THE CONUNDRUM IN THE DIGITAL ERA: ANALYSIS OF INDIA’S CRYPTO REALITY
Updated: Jun 11
The recent freefall in the mark of Bitcoin after Elon Musk’s statements as well as the affirmative remarks from the Finance Minister has shifted the lens to focus on the governance of crypto-currencies. The looming repercussions of the 2008 financial crisis led us to the introduction of an exceptional instrument characterized as crypto-currency. Bitcoin, regarded as the first crypto-currency was introduced by Satoshi Nakamoto, a pseudonym used by the mysterious originator. Crypto-currency embodies the notion of “self-sovereign identity” as they are neither regulated by any institution nor can be classified as an asset or liability. It proliferates on anonymity which is reinforced by a network called block chain operated by anonymous computers interlinked through a chronicle of unattested transactions.
In India, virtual currencies are traded on exchanges thereby assuming the role of an asset however the government has reflected in a very subdued manner. The anonymous character of these transactions has led to apprehension in the government as well as consumers regarding concerns of money laundering, tax evasion, consumer protection as well as terror financing. This instrument operates on a peer-to-peer network which the governments fear may lead to outmaneuvering of state controls and regulatory framework, consequently becoming a safe harbor for unlawful negotiations. Their unpredictable and inconsistent nature emanates retail consumer protection concerns caused by various factors like lack of trust, increasing rates of cybercrimes as well as knowledge gaps.
Through this article the authors aim to discuss the threats and challenges posed by crypto-currency in the Indian scenario as well as throw light at the current legal position. Analyzing the current framework we are faced with two pertinent questions - 1) Will crypto supersede the conventional currency and 2) Will a complete ban on crypto-currency serve as a solution for the challenges faced. Countries around the globe are tackling to implement an optimal regulatory framework which requires an extensive discernment of the functioning and the formal composition of crypto-currencies.
Challenges Posed by Crypto in the Indian Setting
a. Security conundrum - Owing to its nature of being a virtual form of exchange, crypto-currency has emerged as a prominent portal for cybercriminals, terrorist funding drug trades, and money laundering. Thus, there is a larger sensation of discomfort amidst the populace, due to lack of transparency and security.
b. Disruptive taxation- Considering the existing income tax laws, the tax deductibility of crypto-currency revenues is questionable. Income tax authorities have not dismissed the possibility of taxing crypto-currency revenues. If an individual generates a capital gain from crypto-currency holdings, the profit may be taxed as a long-term or a short-term capital gain, relying on how long the crypto-currency was held.
c. Dearth of regulating authority - Crypto-currency exchanges are not governed by any authority. Hence, the potential risks of identity theft have skyrocketed, the consumer confidentiality has been jeopardized, and money transfers in the economy have been closely monitored. The Central Bank of India has been struggling to oversee crypto transactions, as have other banking institutions across the globe.
d. KYC Norms coupled with Price Fluctuations- As crypto-currency’s price is dependent on demand & supply forces. A trader, who utilizes crypto - currency shall act in accordance with KYC norms, which may take considerable days for clearance by the respective wallets in question. Since this currency's value swings at a greater rate in such scenarios, the trader’s prospects of return are weakened.
e. Dubious and dicey- Crypto-currencies operate by creating a specious consumer base. For a crypto trader, not all crypto-currencies will yield significant profits. The price is solely determined by the invisible hand. While valuing crypto-currency, uncertainty remains the most notable issue and thus the risk component enters the picture.
The Legal Status of Crypto-Currency in India
a. The Press Releases & Circular by RBI
The first incidence of apprehension concerning crypto-currency dates back to December 24, 2013, when the Reserve Bank of India (RBI) issued a press statement warning investors of numerous virtual currency about prospective economic, technical, legal, consumer safeguards and privacy concerns. In 2017, the RBI issued two more precautionary news releases, emphasizing that it has not granted any permit or license to any individual or corporation to transact using Bitcoin or other crypto-currencies.
- Foisting of a ban
In the RBI’s Circular, it put considerable bar on trading in virtual-currencies, the safeguards underwent a sharp turn. It stated that entities controlled by the RBI, are prohibited from transacting or providing services to assist anyone engaging in virtual-currencies. Therefore, the crypto-currencies’ transfers were severely affected in the wake of this embargo, and they were unable to maintain their existing known operations. However, it did not clarify which bracket it belongs to, such as goods or commodities, in order to enforce regulations and other consequences.
b. Bills tabled by Inter-Ministerial Committee (IMC)
IMC proposed two bills in 2017, but neither of them saw the light of day.
