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Cryptocurrency and India– A Positive Legal Approach

Author:

Aman Tiwari, Student, Government Law College, Mumbai

2021 is a year in which the financial market saw an exponential boom. A large number of people started to see the value in investing and the number of investors has taken the markets by a storm. One such form of investing which has given the highest number of returns in the 10-year period compared to any other asset is Bitcoin. In the past 10 years, bitcoin has given 48,22,525% returns on investment. On 9th Feb 2011 Bitcoin had hit 1 USD, On 9th Feb 2021, Bitcoin hit an all-time high of $48,226.25. In comparison, the international gold market has risen by 35% and SENSEX has risen by 191.76%. Even though Bitcoin has given such high-yielding returns, many people including the governments have been sceptical about it as not a lot of people understand what Bitcoin is.


What is Bitcoin and Blockchain Technology?

Bitcoin is a type of cryptocurrency which works on Blockchain Technology. Blockchain is basically a type of ledger system in which a record of every transaction is duplicated and distributed among the network of interconnected systems which makes it nearly impossible for a person to hack the data. With every transaction, a new block is added to the chain which is simultaneously added to every participating system in the blockchain. A blockchain is maintained by the participants and there is no centralised authority. Therefore, if a hacker tries to make changes, it will notify every single participant in the blockchain network making it one of the safest and the most efficient systems in the world.

Blockchain technology helps in automating various processes of auditing and book-keeping as the errors cannot be made and there is no scope for fraud. This will reduce financial scams and frauds and ensure transparency in the financial recording.

Now, what does cryptocurrency have to do with Blockchain? Cryptocurrency is essentially a form of reward given by the network on doing complex calculations between two participants in a blockchain. The good thing about bitcoin and other cryptocurrencies is that there is a limit to the number of bitcoins that will ever get into circulation. Unlike fiat money which the governments keep printing without a said limit. Although the RBI maintains depositories for printing notes, it has been seen in many third world countries that their currency has lost its value because the government has printed the amount of fiat money without a limit. The scarcity of Bitcoin is what makes it valuable.


Another feature of cryptocurrency transaction is that they are anonymous which is alarming for most governments. The anonymity of crypto transactions makes it harder for the government to track down activities like money laundering, terrorism funding, tax evasion and so on. This has been the main reason why the Indian government is seeking a ban on cryptocurrency


Why the government should not ban cryptocurrency

What the government needs to understand is if it bans cryptocurrencies, it will have to ban blockchain technology. Imagine if India had banned the internet instead of regulating it through the Information Technology Act, 2000. Blockchain technology is the internet of the present day. - an inevitable wave of technology, banning which shall seriously harm the development of the nation. If the govt bans one form of cryptocurrency, a new form of cryptocurrency will be started. Therefore, in order to ban cryptocurrency, the entire blockchain system will have to be banned which as explained before is not feasible.


India has seen a rise in the number of crypto exchanges. Various crypto trading exchanges such as Coinbase, WazirX have seen a rise in the past few years. India is home to the 2nd highest number of crypto traders in Asia after china the market capitalisation of which is $1.4 billion.

The RBI should also set a set limit to the maximum capitalisation cryptocurrency can have in the initial years to minimise the risks with cryptocurrency.

How can the problem of anonymity be solved?

The government needs to start regulating crypto-exchanges. Simple regulatory methods such as Aadhar based e-KYC can help the government track down transactions and reduce the chances of money laundering, terrorism funding and other such illicit activities. Even though anonymity is one of the pillars of cryptocurrency, it poses serious threats to the nation which cannot be ignored. Sometimes you have to cut off an arm to save the body. It is therefore safe to say that anonymity can be given up to make way for the revolutionary technology called the blockchain.


Another big concern for the government is that the value of a currency is determined on the basis of simple demand and supply rule. More the supply, the lesser will be the value and vice-versa. The more the number of substitutes, the lesser will be the demand. If another legal tender starts acting as a substitute for the Indian rupee, the value of the Indian rupee might go down which can seriously affect the economy of the country. Under the Payment and Settlement Systems Act, 2007, the RBI can instruct banks on what is legal tender and therefore has the full right to not consider crypto as a genuine legal tender.

If cryptocurrency poses such a threat to INR, shouldn’t we ban it?

No. The question of banning comes into the picture when it is considered as a form of payment or a legal tender. Instead, the government should treat it as an asset class like real estate and stocks which are regulated through various authorities to ensure transparency in the transactions. Banning crypto won’t solve the problems of money laundering and terrorism funding. However, regulating them through authorities can help in preventing such acts.

