Today, when technological advancements occur exponentially, the fintech sector has found itself at the vanguard, from online stock trading platforms and mobile banking to unequivocally the most coveted one, cryptocurrency. The popularity of cryptocurrencies such as ethereum Bitcoin has considerably increased in the recent past worldwide and in India.
According to several media reports, the three largest crypto exchanges in India, WazirX, CoinDCX, and Unocoin, claim that there are anywhere between 6 million to 1 crore cryptocurrency holders in India, holding more than 10k crore INR (1).
Moreover, the growth potential of the space, estimated by a Nasscom and KPMG report (2), transactions in the Indian fintech sector grew 121% from 2018 to 2020. Indian GDP will also increase from fintech by an additional 730 million USD by 2025 (3).
Cryptocurrency is a kind of digital cash that is decentralized, peer to peer, non-state administered, and open source-based. Open-source software offers a platform where users can produce a private currency and make payments without the source to banks and Central banks, based on encryption technology (4). Blockchain is the technology behind cryptocurrency and enables its existence.
The MEITY, Ministry of Electronics and Information Technology of the Indian government had drafted the national strategy on blockchain in January 2021. It described blockchain technology as a distributed ledger technology suitable for decentralized and transactional data shared across a huge network of untrusted entities. The technology enables a new kind of distributed software architecture, which enables finding concurrence on their shared states without the requirement to establish online trust with any central participant or entity. It eliminates the need for a central entity or third party to validate the transaction over the peer-to-peer network. Instead, the history of transactions stored at each node of the network and the consensus of the participants validate such transactions (5).
Legal Position in India
India’s reluctance pattern is evident from the series of either prohibitory or cautionary that the RBI, Reserve Bank of India had issued. The country had also formed an Inter-Ministerial Committee that proposed two bills, which were quite contradictory. The RBI has kept that there is a high risk of terror financing, money laundering, frauds, and hacking. However, in 2020, the apex court passed a landmark judgment, offering a rather pro-cryptocurrency perspective as opposed to the past RBI circulars and Inter-Ministerial Committee bills.
It is crucial to known the chronology of events to know its interplace with what the future holds for crypto in India.
RBI Press Releases
The first instance of reluctance for cryptocurrency can be traced back to 24 December 2013, when the RBI released a press release cautioning the users, traders, and holders, including Bitcoins, dogecoins, litecoins, bbqcoins, etc., about the potential financial, legal, operational, security, and customer protection-related risks (6). The primary highlighted concerns include:
- No authorized central agency to regulate such payments, no established framework for recourse to customer disputes, problems, chargebacks, etc
- High susceptibility to losses for digital wallets, arising out of hacking, compromise of access credential, loss of password, malware attacks, etc
- the gravity of risk related to the high volatility
- scope for illegal and illicit activities and unintentional omittance to comply with anti-money laundering and the financing of terrorism, AML, CFT, combating laws
There were other two cautionary press releases on 1 February 2017 (7) and 5 December 2017, respectively (8). The RBI reiterated the risks and clarified that it has not authorized or licensed any company to operate schemes or deal with cryptocurrencies, including Bitcoin.
Inter-Ministerial Committee Proposed Bills
On 2 November 2017, the Indian government constituted an IMC, Inter-Ministerial Committee, which proposed two bills. Notably, neither of these bills show the day’s light.
The IMC first recommended the First Draft Bill, Crypto-token Regulation Bill of 2018. Initially, IMC didn’t lean towards an outright ban and not opted for it on the pretext of it being an extreme means.
It recommended prohibiting persons dealing with activities related to cryptocurrency from falsely posing these products as not being investment schemes or securities or offering investment schemes because of the gaps in the existing legislature. It also recommended regulating VC exchanges and brokers, where purchase and sale may be allowed.
However, The First Draft Bill was not executed. Later, the Second Draft Bill Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, was introduced (9).
It recommended a ban on the usage of cryptocurrency as legal tender. Further, buying, mining, holding, dealing, selling, issuance, disposal, or use of cryptocurrency in India would be prohibited. The second bill proposed to prohibit the use of cryptocurrency, as a mean of exchange, store of value or account unit, as a payment system, for offering crypto-related services to customers and investors like trading, registering, selling, or clearing, for trading with Indian or foreign currency, for issuing crypto-related financial products, as a credit basis, as a medium to secure funds, and as a medium for investment.
