By: Nandhini Ramalingam
Virtual currencies have gained significance in the past decade and during time of COVID-19 an increase in the cryptocurrency investment was witnessed as the traditional ways of investment were in toil in lieu of the global pandemic. There are no defined rules to regulate the cryptocurrency transactions in India till date. The Cryptocurrency Bill (The Cryptocurrency and Regulation of Official Digital Currency) 2021 has been introduced in the Lok Sabha which aimes at abolishing private cryptocurrencies and further regulating them by assigning a legal status.
RBI ON CRYPTOCURRENCIES
The Reserve Bank of India issued a circular in 2018 prohibiting banks from extending financial services which involves cryptocurrency and it also voiced out the potential legal, financial and security risks associated with cryptocurrencies. An Inter-Ministerial committee constituted by the Ministry of Finance published a report proposing actions to be taken with respect to Virtual Currency in 2019. This report raised concerns like the need to secure consumers from fraud and risks, to prevent criminal activities and the protection of financial systems. The committee submitted the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 which suggested a blanket ban on cryptocurrency.
The Supreme Court in the case of Internet and Mobile Assn. of India v. RBI quashed the RBI circular based on the doctrine of proportionality. The court also held that the denial of access to cryptocurrency is violation of right carry on any trade or profession guaranteed under Article 19(1)(g) of the Constitution of India.
LEGALITY OF CRYPTOCURRENCY
The Cryptocurrency Bill, 2019, defined the term “cryptocurrency” to mean any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value, or functioning as a store of value in a financial transaction.
The SC recognised in the IMAI judgement that the cryptocurrency could be notified under the Foreign Exchange Management Act, 1999 to fall under the definition of currency therefore, bringing all the activities with respect to cryptocurrencies under the control of RBI. The cryptocurrency does not hold any inherent monetary value and it cannot be classified as a prepaid instrument under the Payment and Settlement Systems Act, 2007. However, the Court recognised the ability of RBI to regulate cryptocurrencies under the PSSA.
THE WAY FORWARD
After the Supreme Court’s judgment, RBI further cleared the air surrounding its earlier circular by issuing a circular on Customer Due Diligence for Transactions in Virtual Currencies (VC). By reference to RBI Circular DBR.No.BP.BC.104/08.13.102/2017-18 dated 6-4-2018, Reserve Bank took notice of the fact that various banks/regulated companies have warned their clients against trading in virtual currencies. It further pointed out that all such notifications were not in congruence as the earlier circular that was issued by RBI back in 2018 was no more valid as it was set aside by the Supreme Court in March 2020. However, banks and entities, on the other hand, were directed to proceed with proper conduction of due diligence as per guiding norms for anti-money laundering (AML), know your customer (KYC), combating of financing of terrorism (CFT), and regulated entities’ obligations together under the Prevention of Money-Laundering Act, 2002 (PMLA), in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act, 1999 (FEMA) for overseas remittances.
Cryptocurrencies are not illegal in India but it is important to note that India currently lacks a regulatory architecture to manage cryptocurrencies. In November 2017, the Government formed an Inter-Ministerial Committee (IMC) to analyse currencies.
The Ministry of Corporate Affairs — General Notification dated 24-3-2021, remains the only official word conveyed from the end of Government of India (GoI). The notification made it compulsory for companies to disclose their crypto trading/investment during the financial year. The notification proclaimed “Details of Cryptocurrency or Virtual Currency where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the following shall be disclosed—
(a) Profit or loss on transactions involving cryptocurrency or virtual currency.
(b) Amount of currency held as at the reporting date.
(c) Deposits or advances from any person for the purpose of trading or investing in cryptocurrency/virtual currency.”
The New Cryptocurrency Bill 2021 acknowledges the grey zone of cryptocurrency regulations and it aims to outright ban all private cryptocurrencies; however, there is still a grey area in which all sorts of cryptocurrency will fall within the purview of private cryptocurrencies.
In a nutshell, the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 aims to outlaw all private digital currency and enforce a regulated procedure for introducing a cryptocurrency legally. If the Act is enacted, a large number of cryptocurrencies will follow the formal road outlined by the act in order to become legal in India.
With the Indian Economy completely devastated from the second wave of the Novel Coronavirus it is a very lucrative time to add this uplifting factor of cryptocurrency into the market. This move is likely to induce multiple new start-ups based on blockchain and many more Indian Intermediary platforms apart from Wazirx. However, with the central bank also introducing its own cryptocurrency it is very much possible that elimination of intermediary happens as banks and financial institution involve themselves in cryptocurrency directly.