GROWTH OF CRYPTOCURRENCY IN INDIA: CHALLENGES & IMPACT ON LEGISLATION
Updated: Jul 6, 2021
Author: Priyanka Bhattacharyya, V Year of BBA.,LL.B(Hons) from Amity Law School, Kolkata.
Co-author: Chandramouli Ghoshal, V Year of BBA.,LL.B(Hons) from Amity Law School, Kolkata.
In the era of technological advancement & globalisation, the laws and regulations should be framed in such a manner that it is just and fair, unlike other counties globally India is working hard to establish itself as a global leader in terms of industrialization and technical development. The emergence of Cryptocurrencies in India has been observed lately. The Cryptocurrencies are digital assets which can be used as a medium of exchange, the are do not exits in physical form (like the currency notes) and they aren’t also typically governed by any authority as they generally use decentralised control technique method which is termed as Cryptography which is a complex encryption technique that are used to control data or cryptocurrencies. The government of some countries have widely accepted the cryptocurrency and have formed suitable legislation & Regulation to govern them.
Not only have governments from various countries responded differently to this extraordinary phenomenon, but so have citizens from various parts and cultures, each of them has seen Cryptocurrencies by their own lens.
Furthermore, several theories have been promoted as reality, as well as several facts that have been promoted as myths, have all led to the formation of a diverse set of viewpoints and perspective pertaining to the emergence of crypto assets. The Cryptocurrency was created in 2009, cryptocurrency went from being a theoretical concept to (virtual) reality. Cryptocurrency grew in popularity throughout the years, it drew substantial investor and media attention in April 2013. Cryptocurrency is expected to dominate the future of money since it secures people's identities and money, makes transactions more transparent, and has the potential to be profitable. The worldwide cryptocurrency market was valued at USD 792.53 million in 2019, and it is predicted to reach USD 5190.62 million by 2026. The recent growth of Cryptocurrency in India has led to emerge number of questions relating to its implementation and regulation of the cryptocurrency.
Cryptocurrency, Emergence, Virtual Currency, Digital assets, Regulations
The emergence of crypto assets has made it easier to understand the concept of virtual Currency transactions. Some countries in the world have readily accepted the virtual currency and have made regulation and norms on their governance, whereas few counties till date have not willingly accepted cryptocurrencies and neither made advancement in framing laws for governance of this assets. The counties like India, Nepal, Pakistan, Bolivia, Morocco, Vietnam and many other counties have not till date accepted cryptocurrencies, but the countries like China, UK, US, Thailand, and Malta are launch blockchain and cryptocurrency start-ups which is helping them in their economical and Technological advancement.
In India recently the government is taking measure for implementation of laws to govern the crypto assets in the investment market. Under the current and existing legislative system Reserve Bank of India (RBI) and India's Securities and Exchange Board (SEBI) have authority over the country's cryptocurrency rules. The major problem that arises in governing of the cryptocurrencies are the jurisdictional limits and the loopholes in the regulatory system could lead to the cyber fraud, money laundering and it would possibly lead to monetary losses.
UNDERSTANDING THE NOTION OF CRYTOCURRENCY & ITS FUNCTIONING
The Cryptocurrency are digital asset created to function as a medium of exchange or transaction which are stored in a ledger existing to regulate the creation of new units, check transactions, and secure transactions without any middleman’s intervention. The word cryptocurrency is derived from the word ‘crypto’ which means encrypted and the word ‘currency’ means monetary valuation therefore the word cryptocurrency is an online encrypted currency form. The Crypto-assets promote industrial decentralization, eliminate intermediaries by using cryptography and peer-to-peer networking, and in effect reduce costs.
There are thousands of different types of crypto assets or cryptocurrencies such as Bitcoin, Ripple, Litecoin and Ethereum have all recently been listed. Basically, there are no centralised regulation or banks to control this peer-to-peer network, hence even if something goes wrong there is no system to step in and hence it involves significant risk factors. There is total 1500 types of crypto assets in existence, each with its special technological features.