We could see the strictness of the Second Draft Bill from the last one that offered penalties and offenses. It also recommended a digital rupee, introduced by the RBI, and serves as a legal tender.
There was a steep drop in the cautionary measures when the RBI released a circular on 6 April 2018, Prohibition on Dealing in Virtual Currencies, imposed a substantial ban on dealing with cryptocurrencies (10).
The circular-directed companies regulated by the RBI shall not deal in cryptocurrencies or offer services for allowing any entity or individual to deal with or settling cryptocurrencies with immediate effect. Such services included maintaining accounts, trading, registering, settling, offering loans against virtual tokens, clearing, receiving them as security, opening accounts of crypto exchanges, and transferring or receiving money in accounts related to the sale or purchase of cryptos. Hence, private individuals or entities that deal with cryptos that needed assistance from such entities were virtually impeded from continuing their operations.
It further stated that regulated entities that already offered such services should exit the relationship within three months from the circular date.
Consequently, the crypto exchanges suffered a huge blow and couldn’t sustain their established businesses.
Supreme Court’s Landmark Judgement
The tide made a shift on 4 March 2020 when the apex court, in Internet and Mobile Association of India V. RBI, with a three-judge bench of Justice Aniruddha Bose, Rohinton Nariman, and V. Ramasubramanian, lifted the ban (11). The court had predominantly examined the matter from Article 19(1)(g) of the Indian Constitution perspective, which is the freedom to practice any profession, carry on any occupation, business, trade, and the proportionality doctrine.
The first issue, the judgment, contended that RBI lacked jurisdiction to forbid crypto dealings. It argued that crypto couldn’t be equated with money or legal tender, and they weren’t currency in the strict sense.
Considering the first contention, the court analyzed the cryptocurrency definitions by different governments, judiciaries, and governments. It held that cryptos were not a widely accepted mode of exchange and can’t be regarded as a final debt discharge, and they are not legal tender. However, it acknowledged that cryptos could create a parallel system even if they couldn’t strictly be equated to currency. Hence, in such a case, the RBI can invoke its power to regulate it.
The second issue the court contended was that the RBI Circular didn’t protect the public interest in general and violated the right to practice any profession as per the Indian Constitution. Therefore, it disproportionately affected the livelihoods of people dealing in cryptos. It argued that the measures of RBI were extreme and didn’t pass the proportionality test. A principle where the court scrutinizes how the decision-maker orders his priorities, concludes or reaches a decision.
The Supreme Court acknowledged that the RBI Circular adversely impacted the businesses dealing with cryptos. Since it substantially wiped the crypto exchanges out of the country, it infringed Article 19(1)(g). The crypto exchanges, prima facie, had no recourse.
The court went on the check that the trading in cryptos and functioning of the exchanges are sent to comatose by the RBI by disconnecting their lifeline, namely, the interface with the regular banking space. The court discussed that the RBI didn’t show any Substantial empirical data of the actual harm. To date, the RBI had not come with a stand that any of the entities, the banks, had suffered any loss or adverse effects suffered directly or indirectly on account of the interface that the crypto exchanges had with any of them.
The court stressed the vitality of determining and establishing the loss suffered by the RBI on account of the existence of cryptocurrencies and vividly stated that there was none.
The court also stated that despite the committee which proposed two draft bills, there was no final call, and both bills contradicted each other and recommended opposite propositions.
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
The New Bill seeks to offer a facilitative framework for the official digital currency issued by the RBI. It also seeks to prohibit all private cryptocurrencies in the country. However, it enables some exceptions to promote the underlying technology (12).
Concerns with the New Bill
While the new bill takes due knowledge of a long grey area in crypto laws and fosters the digitalization advent, it proposes to ban private cryptos in their entirety.
It is vital to note that the Indian population has shown huge interest in cryptos, with India until recently contributing to about 2 to 10% of the 430 billion USD cryptocurrency market globally. Considering the huge number of crypto investors in India, it is bound to cause a certain sense of panic.