The IMC didn’t advocate for an absolute clampdown in the Crypto-token Regulation Bill of 2018, but it did urge that anyone operating with crypto tokens be prohibited from misrepresenting these instruments as not comprising securities, and that crypto transfers be governed where buying and selling could be permissible.
Alternatively, the Second Draft Bill, prohibited the use of crypto-currencies as legal tender. Mining, purchasing, retaining, trading, licensing, disposition, or usage of crypto-currency would also be forbidden. The sections that called for fines and infractions demonstrated the stringency of the Second Draft Bill. Additionally, it envisaged the introduction of a digital rupee, which would be issued by the RBI and used as legal tender.
c. Supreme Court’s ruling
The turning tide, in the case of Internet and Mobile Association of India v. RBI, was when the SC repealed the prohibition issued by the RBI Circular. It delved into the case primarily through the lens of Article 19(1) (g) and the proportionality principle and emphasized the necessity of gauging and documenting the loss incurred by the RBI, as a result of the presence of virtual currencies, underlining that there had been none. The RBI's impugned ruling was annulled as a result. It would be a positive development for crypto-currencies, and block-chain transactions all across the globe, even if the destiny of virtual currencies is still murky owing to governmental complexities.
d. Crypto-currency Bill, 2021: A new wave
The New Bill aims to establish a more conducive environment for the formation of the RBI's official digital currency. In addition, it proposes to outlaw all private crypto-currencies in India. It does, nonetheless, provide for some provisos in order to foster crypto-currency's emerging technology and applications.
- Major issues
The New Bill encourages the adoption of digitalization, but it wants an outright ban on private crypto-currencies. It’s worth noting that, the Indian populace has demonstrated a strong interest in holding digital currencies, with India accounting for 2 - 10 percent of the global virtual currency industry worth USD 430 billion until recently. Given the large multitude of crypto players, this is going to generate some tension.
Moreover, with just one virtual currency, the RBI would have an exclusive control over it. There will be concerns about whether or not international traders will be able to trade in the Indian digital currency, and how it will be governed. As a result, the impending likelihood of international investors being authorized to invest in the Indian digital currency while Indian investors' ability to invest in global crypto-currencies’ being restricted, creates additional issues. The formulation of a framework that examines the merits and downsides in a comprehensive perspective is a pressing concern.
While there have been confrontations and reservations regarding crypto trade one cannot disregard the government’s advancements on digital currency. It can be clearly observed that the government does not want to be left behind in this global transmogrification happening in technology and aims to utilize its benefits. While addressing the common concerns of taxation and security protection, the regulators need to work towards providing a contributory environment for the effectual functioning of crypto-currencies.
Way Forward: The Future of Crypto-currency
With the accelerating pace of technology which has overshadowed regulations, it is high time to facilitate the materialization of a comprehensive approach to cryptos. After examining the current situation we can list a few steps that the Central government can take in an active effort in interlinking research to policy-making for an enhanced perception of the implications of crypto.
a. Take a distinct stance on digital currency
Regulators need to actively involve with bodies like the G-20 to confront issues like tax evasion, terror financing and money laundering. Policy-makers can proto-type regulations against those existing in countries like the U.S. and Switzerland where it’s successfully implemented and alter the policy framework according to the Indian scenario.
b. Regulate the exchanges
Having taken into account the existing policies of the present government with respect to privacy, it can be observed that the most streamlined channel to regulate the transactions would be to have a direct supervision of the exchanges. The exchanges in India have adopted the “know your customer” mandate which accords considerable protection along with having a regard to an individual’s privacy.
In conclusion, straightaway banning crypto mining will eventually lead to a surge in the black market trade and cause immense collateral damage. Regulators have to acknowledge that the crypto industry fuels various innovations in the world which otherwise would cost a lot of money and time. Therefore, it is imperative that the Indian government comes up with an optimal solution and implement a comprehensive regulatory framework for its efficient functioning.
Title Image: CMC
This article has been written by Isha Lodha and Prapti Kothari. Prapti and Isha are both second year law students form ILNU, Ahmedabad & GNLU, Gandhinagar respectively.