By
Kajal Kumari & Shalini Gupta, V year of B.A.,LL.B. from Galgotias University
“Cryptocurrency offers a way for forgotten and oppressed people to participate in the global economy.”[i]
-Mr. Paul Gosar
Introduction
Since time immemorial, the currency has been an integral part of our lives. In the stone age times, people used a barter system in which people exchanged goods and services for other goods and services in return. The barter system lost its impact due to various flaws in it like there is no common measure of value. After many iterations, modern currency came into existence which gained widespread popularity i.e. paper currency, coins, credit card and digital wallets which are controlled by banks and Government. During online transactions, there are various issues like the technical issue at the bank as a result system or internet is not working properly, accounts got hacked or identity theft through which various cybercrimes can happen. Therefore, cryptocurrency came into existence to protect from all these crimes. A cryptocurrency is a digital or virtual currency which has been designed to work as a medium of exchange that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.[i] Cryptocurrencies allow for online payments with security. These are also known as virtual money or virtual tokens. It emerged as a peer to peer electronic system which allows online payments to be sent directly from one party to another party and uses cryptography for security purpose.[ii] The first cryptocurrency was Bitcoin. In early 2009, a group of programmers under an alias Satoshi Nakamoto introduced Bitcoin. Satoshi described it as a ‘peer-to-peer electronic cash system.’[iii]
Cryptocurrency Bill
Cryptocurrency Bill for India named “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019” has been drafted by an Inter-Ministerial Committee (IMC) headed by former Secretary of the Department of Economic Affairs (DEA) Subhash Chandra Garg.[iv]The committee was constituted on 2 November 2017 under the chairmanship of former Secretary of the Department of Economic Affairs Subhash Chandra Garg.[v] The committees meeting held three times for the discussion on the banning of cryptocurrencies before submitting its report. The committee drafted a Bill named ‘The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ which will be introduced in the Parliament soon. The draft Bill seeks to ban all cryptocurrencies as a legal tender and currency[vi] and based on the risk associated with the risk to the consumer, potential use for money laundering and the threat to the financial system of the country.
Features of Cryptocurrency
· Cryptocurrency has no physical form as it exists only in the network;
· Cryptocurrency has no intrinsic value as it has no redeemable value for another commodity like gold, silver;
· The network of cryptocurrency is completely decentralized as its supply is not determined by the Central Bank.
How cryptocurrency works
1. A transaction is requested by someone;
2. On peer to peer networks which consist of computers known as nodes broadcasted the requested transaction;
3. By using the known algorithm, the network of nodes validates the status of users and transactions;
4. A transaction which is verified can involve cryptocurrency, records, contracts or other information;
5. Once the transaction is verified then the transaction is combined with other transactions to create a new block of data for the ledger;
6. The new block which is created added to the blockchain which already exists, in a way that is permanent and unalterable;
7. Now, the transaction is complete.
Ban on Cryptocurrency
On 6th April 2018, Reserve Bank of India issued a circular, banning all entities which are regulated by the Central Bank from trading in cryptocurrency or virtual currency. A writ petition was filed by the Internet and Mobile Association of India asking for the reversal of the circular.[vii]
Arguments are given by RBI for banning of cryptocurrencies
· RBI said it did not want these virtual currencies spreading like a contagion, and had, therefore, larger public interest, asked banks not to deal with people or exchange dealing in these non-fiat currencies.
· There were risks and concerns about data security, consumer protection and their use for speculation. These types of trading affect fundamental rights.
Inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public.[viii]
Grounds on which circular was challenged
There are following grounds on which circular issued by RBI was challenged before the Hon’ble Supreme Court:
· RBI has no jurisdiction to deal with cryptocurrency because cryptocurrency is not regarded as legal tender, it is only regarded as tradable commodities.
· RBI circular imposes a total ban on that activity which is not declared as illegal, it violates the right given under Article 19(1)(g) of the Constitution of India which guarantees to all citizens the right to “practice any profession or to carry on any occupation, trade or business”.
· Circular issued by RBI is arbitrary and imposes disproportionate restrictions.
Supreme Court’s Observation
On 4th March 2020, in Internet and Mobile Association of India v. Reserve Bank of India[ix], the Hon’ble Supreme Court lifted the curb on the ground of proportionality which was imposed by Reserve Bank of India on the regulated entities.
· The Supreme Court held that the circular which was issued by the Reserve Bank of India to ban all entities which are regulated by the Central Bank from trading in cryptocurrency or virtual currency violates the right given under Article 19(1)(g) of the Constitution of India.
· As there is no precise definition of virtual currencies so circular did not pass the proportionality test and any adverse effect of the virtual currencies on the operation of banks and the financial institution had not been proved by Reserve Bank of India.
· The Supreme Court also said that these activities fall within the purview of RBI when virtual currencies are accepted as valid payments for the purchase of goods and services.
Criticism for the ban on cryptocurrency
Trading cryptocurrency for cash is banned in many countries. The draft Bill criminalized the use of private cryptocurrencies. The punishment for its use has also been given in the draft Bill i.e. fine and imprisonment up to 10 years. In 2018, The Reserve Bank of India Act, 1934 and The Payment Settlements System Act, 2007 issued the circular to the entities not to deal in virtual currencies. The Supreme Court of India overturned a decision by the Reserve Bank of India which prohibited banks from dealing with cryptocurrency exchanges.[x]
The Court further said that the virtual currency did not cause any damage to banks. In past, too many peoples owned cryptocurrencies. The decision to criminalize investing in virtual currencies will destabilize many businesses which have been operating legitimately.[xi] Investors are frustrated because some of them had already invested in cryptocurrencies. If there will be a ban on cryptocurrencies, then many people will lose their wealth. Some people said that banning cryptocurrency would cost talent in India as it is the future for an advanced country. Some people also criticised by saying that the Government does not have vision and understanding of technology and no one can stop India from developing.