The RBI has time and again emphasized the possible misuse of cryptocurrency for money laundering, terror financing, etc. However, if the new bill imposes a ban on private cryptos, it can lead to the formation of an underground market where genuine investors may be forced to work in unmonitored climates. Moreover, the goal of introducing a law is to facilitate a safer technological environment to deal with cryptos. However, as the state-owned crypto to carry the same role as other cryptos will also be exposed to the same risks. Hence, even the introduction of a national digital currency may not mitigate the risk substantially.
Furthermore, it is important to highlight that with the only cryptocurrency, the RBI will have a monopoly.
There will also be a question of whether foreign investors can invest in Indian digital currency and its regulations. Thus, there is also a looming possibility of foreign investors investing in Indian digital currency, while the freedom of Indian investors to invest in foreign cryptocurrency is essentially restrained. And it leaves room for further complications (13).
A policy that holistically considers the pros and cons is the need of the hour.
Earlier this week, the RBI came out with a clarification on the crypto trade. It stated that banks couldn’t refer to its April 2018 circular to caution their customers against crypto trading (14).
Such references to its previous circular by banks are not in order as the Supreme Court had already set it aside in March 2020.
“As such, considering the order of the Supreme Court, the circular is no longer valid, and hence can’t be quoted or cited,” stated the RBI statement.
While the central bank’s statement is objective, it indicates that the stance of the Indian government towards cryptos is softening.
It comes at a pivotal time when the government plans to frame rules to either ban or regulate crypto trade in India; the latter option is a preferred choice of most crypto exchanges and traders in India.
This clarification will directly help crypto exchanges that have been facing several bottlenecks in their negotiations with banks.
Nischal Shetty, CEO, and Founder of WazirX has welcomed RBI’s statement and stated that it is a positive development for India’s entire crypto sector. He added that banks will now have more clarity when it comes to dealing with crypto exchanges.
“It is amazing to see RBI clarifying and helping solve uncertainty for the crypto market in India. There are more than 1.5 crore Indians in crypto. And the news has brought confidence and joy to everyone in the space. Let’s continue to create the Indian crypto ecosystem,” Shetty stated on Twitter (15).
The Importance of RBI’s Clarification
The RBI had also asked regulated entities to perform customer due diligence process consistent with regulations governing “standards for KYC, anti-money laundering, combating financial terrorism, and responsibilities of regulated entities under PMLA, 2020 in addition to ascertaining compliance with relevant provisions under FEMA for foreign remittances.”
It is also a welcome move, as per Shetty, as all crypto exchanges are up to date with all regulations.
The statement is another indication that the Indian government is looking to soften its stance on crypto trading and opt for regulation instead of a blanket ban. A recent The Economic Times report (16) indicated that the Indian government plans to set up a new expert committee to re-check crypto trade’s all aspects.
An earlier committee headed by Subhash Garg, a former finance secretary, recommended a blanket ban on cryptos in 2019. However, several within the government now feel that the committee’s recommendations have now turned “outdated.”
Earlier in March, the MCA Ministry of Corporate Affairs had asked companies to declare their cryptocurrency investments (17). The market had viewed it as another indication that the Indian government may consider regulating the crypto trade. Even Nirmala Sitharam, the Finance Minister, said that the government would not shut down all options on cryptos (18).
Is There a Hope for Cryptocurrencies in India, Afterall?
Combining all these developments and the rising popularity of the crypto trade in the country, yes, there is a high possibility.
Regulating crypto trade instead of a complete ban should be the government’s preferred choice, considering the changing circumstances.
According to a Business Standard report (19), citing sources in the RBI, stated that allowing banks to perform due diligence for crypto investors amounts to “legitimizing trading in India.”
A source cited in the report stated that “The RBI could have stopped after the first passage which stated the April circular is no longer valid. However, it went on to permit banks to perform due diligence for crypto users like other legitimate activities allowed for the banks.”
After the RBI’s clarification, people from the crypto market state the central bank has cleared their stance on cryptos, and it will help make the domain stronger.
They also added that the cryptocurrency ecosystem now requires concrete guidelines from the government for better regulation. For instance, a regulatory framework for taxing cryptocurrencies.
While building a solid framework for cryptocurrencies may take a while, RBI’s clarification is a big step in the direction.