HISTORIC STANCE ON IMPLEMENTATION FOR REGULATION OF CRYPTOCURRENCY IN INDIA
India's relationship with cryptocurrencies is tumultuous. In 2008, for the first time the concept of Cryptocurrency emerged in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” which was developed Satoshi Nakamoto, this paper mainly dealt with peer-to-peer transactions with the use of the electronic cash, and it allowed to make the payment from one party to the other without involving the third-party system such as the financial institution. The paper majorly covered the advantages which makes it feasible to be used for transactions and it also discussed the process which is followed to make the transaction safe & user friendly. In 2009 the first cryptocurrency transaction took place around the world.
After the cryptocurrency gaining high popularity and recognition in the world, the several cryptocurrency transactions started operating in India between 2012 to 2017 some of the popular exchanges were Litecoin, Zcash, Dash, Monero, Ripple, Ethereum and etc, these exchanges lead to the establishing Indian cryptocurrency market.
The increasing popularity of cryptocurrencies lead to high concerns to the Reserve Bank of India (RBI) and lead to shift in traditional cult in the investment market. While considering the role of the Central Bank of India, RBI which is a statutory authority mainly deals with controlling of the financial system in India; functions in maintaining the monetary policy framework in India; It also regulates the foreign exchanges and keeps check on the price stability and growth of the economy.
While investors and traders support crypto assets, the government and RBI in 2013 have stated that the unregulated virtual currency is not legal tender. Reserve Bank of India (RBI) issued a Press Release which basically cautioned the public about the risks of investing in a virtual currency, such as Bitcoin. Later with the emergence of the Ethereum in 2015, with the cryptocurrency known as Ether and it become the second-most valued cryptocurrency. Later after the demonetisation of high-value currency notes in November 2016, it resulted in the shifting away from the conventional online banking system to the virtual payment such as the introduction of cryptocurrencies into the public consciousness. The rising popularity and usage of cryptocurrencies in India. It caused the RBI to issue a press release in February 2017, reiterating its earlier concerns and clarified that there is no license authorised to any entity to operate with Bitcoins or Virtual Currencies. In October and November 2017, two petitions were filed in the Supreme Court one was filed by Siddharth Dalmia to put restriction on the selling and purchasing of crypto assets in India, whereas another petition was filed by Dwaipayan Bhowmickin for the regulating the cryptocurrency.
In addition, the Indian government established a high-level inter-ministerial committee to regulate Bitcoins and virtual currencies. This committee submitted reports in July 2019 proposing that private cryptocurrencies to be banned in India; however, no such legal provision was enforced against the cryptocurrencies. However, on April 6, 2018, the RBI issued a circular prohibiting banks and the NBFCs from not only trading with or settling virtual currency, but also from providing certain services to individuals or firms dealing with bitcoins or virtual currencies. This circular undermined cryptocurrency exchanges business operations, as they relied on banking facilities to convert cash to cryptocurrencies and vice versa. RBI majorly concerned with the dwelling risk which is associated with the anonymous nature of the crypto assets which can pose a threat to national security, and it cannot be ruled out.
Later in the case of the Internet and Mobile Association of India (IMAI) filed a writ petition in the Supreme Court and subsequently questioned the power of RBI to impose the ban on cryptocurrencies and claimed the cryptocurrency are not currency rather they can be regarded as commodities in the legal sense.
Furthermore, the inter-ministerial panel was set up in the year 2017 by the government of India, the initiative led to the formation of an executive committee in 2017 to study the Virtual Currencies, the committee was formed under the Chairmanship of Secretary of the department of Economic Affairs, Secretary of the Ministry of Electronics and Information Technology, Secretary of the Securities and Exchange Board of India and also with the Deputy Governor of the Reserve Bank of India. The Committee has been established to study various issues pertaining to Virtual Currencies and the laws to be framed for specific actions. The committee submitted its report in 2019 which recommended the banking of private cryptocurrencies in the country.