Even in the last 5-10 years various Nationalized Banks/NBFCs/scheduled commercial banks have failed to establish any loss occurred to them due to cryptocurrency and crypto-assets. This can be plausible due to the low market volume at which crypto is traded. With an increase in the market capitalisation, the substitute for INR may likely cause some form of devaluation


Benefits of Regulating Cryptocurrency

First and foremost, regulating cryptocurrency will save the blockchain network from getting banned in India thus encouraging India to step into the modern world of technological advances. It will also help in identifying the participants in the crypto transactions through advanced KYC norms. It will also generate millions for the government of India through taxation. Short term capital gains and long-term capital gains can be taxed according to the frequency of transactions that take place for investing purposes.


Why cryptocurrency is not an immediate threat

In order for cryptocurrency to completely replace the Indian rupee, it will take years which is nowhere to be seen in the near future. There are only about 400 million out of 1.36 billion people in India who use UPI or eWallets. Not only India but numerous countries lack the infrastructure to start a decentralized economy through the use of cryptocurrency. In a country where millions of people lack basic necessities and education, how will they have the equipment and the technical know-how to make use of cryptocurrency. Therefore, until we have that level of technological advancement, it is safer to treat cryptocurrency as an asset class.

Cryptocurrency cannot completely replace the Indian Rupee in the near future as the official legal tender due to the extreme volatility in the prices of cryptocurrency. Most of the cryptocurrencies are in their initial years and with so many available options, it is difficult to choose a standard cryptocurrency for being a contender for being a legal tender.


Global Stance of Cryptocurrency

Statistically, most of the developed countries have welcomed crypto as a positive change and have implemented various laws and regulatory bodies to ensure transparency. Most of the underdeveloped or developing countries have placed a complete ban on blockchain technology. Countries like the USA and Switzerland have regulated crypto through legislation and regulation. The Swedish Financial Supervisory Authority, (Finansinspektionen) has legitimized bitcoin and other crypto transactions by regulating them through the use of KYC and AML/CTF. The Financial Market Supervisory Authority (FINMA) in Switzerland has already differentiated cryptocurrency into payment tokens, utility tokens and asset tokens. A similar regulation is expected from the Securities Exchange Board of India and Reserve Bank Of India to make cryptocurrency accessible to the people.

China is set to become the first major economy to release its own digital currency through the use of blockchain technology. This will help China eliminate anonymity ensuring transparency in financial transactions. The Digital Yuan will be regulated by the Central Bank.


Current Scenario of Cryptocurrency in India

The Reserve Bank of India issued a circular (see here) “Statement on Developmental and Regulatory Policies” on April 5th, 2018, paragraph 13 of which directed the institutions regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).

Following the said Statement, RBI also issued a circular dated April 6, 2018, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (hereinafter, “RBI Act, 1934”) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI

(i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

However, in Internet and Mobile Association of India v Reserve Bank of India (see here), the Supreme Court on 4th March, 2020 ruled in favour of the petitioner Internet and Mobile Association of India and held the circular unconstitutional because RBI can merely regulate and a circular is not a legislative bill. Moreover, the numerous entities have failed to establish how cryptocurrency have caused a direct loss to them.


The Internet and Mobile Association of India also contested that Cryptocurrency is a form of the Banking system. A banking system is integral to the right to carry on any profession or trade and therefore banning it will violate article 19(1)(g) of the constitution if Cryptocurrency is treated as payment tokens. They were also the one of the first ones to suggest usage of Aadhar based e-KYC to eliminate anonymity of transactions.

A new bill called “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 has been introduced in the parliament which sheds some positive light on the regulation of cryptocurrency. As of now the government is not looking at a complete ban but some form of regulation.

The government is also planning to launch a cryptocurrency or digital rupee of its own and form a depository to back the value of such cryptocurrency. This indeed gives some relief to those concerned with the ban of blockchain technology.

Recently, WazirX a crypto trading platform enabled NFT trading. NFTs are Non-Fungible Assets that can help artists and musicians to place their digital assets on auction through blockchain technology. Original files of the creator can be stored through encryption which reduces the chance of buying a duplicate copy of the digital art which is inherent part of blockchain technology.


The future of Cryptocurrency does seem bright for India with new laws hinting towards regulation of cryptocurrency. To quote CEO of India’s largest crypto trading platform WazirX Mr. Nischal Shetty said, “WazirX India got more customer signups in the first 6 days of April 2021 than the entire first 6 months of 2020”. A large number of people are welcoming crypto into their portfolio of investments. On the other hand, some of the biggest investors in India like Mr. Rakesh Jhunjhunwala have publicly admitted to never invest in crypto currency due to the lack of assets backing such huge trades. We also have Elon Musk, CEO of Tesla and also the richest person in the world, publicly encourage crypto trade. Tesla has started to accept bitcoin as a payment for its vehicles. Visa and PayPal have also allowed Bitcoin as a form of payment. Most of the developed countries are jumping on this bandwagon of the huge bull-run crypto investments have seen in the past year. India has an enormous untapped potential for the growth of cryptocurrency and get the first mover advantage to rise as one of the leading countries in this new era of technology.

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