Will the year of Cryptocurrency ever arrive in India?

Introduction

Passing years and seasons have proved the worth of cryptocurrency, especially Bitcoin, with more than 18 million of it being circulated today. It has progressed quicker than any financial ecosystem in history, from being a buzz phrase used among techies it has managed to attract general attention too. The majority of the contemporary market capitalisation has been driven by investors anticipating the prospects of blockchain technology.

Since the inception of cryptocurrency, from the leading experts to outsiders, all have witnessed its pricing figure that oscillates every few minutes. There would not be a crypto investor who has not tried to get to the root of this problem. Investors have been trying their luck hard to crack the code and decipher why cryptocurrency fluctuates and use that strategy to generate profitable bets in the crypto market. Its nascent stage is the highest contributing factor changing its value but it is not the only one. The presumption goes that such a volatile behaviour of cryptocurrency is likely to be in motion until a sufficient amount of pricing stability and acceptability is attained in the market.

When it comes to the administration and legality of crypto currencies, government perspectives vary throughout the world. Regulations are developing at an unprecedented rate in many parts of the world. Globally, various approaches have come into play such as setting up a body to monitor the Initial Coin Offerings, constituting cyber units to track unregistered securities. Such steps mark an attempt to protect the technology providers, financial institutions, and investors.

European Union (EU) Governments have been unified in their cautious optimism towards blockchain technology, willing to support the new field while avoiding wrongdoing and alerting potential investors of associated risks. In terms of cryptocurrency regulations, Asia has adopted a varied approach, with some nations outright outlawing trade such as China while others showed acceptance and encouragement.

In the Asian sub-continent Japan has the most proactive regulatory environment for cryptocurrencies. Though in past the country faced waves of scams; yet has learned its lessons well which is visible in the fiscal earnings released by Monex Group in April 2021. In comparison to prior years, coin-check revenues rose by more than fivefold to ¥20.8 billion. About 210,000 of the 260,000 subscribers it attracted were concentrated in the second part of the fiscal year, signifying that several people had jumped upon the new crypto bandwagon.

Hong Kong too has been relatively supportive of cryptocurrency. According to the recent government proposals, in Hong Kong, cryptocurrency exchanges will be required to get a licence from the city’s market authority and will only be permitted to provide facilities to professional investors.

Undoubtedly, the spectacular rise of cryptocurrencies in the past few years has piqued the interest of the investing public and financial institutions. Eventually, in most countries, the debate is no more about if a cryptocurrency will survive, rather about measures that will advance, thereby affect the institutions as it attains market maturity with time.

It is noteworthy to observe that with India’s rapid technological progress and extraordinary breakthroughs, particularly due to COVID-19 pandemic, the fintech sector has been on a steady upward trajectory. Nearly 7 million Indians have already invested roughly one thousand million dollars in cryptocurrency the Government is facing a complex challenge to allow the fintech sector to thrive in India while ensuring that it is done safely. However, in India, the story seems to be half-cooked. Though off lately the story has begun to cook more than it was earlier.

Position of cryptocurrency in India

Invariably, the traditional investors hold a conservative view propounding that the Government of India, will sooner or later introduce a Bill concerning cryptocurrency, and such a Bill will put a wet blanket on crypto and thereby banning it. This school of thought believes that Government can never be in a position to legalise cryptocurrency for it will lead to devaluation of Indian rupee. The Finance Minister in 2018 strengthened this lobby when it stated that:

The Government does not consider cryptocurrencies “as legal tender or coin” and will take all measures to eliminate the use of those crypto assets in financing “illegitimate activities” or a part of the payment system. The Government will explore the use of blockchain technology proactively for assuring in digital economy.1

This statement was succeeded by a circular from Reserve Bank of India (RBI).

The notification was pertaining to the Prohibition on dealing with Virtual Currency (VCs). While cautioning the user availing virtual currency services it decided to restrict its entities from dealing in VCs or providing services to assist anyone in dealing with or settling VCs. Maintaining accounts, trading, settling, registering, lending against virtual tokens, clearing, taking them as collateral, creating accounts with exchanges that deal with them, and transferring/receiving money in accounts connected to the purchase/sale of VCs are all elements of such services. Regulating entities that provided such services were also asked to exit the relationship by July 2020. RBI time and again has reflected upon the displeasing nature of cryptocurrency and its dissatisfaction in matters of legalising the same.

Nevertheless, the Supreme Court in Internet and Mobile Assn. of India v. RBI2 revoked this order in March 2020. The Court observed that, although Reserve Bank has the power and right to issue such circulars but the notification beforehand lacked the proof of the damage or adversity faced by regulating entities directly or indirectly while operating cryptocurrency.

For both Indian users and crypto firms who wish to serve them, the Supreme Court’s judgment is a huge step in the right direction. The move will not only increase the everyday usage of cryptocurrencies in India, but it will also draw fresh expertise and creativity to the nation’s blockchain endeavours.

Experts believe that as a natural development India will progress to become one of the leading countries for cryptocurrency and digital asset adoption in the near future and it will advance in the direction of a cashless economy if the Government does not take a step backward from cryptocurrency.

After the Supreme Court’s judgment, RBI further cleared the air surrounding its earlier circular by issuing a circular on Customer Due Diligence for Transactions in Virtual Currencies (VC).3 By reference to RBI Circular DBR.No.BP.BC.104/08.13.102/2017-18 dated 6-4-2018, Reserve Bank took notice of the fact that various banks/regulated companies have warned their clients against trading in virtual currencies. It further pointed out that all such notifications were not in congruence as the earlier circular that was issued by RBI back in 2018 was no more valid as it was set aside by the Supreme Court in March 2020.  However, banks and entities, on the other hand, were directed to proceed with proper conduction of due diligence as per guiding norms for anti-money laundering (AML), know your customer (KYC), combating of financing of terrorism (CFT), and regulated entities’ obligations together under the Prevention of Money-Laundering Act, 2002 (PMLA)4, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act, 1999 (FEMA)5 for overseas remittances.

