With the rise in the development and implementation of blockchain technology, cryptocurrencies and Non-Fungible Tokens (NFTs) have taken the world by storm. In only a decade, the cryptocurrency market has grown to a whopping 3 trillion dollars, with NFTs riding its coattails and boasting a 41 billion dollar market for itself.
India has also seen an increased interest in cryptocurrencies and NFTs amongst retail investors who wish to add a new asset class to their portfolios. Several crypto trading platforms such as WazirX and CoinDCX have started to come up in India to meet this growing demand for cryptocurrencies.
Taking note of this trend, it has become imperative for the Indian government to establish clear guidelines and regulations pertaining to cryptocurrency and NFTs. Currently, cryptocurrencies and NFTs reside in a legal grey area. This article looks at the history of crypto regulations in India and examines the proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 to present a picture of the legislative impasse that India faces today.
Since cryptocurrencies have gained popularity among investors, the Reserve Bank of India (RBI) has raised concerns about their volatility and the lack of safeguards in the market. Considering cryptocurrencies are based on the concept of de-centralised control and have no single authority regulating their issuance, the government finds it challenging to trace the origins of transactions in the market. This raises concerns about their potential to be used in financing terrorism, laundering money and other illegal activities.
In light of these concerns, on the April 6, 2018, the RBI issued a circular prohibiting all RBI-regulated entities from rendering services in connection with virtual currencies, including maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of virtual currencies. This came as a big blow to crypto trading platforms and retail investors who had heavily invested in cryptocurrencies, as it meant an effective ban on cryptocurrencies. However, this circular was later set aside by the Supreme Court in March 2020 in the case of Internet and Mobile Association of India V. Reserve Bank of India.
It was held by the Supreme Court that,
"The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned..."
Following the judgment, the RBI announced that the initial circular as no longer valid, effectively lifting the ban that was placed on cryptocurrencies.
Since then, the Union Finance Minister in March 2021 said that the government was considering regulating cryptocurrency, taking a "calibrated approach," so India does not miss out on the opportunities in the sector. This change of stance in the government's policy can be attributed to the huge number of retail investors heavily invested in the crypto market, who would be severely aggrieved by a ban on cryptocurrency.
Following this, the government had listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Draft Bill) for introduction in the winter session of Parliament. According to the Lok Sabha bulletin dated November 23, 2021, this Bill seeks "to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses".
While this proposed Bill was eventually not discussed in the winter session, it gave rise to tremendous amounts of speculation as to the legality of cryptocurrencies if this Bill gets passed.
Reports suggest that this Bill will affirm that cryptocurrencies cannot be used as currency or as legal tender and may be described as 'cryptoassets' to avoid confusion. Furthermore, it suggests that the Prevention of Money Laundering Act will be amended and applied to cryptocurrency transactions to prevent terrorism financing, and the exchange of cryptocurrencies will come under the umbrella of the Securities and Exchange Board of India (SEBI).
The Confederation of Indian Industry (CII) has made a representation to the government and the Parliamentary Standing Committee on Finance, advocating for SEBI to be the regulatory authority for cryptocurrency. CII suggested that India adopt a specific provision for declaration of cryptocurrency holdings and transactions, akin to the US, and has also recommended that cryptocurrency be treated as a capital asset for tax purposes. It also suggested that India impose obligations on intermediaries on reporting for tax purposes. If the revenue generated by crypto exchanges is taxed, it can be a win-win situation for both the government as well as investors as it would clear the government's stance on cryptocurrencies. This would mitigate the volatility introduced in the crypto market by virtue of its uncertain legal status.
The government has made it abundantly clear that it plans on creating an official digital currency for India. The question now is whether a blanket ban on all private cryptocurrencies and having a single regulated 'official digital currency' defeats the purpose of cryptocurrencies in general or is justified given the volatility of its markets and its potential for misuse.
Mohit Kapoor is Founder & Senior Partner, Universal Legal. Shuban Sheth is an intern.
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