The Analysis of Cryptocurrency Conundrum in India

By Vanshika Sharma

Cryptocurrency is a digital currency which is used for the exchange of goods and services and have robust cryptography for securing online transactions. A number of companies issue their own currency which are called tokens that can be used for the online transactions. There are plethora of currencies which are exchanged virtually some of them are Bitcoin, Ethereum, etc. WazirX, Unocoin and CoinDCX are the three major crypto-exchanges in India and according to some media reports there are between 60 lakhs to one crore cryptocurrency holders in the country having holdings of over Rs 10,000 crore.[1] The technology that govern the cryptocurrency is the blockchain technology. According to a report by NASSCOM and KPMG, transactions in the Indian fintech sector (FinTech) grew 121% from 2018 to 2020 and India’s GDP will increase from FinTech by an additional $730 million by 2025.[2]

Current Legal Position related to cryptocurrency in India

In December, 2013, RBI released the first press release which warned the users, traders and holders of virtual currencies such as Bitcoins, litecoins, bbqcoins, dogecoins etc., about the potential financial, operational, legal, customer protection and security related issues that they can unveil. The main concerns raised in the press release were:

• there was no dedicated central agency which could regulate these transactions and, there is no authorised framework for recourse to customer problems and disputes.
• digital wallets are susceptible to losses arising out of hacking, loss of password, compromise of access credentials, malware attacks etc.;
• the seriousness of risk accompanying the instability in the value of virtual currencies.
• scope for illicit and illegal activities and unintentional omittance to comply with anti -money laundering and combating the financing of terrorism (AML/CFT) laws.

Furthermore, RBI made two more press releases in February, 2017 and December, 2017 and reiterated that it has not given any licence or authorization to any entity or company to operate schemes or deal with Bitcoin or any other virtual currencies.

The Inter-Ministerial Committee (IMC) recommended to pass a bill in 2017 in order to curb the menace of virtual currencies. In 2017, Crypto-token Regulation Bill was passed to stop the people involved in the illegal activities related to crypto currencies and to regulate virtual currency exchanges and brokers.

In 2018, RBI issued a circular preventing commercial, small finance banks, payment banks, cooperative banks, NBFCs from dealing in virtual currencies and providing services to all entities that deal with them. Trading volumes fell by 99% and by August 2018 about 95% of jobs vanished.
When the first draft could not fulfil the purpose then IMC passed second draft in 2019, Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. It proposed to ban usage of virtual currencies as legal tender. Further, mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency in the country would be prohibited.

Supreme Court Ruling on Cryptocurrency

The Hon’ble Supreme in the recent case Internet and Mobile Association of India V. Reserve Bank of India[3]gave relief to currency holders and lifted the ban on the banks in 2018 that was imposed by RBI circular because of the two main reasons the first one is cryptocurrencies in India are unregulated but not illegal in India and the second one is that it violates the fundamental right enshrined under Article 19 (1)(g) of the Indian Constitution.

Repercussions of banning cryptocurrency in India

Post banning, the authorities will have to establish a robust surveillance system that could keep a track of all the digital activity throughout the country which is difficult to regulate in India. All these efforts are likely to make the cryptocurrency market go underground.[4] Such blanket ban would make suffer only the young coders and start up founders by conducting arbitrary raids. Only ordinary Indians would be divested of the real benefits of the cryptocurrency. India receives the highest inflow of global remittances and using blockchain networks could save Indians billions in transfer fees.

Recent Bill Proposed by the government

In January, 2021 the government has thought to come up with a new legislation- Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. Although this bill is currently not in public domain, but as per the sources, the Crypto Bill aims to ban the “private” cryptocurrencies in India with some exceptions to promote the underlying technology of cryptocurrency and provide a framework for creating an official digital currency, the central bank digital currency to be issued by the Reserve Bank of India (“RBI”). Currently, the definition of the term ‘private cryptocurrency’ has ambiguity and have clarity issues but the experts believe it to include any cryptocurrency which has not been issued or recognised institutionally by the RBI.

Amendment in the Companies Act, 2013

There has been an amendment in the Schedule III of the Companies Act, 2013 in order to have transparency in the financial statements with effect from 1^st April, 2021. As per the changes introduced the companies will have to make disclosures on corporate social responsibility, promoter shareholding and Benami property transactions. It provides a feature of recording transaction-wise audit trail and logging facility for each change that’s made in the books of accounts. The changes introduced will give a way to identify the company’s transparency and confirming if it has traded or invested in crypto or virtual currency during the financial year. If the answer is affirmative, then the companies will disclose profit or loss on such transactions, along with the amount of currency held on the reporting date. And lastly, details of deposits or advances received from any person for trading or investing in such currency must be separately mentioned.[5] The amendment will be operational after the approval of Parliament.
Conclusion

In the last few years, the government’s stand has been very unclear when it comes to the cryptocurrency. The recent MCA notification mandating companies to make certain disclosures with respect to the cryptocurrency online transactions with effect from 1^st April, 2021 has given a positive hope to the cryptocurrency holders. The MCA notification and the cryptocurrency Bill, 2021 are still contradicting as they both go in the different directions. This uncertainty in the bill would continue until the cryptocurrency bill, 2021 comes in public domain. But one thing is certain that the recent MCA notification has surely given some respite to the cryptocurrency holders.

[1] Ridhima Saxena, India’s Crypto Investors Weigh Options Ahead Of Impending Ban, Bloomberg Quint, February 14, 2021, https://www.bloombergquint.com/business/indias-crypto-investors-weigh-optionsahead-of-impending-ban

[2] Volume 3, 2020, Volodymyr Ustymenko, Nataliya Polishchu, Visegrad Journal on Human Rights, The genesis of the formation and development of legal regulation of cryptocurrencies in India and Ukraine http://vjhr-journal.sk/wp-content/uploads/2020/12/Vyshegrad-2_2020_Tom-3.pdf#page=164

[3]  Internet and Mobile Association of India V. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018

[4] https://www.business-standard.com/article/economy-policy/why-a-ban-on-cryptocurrency-could-have-dire-consequences-for-india-121031900168_1.html

[5] https://www.bloombergquint.com/law-and-policy/companies-act-additional-disclosures-on-cryptocurrency-regulatory-actions-introduced

Author is a 2nd year law student at Lloyd Law College. In a very short span she has gained rich experience working as a legal researcher with several firms and Independent organizations. She has keen interests in General Corporate and IPR, has always been enthusiastic to take up new projects. Currently working as a legal intern for the Summer Internship 2021.