• Vikram Jeet Singh

Cryptocurrency in India: State of Play

(Vikram Jeet Singh & Kalindhi Bhatia)


Virtual currency ("VC"), like cryptocurrency, is a form of currency that stores data on a digital ledger (called the ‘blockchain’). The transfer of crypto happens privately, through a peer-to-peer method, thereby eliminating the need for banks and other financial institutions. However, these de-centralised features also make it difficult for the government to trace any illegal transactions. In the interest of investor security, the Central Government and Reserve Bank of India ("RBI") have introduced several measures. These measures have been met with legal challenges and conflicting public views.


In this article, we examine the regulatory landscape of VCs in India and what the future looks like.


The Story so far


The RBI and the Central Government have leant towards a ban (full or partial) on Virtual Currencies. Their reluctance towards accommodating VCs in the Indian economy is evident:

  • 2013: RBI cautioned traders and holders of VCs about the risks involved, and categorically stated that VCs are not an authorized mode of payment [1].

  • 2017: RBI clarified that no licenses were granted to entities dealing with VCs [2], and issued additional press releases to highlight the risks associated with VCs.

  • 2018: RBI issued a strongly worded circular prohibiting all entities regulated by them (i.e., banks, payment system providers, small finance banks, etc.) from dealing in VCs or providing any services which facilitates anyone to trade VCs [3] (“2018 Circular”). While this circular did not outright ban VCs, it restricted VC exchanges from even opening a bank account or borrowing loans from the bank for business purposes. In effect, it precluded crypto exchanges from carrying out their business operations, including conversion of crypto to fiat currencies and vice-a-versa.

  • 2018-19: During the announcement of the annual Finance Budget in the Parliament, the Central Government stated that it does not consider crypto as a legal tender. [4]

  • 2019: The Inter-Ministerial Committee (set up in 2017) to study issues related to VCs, recommended that all private cryptocurrencies be banned in India. Along with its report, the committee also drafted the ‘Banning of Cryptocurrency and Regulation of Official Digital Currency, 2019’ bill (“2019 bill”), which imposed a blanket ban on all cryptocurrencies and undertaking any transactions involving crypto assets. This bill, however, was not placed before the parliament for its consideration.


2020 - Supreme Court to the rescue


The freeze on crypto-trading due to the 2018 Circular was met with wide-spread push back, resulting in it being challenged before the Supreme Court in Internet & Mobile Association of India vs RBI [5] in 2020. The Supreme Court set aside the 2018 circular, noting the following:

  1. The RBI does not have broad powers to impose such a prohibition.

  2. Though the RBI is empowered to regulate anything functioning in the form of money, it has to show possible damages before imposing prohibitions.


However, the court refrained from opining on the legality of cryptocurrencies and left it to the legislature. Nonetheless, this judgement relieved VC exchanges from the RBI imposed constraints and allowed them to resume business as usual. Although many banks sought to play it ‘safe’ and avoid RBI’s ire by continuing to refuse to provide services to VC exchanges. To clear the air, RBI issued a circular in 2021 [6] , stating that banks cannot continue to rely on the 2018 Circular and persuaded banks to treat them as per regular practises, and continue to carry out customer due diligence practices like KYC, AML, etc.


Recent developments


2021

The Central Government’s aversion to cryptocurrencies was, once again, indicated in 2021 when the Parliament Bulletin listed “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” (“2021 bill”) as one of the proposed laws to be considered during the upcoming winter session. Though a bill has not yet been made available in the public domain, the Bulletin noted that it seeks to prohibit all private cryptocurrencies but provides certain exceptions to promote the underlying technology. [7] However, the 2021 bill was not deliberated during the winter session and was not tabled in the subsequent session.


In July, 2021, a question on the status of VCs was raised before a Delhi Metropolitan Magistrate Court [8], i.e., are they legal tender, or commodities, consumer products, or payment instruments, or something else? The court held that ‘while crypto is not a legal tender, all transactions have to be compliant with general laws such as the Foreign Exchange Management Act, 1999’. Apart from this, Indian courts have not yet weighted in on the legal status of VCs.


2022


While the legality of cryptocurrencies continues to be a grey area, some clarity was provided during the Parliament’s annual fiscal budget announcement in February, 2022 (“Finance Bill”). The Finance Minister announced that income from virtual digital assets would be taxed at a flat 30% coupled with a tax deduction at source of 1%. [9] Some stakeholders inferred that this is indicative of a tacit acceptance of VCs, but these inferences lack merit as the announcement did not expressly (or implicitly) acknowledge that crypto shall be regarded as a legal tender or an investment class. The (Indian) Income Tax Act, 1961’s provisions are wide-ranging to levy taxes on all transactions, including illegal transactions, and does not bifurcate basis the legality of the source of income.


The Finance Bill’s reprieve was short-lived, and in February 2022 the RBI’s Deputy Governor spurred the space by stating that “Cryptocurrencies are akin to Ponzi schemes and should be banned outright”. A week’s gap has put the VC’s legality in muddy-waters yet again.



 

Footnotes

  1. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247

  2. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435

  3. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF

  4. https://www.indiabudget.gov.in/budget2018-2019/ub2018-19/bs/bs.pdf , paragraph 112

  5. (2020 SCC online SC 275).

  6. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12103&Mode=0

  7. http://loksabhadocs.nic.in/bull2mk/2021/23.11.21.pdf - Sr. No 11,

  8. Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207 of 2020, dated July 01, 2021.

  9. https://www.indiabudget.gov.in/doc/Finance_Bill.pdf, page number 45.