Cryptocurrency is a nationless currency. Therefore, it does not depend upon any Government. Those who want to ban cryptocurrency are not understanding the value of a decentralized and frictionless ledger created to transfer value instantly. It is correct that cryptocurrencies can create opportunities for illegal activities such as money laundering and terrorism[xii] but if they can be prevented by laws and regulations, they can create global opportunities in several aspects.
According to Nasscom, “A ban would inhibit new applications and solutions from being deployed and would discourage tech start-ups.”[xiii] Investors in India says that the recommendation by the Government is unwarranted.
Cryptocurrency Act, 2020 of U.S.
The bill was referred to the Committee on Financial Services and also to the committee on Agriculture for consideration. On 9th March 2020, he delivered an updated draft of crypto-currency Act of 2020 while being under coronavirus quarantine.[xiv]
The purpose of the crypto-currency Act of 2020 is to clear that which Federal agencies regulate the digital assets, to require those agencies to give the notification about the digital assets, any Federal licenses, certifications to the public or the registrations required to create or trade-in such assets.[xv] The bill not only provide clarity but also provides legitimacy to crypto-assets in the United States. The Act gives more clarity about cryptocurrency and it makes it easier for business and institutions to participate in this growing industry.
Conclusion
Cryptocurrency offers a new, effective and attractive model of payment methods that can boost companies and operate revenues.[xvi] With the rapid progress of technology, cryptocurrency will also progress if it did not get banned. The banning of cryptocurrency will lead to the stoppage of innovation through which our country gets developed. The benefits of not banning the cryptocurrency need to be studied so that the trust and confidence build up among all the people who are against the cryptocurrency. Through regulations, several countries are trying to mitigate the risks associated with virtual currencies. Cryptocurrencies are also beneficial as they keep a record of transactions and work efficiently in cross border payments.
[i]Jake Frankenfield, cryptocurrency, INVESTOPEDIA (May 5, 2020), https://www.investopedia.com/terms/c/cryptocurrency.asp.
[ii] Ministry of Finance, Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, PRS LEGISLATIVE RESEARCH, https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currency-bill-2019.
[iii] What is cryptocurrency. Guide for beginners, COINTELEGRAPH, https://cointelegraph.com/bitcoin-for-beginners/what-are-cryptocurrencies.
[iv] Kelvin Helms, Indian Government Delays Introducing Crypto Bill, BITCOIN.COM (Nov. 15, 2019), https://news.bitcoin.com/indian-government-delays-introducing-cryptocurrency-bill/.
[v] Kevin Helms, India to introduce crypto Bill next parliament session-A look at community responses, BITCOIN.COM (Aug 9, 2019), https://news.bitcoin.com/india-introduce-crypto-bill-next-parliament-session-community-responses/.
[vi] Section 6, Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.
[vii] Sakya Singha Chaudhury, Avijeet Kumar Lala & Meha Chandra, A comparison of developments in cryptocurrency regulation, ASIA BUSINESS LAW JOURNAL (May 27, 2020), https://www.vantageasia.com/comparison-developments-cryptocurrency-regulation/.
[viii] IAS Parliament, SC Quashed Ban on Virtual Currency, IAS PARLIAMENT (Mar. 06, 2020), https://www.iasparliament.com/article/sc-quashed-ban-on-virtual-currency?q=essar.
[ix] (2020 SCC Online SC 275).
[x] James Highfield, SC of India lifts ban on cryptocurrency exchanges, LEXOLOGY (Apr 3, 2020), https://www.lexology.com/library/detail.aspx?g=4a53e4ff-f225-44ce-a5cf-0b7fea348d08.
[xi] Rohan Abraham, The toss of a bitcoin: How crypto ban will hurt 5 mn Indians, 20k blockchain developers, THE ECONOMIC TIMES (Sep 16, 2019), https://economictimes.indiatimes.com/magazines/panache/the-toss-of-a-bitcoin-how-crypto-ban-will-hurt-5-mn-indians-20k-blockchain-developers/articleshow/71146269.cms.
[xii] Global legal research directorate staff, regulation of cryptocurrency around the world, LOC (June 2018), https://www.loc.gov/law/help/cryptocurrency/world-survey.php.
[xiii] Rebecca bundhun, Will India ban cryptocurrencies?, N BUSINESS (Aug 4, 2019), https://www.thenational.ae/business/money/will-india-ban-cryptocurrencies-1.894058.
[xiv] H.R.6154 Crypto-currency Act of 2020, CONGRESS.GOV, https://www.congress.gov/116/bills/hr6154/BILLS-116hr6154ih.pdf.
[xv] Jason Brett, Congress considers Federal crypto regulators in New Cryptocurrency Act of 2020, FORBES (Dec 19, 2019, 9 PM), https://www.forbes.com/sites/jasonbrett/2019/12/19/congress-considers-federal-crypto-regulators-in-new-cryptocurrency-act-of-2020/#3452e7f85fcd.
[xvi] Shailak Jani, The growth of cryptocurrency in India: its challenges and potential impacts on legislations, RESEARCH GATE (Apr 2018), https://www.researchgate.net/profile/Shailak_Jani/publication/324770908_The_Growth_of_Cryptocurrency_in_India_Its_Challenges_Potential_Impacts_on_Legislation/links/5ae1720a458515c60f660076/The-Growth-of-Cryptocurrency-in-India-Its-Challenges-Potential-Impacts-on-Legislation.pdf.
[i] Kevin Helms, US Lawmaker introduces Crypto-currency Act of 2020 while under coronavirus quarantine, BITCOIN.COM (Jun 27, 2020), https://news.bitcoin.com/cryptocurrency-act-of-2020/.