The crypto regime in India

On 6^th April 2018, the Reserve Bank of India (RBI) issued notification “Prohibition on dealing in Virtual Currencies (VCs)”[1] banning any and all trading/ maintaining accounts/ settling/ clearing/ registering/ accepting them as collateral and receipt of money in accounts relating to purchase of virtual currencies, by entities regulated by RBI. The bank had earlier cautioned the users, holders and/or traders of the virtual currencies like Bitcoin, Ethereum, Libra, Tether and others about the various risks included when dealing with such currencies.

This prompted the Internet and Mobile Association of India and other stakeholders including the crypto-managers and other traders who did business to challenge this in the Hon’ble Supreme Court.

Virtual Currency is, as defined by the Internal Revenue Service of the United States, “… a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency (i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance), but it does not have legal tender status in any jurisdiction. Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.”[2]

In their petition in the Supreme Court, the petitioners majorly contended that:

1. Virtual/Cryptocurrency is not money but a medium of money akin to any other medium like cards.
2. Virtual/Cryptocurrency was more similar to property than money.[3]
3. The act by RBI was arbitrary as the notice was circulated after issuing a ‘cautionary statement’ a day prior. The authority changed its stance which is, on the face of it, arbitrary.
4. The circulation of notice was an ultra-vires act as the notice regulated not only the entities over which RBI had power over, but is also bound to affect individuals and other entities over it does not have jurisdiction i.e. users and other traders of virtual currencies.
5. RBI acted on limited understanding and hard facts as there was no substantive fact-finding on part of RBI and it merely went ahead to ban the trading/ maintaining accounts/ settling/ clearing/ registering/ accepting them as collateral and receipt of money in accounts relating to purchase of virtual currencies, by entities regulated by RBI; instead of regulating it.

RBI refuted these claims in response to the petition.

The Hon’ble Supreme Court in its judgment [4] on March 4^th, 2020 has quashed the RBI circular, finding it arbitrary and in violation of the traders’ right to freedom of trade; and ordered unfreezing of bank accounts of the traders and other crypto-exchanges.

To examine the government’s attitude towards the virtual currencies, it is important to note that prior to the April 6^th notice that prompted IMAI to file the petition, the then Finance Minister Late Arun Jaitley had made it a point to declare in his February 2018 budget speech that “The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”[5]

Later, in a response to a question in Rajya Sabha on July 16^th, 2019, the State Minister for Ministry of Finance specified that the government had not prohibited the use of cryptocurrencies in India and that the government and RBI have been issuing advisories regarding risks and dangers associated. He also mentioned that the government had also constituted an Inter-Ministerial Committee which had submitted its report[6] to the government. (The report of the IMC was submitted on Feb 28^th, 2019)

A point to observe here is that while other jurisdictions have agreed and made efforts to regulate crypto-assets and trading in cryptocurrency, the government of India was bent on outrightly banning it. In its report[7], the Committee, not surprisingly, recommended a ban on cryptocurrencies in India.

On July 27^th, 2019, the government, following the recommendations of IMC, released the draft on “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”. Refer to our article for comments on the draft[8].

What is more surprising is that New Delhi continued to maintain its globally inconsistent stand to ban crypto-assets and other forms of virtual currency, albeit indirectly through RBI. The G20, in their Osaka Declaration in June 2019 had conceded that “crypto-assets do not pose a threat to the global financial stability at this point.”[9] In their declaration, the G20 also lauded[10] FATF in its work on regulating virtual assets and asserted their faith in its framework.

Now, after the Supreme Court has quashed the RBI circular banning Virtual Currencies, we will have to wait for the government’s next move. The government can still ban virtual currency by an ordinance or by tabling and passing the draft on Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 in the parliament. Indian governments have had an aversion to new technologies, especially those which grant an individual some level of anonymity. It won’t be far fetched to say that any move by the government to again ban and/or influence the crypto market in the country, maligned with bad faith, would certainly be challenged in the court.

Instead of banning or putting in place a harsh regulatory regime on virtual currencies, perhaps the government could implement a more lenient and development supportive framework.

There are various regulatory frameworks for Virtual Assets, with the one prescribed by FATF being the most prominent and widely accepted one. Hong Kong and Abu Dhabi[11] have recently adopted the FATF Framework.

The framework[12] as proposed by FATF includes identification and KYC of all users who will use the services of any Virtual Asset Service Providers (VASPs) and impose anti-money laundering and counterterrorism financing rules on activities related to Virtual Assets (VA).

The government of India’s chief concern of possible use of virtual assets as a tool for terror funding and money-laundering will most certainly be addressed through this.

Another notable regulatory framework includes the proposed framework[13] by the Ontario Securities Commission.