and if someone tries to modify it, the block will totally change the ID.

Furthermore, it gives a fantastic transparency system since it is available for everyone to view, and if someone tries to change the data, the users will discover right immediately.

• Faster processing

Before blockchain technology became operational, traditional technologies required a significant amount of time and money to complete the task. However, since the adoption of blockchain technology, transactions have become much quicker and more frequent. This is also one of the most significant benefits of blockchain, since it saves time and money on the network.

• Traceability

It is regarded as one of the most notable aspects of blockchain technology. The blockchain technology structure is designed in such a manner that it can easily trace the location of the network and is recognised as a safe and reliable source of transaction. It also leaves a permanent audit trail.

Blockchain cons:-

• Complex regulations

It is one of the most serious drawbacks of blockchain technology. It is not required for any blockchain technology to have adequate rules and regulations in the network’s operation. As a result of the lack of laws and regulations, frauds occur, giving rise to the notion of ICO.

• Privacy concerns

Another significant disadvantage of blockchain technology is that it poses privacy concerns. The most essential thing for every commercial firm is to protect privacy in order to maintain the value of their brand in the long term. However, owing to the absence of privacy in blockchain, many companies must face the loss of profit since information may be shared with competitors.

• High cost

Although blockchain is less expensive than other networks, its solutions might be very expensive. In general, the cost is greatly depending on your requirements and the sort of blockchain functionality you need.

• Dispensable performance

It is also a significant disadvantage of blockchain technology since the calculations necessary in this network are more repetitious than those required in traditional networks. It usually happens when new nodes are added when the ledger is updated. When there is an update in the ledger version, all of the network’s nodes update as well.

Current scenario of Cryptocurrency in India:-

Recent developments in the crypto world, also like Bitcoin’s drop from $65,000 in April to below $40,000 as a result of Elon Musk’s remarks, have refocused attention on legislation governing cryptocurrency governance in India. Around 7 million Indians have already invested more than $1 billion in cryptocurrencies, and the government faces a difficult challenge in allowing the fintech sector to thrive in India while ensuring that there are no safety issues.

Stand of Government on Cryptocurrency:

After months of deliberation on whether to legalize or prohibit cryptocurrencies, the Indian government has made an optimistic step toward regulating digital currencies in India. The Ministry of Corporate Affairs (MCA) has made it necessary for businesses to report their cryptocurrency trading/investments within the fiscal year. Experts regard it as a positive start and anticipate that the taxes laws will be implemented. This is seen as the first step in regulating cryptocurrencies in India.

The accounting of crypto assets aims to reduce illegal activities and the circulation of black money through cryptos. Transparent disclosures can also help to enhance company governance. The Centre has informed crypto stakeholders that there would be no blanket ban on digital currencies and that it is currently developing its final position on the issue. Finance Minister Nirmala Sitharaman has stated that the government is open to experimenting with new technologies and is not dismissive of them. While the government has reservations over cryptocurrencies, it is also developing its own digital money. The government does not want to be left behind in the new age digital revolution, and it intends to capitalize on the advantages that blockchain technology provides. “The time has come to capitalize on its uses while also fortifying the digital infrastructure,”.

Conclusion

Unless and until a robust regulatory framework is implemented, India’s cryptocurrency industry would remain uncontrolled. While the Supreme Court’s ruling has boosted the crypto industry, and cryptocurrency start-ups in India are expanding and releasing new products, there are some concerns since the finance ministry has launched a government bill for inter-ministerial talks that may ban cryptocurrencies. Despite this, cryptocurrency start-ups in India are optimistic about cryptocurrency’s enormous potential and future, and they are pressing the government to avoid implementing a blanket ban.

[i] The Banking Regulation Act, 1949. Act no.  10 of 1949, section 35A: Power of the Reserve Bank to give directions.

[ii] The Banking Regulation Act, 1949. Act no.  10 of 1949, section 36(1) (a): Further powers and functions of Reserve Banks.

[iii] The Banking Regulation Act, 1949. Act no.  10 of 1949, section 56: Act to apply to co-operative societies subject to modifications.

[iv] Reserve Bank of India act, 1934. Section 45JA: Power of Bank to determine policy and issue directions.

[v]  Reserve Bank of India act, 1934. Section 45L: Power of Bank to call for information from financial institutions and to give directions.

[vi] The Payment and Settlement System act, 2007. No. 51 of 2007, section 10(2): Without prejudice to the provisions of sub-section (1), the Reserve Bank may, from time to time,

issue such guidelines, as it may consider necessary for the proper and efficient management of the

payment systems generally or with reference to any particular payment system.

[vii] Indian Constitution , Art.19(1)(g): to practise any profession, or to carry on any occupation, trade or business

References

(1) Nehaa Chaudhuri & Anirudh Rastogi, India needs legal framework for cryptocurrencies, (Mar.11, 2020), https://economictimes.indiatimes.com/news/economy/policy/view-india-needs-legal-framework-for-cryptocurrencies/articleshow/74567416.cms?from=mdr.

(2)Vijay Pal Dalmia, Explaining Bitcoin and Legal Position in India,(Mar. 28, 2020), https://www.lexology.com/library/detail.aspx?g=5cc1e39e-2bd5-45cf-a555-63b4e80ed52b.

(3) Rachit Garg, Key insights on legal framework of cryptocurrency in India,(Apr. 25, 2021), https://blog.ipleaders.in/key-insights-legal-framework-cryptocurrency-india/#Status_in_India.

(4) Ayush Verma, Regulation of bitcoin under Indian framework, (Feb. 8, 2021), https://blog.ipleaders.in/regulation-bitcoin-indian-framework/.

(5) BusinessToday.In, Cryptocurrency in India: What’s the govt’s stand, legal status, its future, (Jun. 26, 2021), https://www.businesstoday.in/latest/corporate/story/cryptocurrency-in-india-what-the-govt-stand-legal-status-its-future-296570-2021-05-20.

(6) Disha Ganguli, Cryptocurrency and its rising importance in India in 2021, (May 14, 2021), https://www.analyticsinsight.net/cryptocurrency-and-its-rising-importance-in-india-in-2021/.

(7) Ayush Verma, Laws and regulation of blockchain along with its status in India, (Oct. 30, 2020), https://blog.ipleaders.in/laws-regulation-blockchain-status-india/#What_is_blockchain.