CHALLENGES & ISSUES FACED IN IMPLEMENTATION OF CRYPTOCURRENCY
1. Security threats: Their lies a concern about the securities threats as the hackers and malicious users generally try to break the system and creates fake virtual currencies or simply steels the virtual currency by simply changing account balances. For example, many people buy virtual gold using WoW (World of Warcraft) gold selling websites in order to pay for virtual items that they need, several WoW gold selling websites are unreliable and vulnerable to hacking, and many users have complained about paying real money for virtual currency that isn't real.
2. Ultimate using of cryptocurrency systems leading to economic concern: The issue of cryptocurrencies is not based on the demand and supply hence it can lead to economical problems due to the issuance of virtual currency in the variety virtual communities.
3. Impact on real monetary systems: Since some virtual currency systems are connected with real world monetary systems, they may affect the demands and supply facilities of real-world money. For example, enabling users to purchase virtual and real goods and services with virtual currency in some platforms may reduce the demands on real money. Users will no longer depend on real money to buy what they want and they will use virtual money instead. On the other hand, some platforms enable users to exchange their virtual currency with real currency and this will increase the demands on real world currency. This fluctuation will affect on the real monetary systems.
4. Fluctuation in virtual currency value: According to Chow and Guo study, it is observed that when the popularity of a virtual community drops, the value of its virtual currency will be devalued. For example, users who own 1000 units of virtual currency can buy from variety of 100 items. In case the provider of that virtual currency drops, users can only buy from 10 items with their 1000 units since dropping will be reflected in fewer goods and services especially in closed virtual communities.
5. Money laundering: Money laundering is one risk that is very likely to rise with the use of VC especially with platforms that enable users to exchange virtual currency with real money. In practical case occurred in Korea in 2008, the police arrested a group of 14 persons for laundering $38 million obtained from selling virtual currency. The group converted the amount of $38 million, which is generated by gold farming, from Korea to a paper company in China as payments for purchases.
6. Unknown identity risks: Since creating an account in most of virtual currency platforms such as social games and social networks is not authenticated, financial transactions cannot be monitored very well. Gamers and users can create more than one account with unknown identities and use them for illegal transactions.
There is no way to recognize the source of creating or cashing out the virtual currencies. This leads to inability to track the transactions in case of money laundering suspicion. Moreover, unknown identity will enable criminals to get paid with virtual currency for their crimes.
7. Black market for cryptocurrency: The financial position of some social games such as Second Life and World of Warcraft are mature enough to create black market for buying and selling their virtual currency.
The increasing popularity of virtual currency in online environment has led to a thriving black market for trading virtual currency with real money. By observing several social games.
ADVANTAGE OF CRYPTOCURRENCY
1. User Autonomy: For many users, the primary attraction of Cryptocurrencies, and indeed one of the central concepts of cryptocurrencies in general, is autonomy. Digital currencies, at least in principle, provide consumers more control over their money than fiat currencies. Users have complete choice over how they spend their money without having to interact with a middleman such as a bank or the government.
2. Discretion: Cryptocurrency purchases are discreet. Unless a user freely exposes his transactions, his purchases are never linked to his personal name and cannot be traced back to him, much like cash-only purchases. Each transaction generates a new anonymous bitcoin address for user purchases.
3. Focus on Peer-to-Peer: The crypto exchange system is entirely peer-to-peer, which means that users can make and receive payments from anyone on the network anywhere in the globe without the need for authorisation from any third party.
4. International Payments with very Low Transaction Fees: The Fees and currency expenses are common in standard wire transfers and international transactions.
The expenses of dealing are kept low since bitcoin transactions do not involve any intermediary institutions or governments. This can be a significant benefit for travellers. Furthermore, every bitcoin transfer is extremely fast, removing the annoyance of conventional authorization formalities and wait times.
5. Payments via mobile devices: Cryptocurrency exchanges, like many other online payment systems, can pay for their coins from anywhere they have Internet access. This means that customers will never have to go to a bank or a store to make a purchase. Personal information is not required to make any purchase, unlike online payments done using US bank accounts or credit cards.
