A dubious concern in the banking finance sector in India today is the debate over according legal status to crypto/virtual currencies (“CCs”). The Reserve Bank of India (“RBI“), vide a notification[1] (“Notification“), directed all entities regulated by RBI not to deal in CCs or provide any services for facilitating any person in dealing or settling with CCs. As the blockchain enthusiasts, the crypto-exchanges and individuals holding CCs, across the globe watched in approbation, in March 2020, the Supreme Court of India[2] (“SC Case“), quashed the Notification, holding that the restrictions imposed by the Notification were disproportionate to the concerns raised by the RBI and therefore unsustainable. However, it was also held that RBI has inherent powers to regulate the dealing and trading of CCs in the interest of the banking system, monetary stability and sound economic growth[3]. While this development was emblematic of optimism amongst industry players in India, the quashing of Notification had only brought CCs into a grey area and one could not have elided that RBI and legislators will be oblivion to any activity relating to CCs in future.
The Parliament proposes to introduce Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Crypto Bill“) in its ongoing session. The Crypto Bill seeks to ban all private cryptocurrencies and create a legitimate framework for official digital currency in India, backed by government/RBI, while providing certain exceptions to promote the underlying technology driving the digital currency.
The Crypto Bill: What we see ahead?
The absence of any legislative/regulatory framework or policy confirming the status of CCs till date and the validity of trading in and dealing with them, questioned their future in India which hinged over a murky structure. The Crypto Bill has brought a ray of hope, suggesting a possible advent of a digital currency in India and its regulation by RBI/government. However, the Crypto Bill also suggests banning of all the private cryptocurrencies. The very news of introduction of Crypto Bill in the Parliament session has sent out shivers in the cryptocurrency market. The industry practitioners have hit the panic button due to the speculative foresightedness attached to the Crypto Bill, including more particularly the banning of ‘private cryptocurrencies’.
As to what is a ‘private cryptocurrency’ remains unclear for now as the draft of the Crypto Bill has not been made available to public. The crypto evangelist bat for currencies like Bitcoin and Ethereum to be public currencies, however there is uncertainty, whether the Crypto Bill will render the use of currencies like Bitcoin and Ethereum illegal in India.
Further, it remains to be seen whether CCs will be treated as a ‘currency’ or a ‘stock’ or there will be an outright ban on dealing with them. The proliferators of CCs contend that they cannot be differentiated, without any reasonable basis, from other persons engaged in the business, including that of pre-paid wallets and other electronic dealings in money, purely because they are engaged in the use, trade or dealing of CCs and that vetoing use of CCs infringes upon the right to carry out trade and business and impairs the Right to ‘Equality’[4], Right to carry out ‘Trade or Business’[5] and Right to ‘Life and Personal Liberty’. Whereas, the primordial concerns of RBI/government that could make CCs nefarious and question their acceptability, are the volatility and fluctuation of their value and anonymity of transactions, which may give rise to cybercrimes, money laundering, misinformed investments by consumers, frauds and terrorism financing.
The forward strategy
The Indian citizenry have long delved themselves into the use, trade and sale of CCs and have established highly successful businesses in the form of crypto exchanges and blockchain driven start-ups and therefore one cannot sign off CCs completely. Crypto firms in India have also experienced a successful phase during the pandemic lockdown and the trading on crypto exchanges increased manifolds. Were at one hand the government’s current move threatens to put the future of this industry in disarray once again, the introduction of Crypto Bill will also be a welcome step. However its success will depend on various factors, like defining ‘private cryptocurrencies’, contours of regulation and power given to the regulators to regulate the use and trade of CCs, that will decide the fate of CCs in India. At this stage, the government may consult stakeholders before coming to a decision on status of CCs in India.
In the milieu of the nascent technology-driven businesses, subsequent to the SC Case, the world now awaits in high anticipation of the Indian policymakers’/legislator’s next move to see whether there will be an outright ban or there will be a regulatory framework on CCs or whether and the lawmakers/government come up with a hybrid digital currency that is backed and regulated by the RBI. A pragmatic sense suggests that the lawmakers and RBI regulate the trading of CCs, either by coming up with a substantive legislation or regulation/policy by RBI for regulating and facilitating the dealings in CCs either as a currency or a virtual asset, ensuring the following inclusions, amongst others;
- The mandatory reporting of sale, trade and usage of CCs to RBI to ensure the identity of participants and the amounts transacted, thereby preventing anonymity in cryptocurrency transactions;
- Since fluctuation in the value of a currency is not good for an economy, a range or a band-width of fluctuation in value of CCs be considered by RBI for a specified period, from time to time, so as to recognize them as currency with definitive value;
- The Master Circular issued by RBI for Know Your Customer (“KYC“) norms, Anti-Money Laundering (“AML“) standards and combating Terrorism Financing[6], can be applied mutatis mutandis to transactions relating to CCs to curb the potential risks identified by RBI in relation to them;
- Compulsory registration of crypto exchanges with RBI and an affirmative obligation be imposed on them to self regulate and comply with KYC/AML regulations and make quarterly disclosures to RBI intimating the necessary information of all transactions in CCs;
- In alternate, where CCs are given a status of stock, Securities and Exchange Board of India (“SEBI“) may license, regulate, and supervise trading and services in relation to CCs;
- An independent unit be set up by RBI or SEBI to study, address and deliberate on emerging technologies and market trends governing CCs and advise RBI/SEBI on regular basis; and
- Defining crimes related to CCs and having an effective enforcement mechanism to safeguard the consumers.
Views are personal.