Cryptocurrencies are not illegal in India but it is important to note that India currently lacks a regulatory architecture to manage cryptocurrencies. In November 2017, the Government formed an Inter-Ministerial Committee (IMC) to analyse currencies.

The Ministry of Corporate Affairs — General Notification dated 24-3-2021, remains the only official word conveyed from the end of Government of India (GoI). The notification made it compulsory for companies to disclose their crypto trading/investment during the financial year. The notification proclaimed “Details of Cryptocurrency or Virtual Currency where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the following shall be disclosed—

(a) Profit or loss on transactions involving cryptocurrency or virtual currency.

(b) Amount of currency held as at the reporting date.

(c) Deposits or advances from any person for the purpose of trading or investing in cryptocurrency/virtual currency.”6

In the eye of some, the move has been seen as a ray of hope which foreshadows taxation rules. Investors, economic, and political thinkers are also channelising their energy to understand if the grappling global developments of crypto will incite the Indian Government to soon come with a more unblurred stance on blockchain technology.

Recently, Central American country — El Salvador positioned itself as a first one to accept bitcoin as a legal tender. Legalising bitcoin though is only a chapter in the story of Salvadoran book yet many propound that it is less about the currency game rather more so about motivating people to use crypto. This will allow them to grasp the air of innovation and step their foot forward in the ground of opportunities and thereby tapping the technology sector of the country. Global debates as to whether or not this move is going to be attractive for the investors are going to depend on the leadership’s ability to utilise their irrefutable political capital to bring a large consolidated fiscal deficit into control.

After El Salvador’s bold step, there have been numerous discussions and deliberations if this step is going wake the Indian Government and think rapidly of crypto prospects. Recently many reports hold apprehensions about Indian Government’s inclination to classify bitcoin as an asset class in the future. Those who might believe that crypto deserves to have a transactional value might not be too satisfied nevertheless ones who think it has nothing but a stored asset value might appreciate the decision if implemented. An asset class is nothing but a mere collection of financial products with comparable financial attributes in the market. Just like one holds an asset such as real estate or precious metals, people might be able to hold money in crypto as an asset. It is no secret that cryptocurrencies such as bitcoins have outperformed all the conventional assets.

If India classifies cryptocurrency as asset class then the step can set a departure from its previous harsh posture against cryptocurrencies. The investors have always been on the lookout for such resolves on the cards from the end of the Government. The global developments in the cryptocurrency have the calibre to escalate the Government’s view to recognise the potential that exists in blockchain technology as a decentralised system.

Though the idea of India accepting cryptocurrency as a legal tender seems to be minute considering it has the propensity in devaluation of the Indian rupee. In an intercontinental view as well, accepting bitcoin or any other cryptocurrency as a legal tender is a concept more suitable to those countries that does not have a currency of their own. In upcoming days embracing cryptocurrency if not as a legal tender but a presumptive asset class seems to be more pragmatic. The step no matter how trivial in nature will certainly get the ball rolling and stimulate the market.

Explicitly, there exist numerous poles opposite theories in the market. As the story of crypto in India remains half-cooked none stands the test of time.

The way forward

We should not compare crypto to a fiat currency because it is a contemporary asset class. Cryptocurrency is simply one of many conceivable applications. Its potential must not be undermined by the Indian Government.

The Financial Action Task Force (FATF) standards say unequivocally that cryptocurrency poses no harm to the global economy and can be adequately controlled. It is also interesting to note that FATF has presented a Crypto Standard Regulatory Report in G20 countries to which India a member. Crypto and fiat can both be synchronised in one ecosystem and crypto can even assist banks in resolving current issues for millions of unbanked individuals.

The market anticipates further guidelines from Indian authorities in the future and an expansion in enforcement. While it is unclear whether a new regulatory framework will emerge in India, ICO issuers, trading platforms, and other businesses that deal with cryptocurrencies should start improving their anti-money laundering, anti-fraud, cybersecurity, and reporting initiatives at the earliest to regulate the market. Though the self-regulation will be a precaution but not a permanent cure, the Government needs to step in at the earliest to combat the wrongdoings.

† Managing Associate, L&L Partners, New Delhi. Author can be reached at chatterjeeaor@swarnendu.co.

†† BA LLB (Hons.) 3rd year student,  Amity Law School, New Delhi. Author can be reached at   yashikabhardwaj06@gmail.com.

1 The Economic Times, “Are Your Crypto Investments Legal? Here is Everything You Need to Know”, available at <https://economictimes.indiatimes.com/markets/forex/forex-news/are-your-crypto-investments-legal-heres-everything-you-need-to-know/articleshow/82259869.cms> (last visited on 8-6-2021, 10.40 a.m.).

2 (2020) 10 SCC 274.

3 Reserve Bank of India, Customer Due Diligence for Transactions in Virtual Currencies (VC), DOR. AML.REC 18/14.01.001/2021-22, (Issued on 31-5-2021).

4 Prevention of Money-Laundering Act, 2002. <http://www.scconline.com/DocumentLink/RE7jhkh0>.

5 Foreign Exchange Management Act, 1999.  <http://www.scconline.com/DocumentLink/pIrl0KB8>.

6 Ministry of Corporate Affairs, Gazette of India, Extraordinary, Part II, S. 3, sub-s. (i) (Issued on 24-3-2021).