6. Accessibility: Cryptocurrency is theoretically available to populations of users who do not have access to traditional banking systems, credit cards, or other forms of payment because users can send and receive bitcoins using only a smartphone or computer.
JUDICIAL PERSPECTIVE ON CRYPTOCURRENCY
In the recent case of Internet and Mobile Association of India v. Reserve Bank of India, whose representatives executed cryptocurrency transactions among themselves, submitted a formal petition to the Supreme Court, requesting that the RBI circular be overturned. They claimed that Cryptocurrency was more along the lines of a product, and that the RBI lacked the authority and power to implement a restriction. The judgement was pronounced by Justice V Ramasubramanian, On March 4th the Supreme Court overturned a long-standing circular prohibiting cryptocurrency circulation and regulation in the country, through the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
On the one hand, the country's cryptocurrency users face criminal penalties, and certain activities such as mining, holding, selling, trading, issuance, disposal, or use of cryptocurrency are prohibited; on the other hand, the legislature's intention cannot be clearly understood from the Bill because certain activities such as mining, holding, selling, trading, issuance, disposal, or use of cryptocurrency are prohibited. The measure, on the other hand, cleared the way for the government to issue its own digital currency, the ‘Digital Rupee,' which will be issued by the Reserve Bank of India.
The Court further highlighted that the Inter-Ministerial Committee's original recommendation for the Crypto-token Regulation Bill, 2018 included provisions to:
The current regulatory framework, prevent those dealing with crypto tokens from falsely claiming that they aren't securities or investment schemes, or from offering investment schemes due to loopholes in the current regulatory system.
Control VC exchanges and brokers where the selling and purchase of VCs is possible. According to the important components of the Crypto-token Regulation Bill, 2018, included in paragraph 13 of the ‘Note-precursor to text,' the Inter-Ministerial Committee was fine with the concept of authorising the sale and purchase of a digital crypto asset at recognised exchanges.
Crypto traders and investors breathed a sigh of relief as a result, and the industry began to grow steadily again. Things, however, did not come to a halt there. Tax authorities in India issued letters to residents dealing in cryptocurrencies in 2019, which included a list of questions about dealing in cryptocurrencies and the money made by trading in cryptocurrency that had not been recorded in residents' tax returns. On June 12, news sources stated that the government intends to impose a permanent ban on cryptocurrency via enacting legislation.
The point is that a law will be more effective in this regard than an RBI circular. The Ministry of Finance has issued a notice for inter-ministerial discussion of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which will work for a time before being tabled as legislation to essentially prohibit cryptocurrency and devastate the business.
Cryptocurrency is defined as "any data, code, or token that has a digital value representation and is helpful in a business operation, or operates as a value store or account unit," according to the Bill. The bill effectively outlaw’s cryptocurrency mining, holding, selling, trading, issuance, disposal, and use in the country. Other associated economic offences are wildly out of proportion to the bill's proposed penalties. Mining, holding, selling, trading, issuing, disposing, or using cryptocurrency is punishable by up to ten years in prison and is similar to money laundering.
In a summary, this bill aims to outlaw all private cryptocurrency in order to establish an appropriate framework for legal digital currency in India, which has the RBI's and government's support. It also tends to make exceptions in order to promote the underlying digital currency-driven technology.
REGULATION OF CRYPTOCURRENCY TRADE
The 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 authorities as well as stringent rules, such as:
The Reserve Bank of India (RBI) oversees regulating cryptocurrencies as legal tender.
The Directorate of Enforcement has issued a statement prohibiting the usage of cryptocurrencies in the case of economic crimes.
The Department of Economic Affairs oversees regulating cryptocurrency's involvement with the state's economic policies.
The Securities and Exchange Commission (SEC) has approved the use of cryptocurrency in security contracts.
Tax implications of cryptocurrency trade, according to India's tax authorities.
As a result, putting together a complete framework to regulate every aspect of cryptocurrency trading appears to be a difficult challenge as there is no specific law till date which can regulate cryptocurrency in India.
CRYTOCURRENCY PREFERABLY SHOULD BE REGULATED BY SEBI
The cryptocurrencies exchanges are like commodities that needs rules and regulation to be governed. India has till date no particular laws and regulation to govern cryptocurrency transaction. There are several reasons that make Securities and Exchange Board of India (SEBI) is more suited to regulate the crypto assets.
The reason are as follows:
1. If the Cryptocurrencies are Treated as Commodities: The crypto assets are more like commodities rather then currencies, hence the SEBI will play a very vital role in management of the crypto currencies, as it will function as a default regulator. The SEBI is already involved in regulating the commodities.
2. Cryptocurrency are meant to be regulated by SEBI: As cryptocurrencies are commodities, and it should be controlled by SEBI. Generally, worldwide the crypto assets are governed by the securities regulators, as in US the Securities and Exchange Commission (SEC) has proactively been involved in regulating and discussing the status of the securities (specially focusing on the bitcoin & the Ethereum). Recently the Thailand has also approved its first ICO portal and the Securities and Exchange Commission (SEC) of Thailand will screen and approve legitimate token sales of crypto assets. Hence even in India the cryptocurrencies should be regulated by SEBI as there is no specialised cryptocurrency regulator and as the RBI is a centralised bank which is mainly controlling and regulating the monetary and financial issue and it does not have much to do with the regulation of commodities and hence like the other countries have recognised the securities regulators to control cryptocurrencies, In India the SEBI is more suited to regulate the crypto assets.
3. Absence of Integrated Financial Regulator: There are many countries which generally follow the integrated financial regulator system which is the in-charge of all key financial sectors. For example, as Japan has its own organisation which centrally covers all the financial and monetary issue it is known as the Financial Services Agency and similarly in Singapore, they have their own organisations such as Monetary Authority of Singapore which is centralised system that governs all financial issues. Since India doesn’t have any Integrated Financial Regulator rather it has different institutions for governing its different sectors and hence India should consign SEBI to regulate the cryptocurrencies and as SEBI already regulates the stock exchanges, financial products and protects the investors through investor protection mechanisms and in regulating the cryptocurrency similar functions are to be adopted.
4. As SEBI has manifested its interest in understanding cryptocurrencies: In India, the SEBI has shown a strong willingness to understand the cryptocurrencies. To understand the regulation of cryptocurrencies, SEBI had revealed in its annual report 2017-18 that it had sent it officials on a ‘study tour’ to Japan, UK and Switzerland to understand the regulators and their deals with cryptocurrencies and ICOs. Other than SEBI no government agency has shown a proactive approach towards understanding & regulating the cryptocurrencies.
RECENT ADVANCEMENT RELATING TO CRYPTOCURRENCY
The government took an initiative to form an executive committee in 2017 to study the Virtual Currencies, the committee was formed under the Chairmanship of Secretary of the department of Economic Affairs, Secretary of the Ministry of Electronics and Information Technology, Secretary of the Securities and Exchange Board of India and also with the Deputy Governor of the Reserve Bank of India.
The Committee has been established to study various issues pertaining to Virtual Currencies and the laws to be framed for specific actions.
Recently the government in its budget plan of 2021 has come up with the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which is basically framed to create framework for governing of the official digital currency to be issued by the Reserve Bank of India and the Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.
The development of Cryptocurrency has spurred a discussion regarding its and other cryptocurrencies' futures. Despite recent challenges and difficulties in implementation and Regulation of cryptocurrencies in India, the Cryptocurrency have gain large media attention over years. Many businesses and Companies have been planning to change their financial exchange from cash or online payment to cryptocurrencies exchanges as it is more advantageous and easier to regulate. Some companies are even coming up with proposal of trading in Cryptocurrency. The cryptocurrency has never been like other mainstream financial system this makes it unique; the success of cryptocurrency is undeniable and with time the need for cryptocurrency is growing in market. Hence, it can be concluded by saying “change is the only constant”.