A complete look back at the regulatory journey of cryptocurrency in India— from 2013 Ban to February 1, 2022, Budget Announcement, from post-budget taxation discussion to RBI’s hint at banning the currency on February 14, 2022.
The discussion on the legalization of cryptocurrency is back with Reserve Bank of India’s Deputy Governor, T Rabi Sankar’s new comments on various regulatory aspects of cryptocurrencies. He said that cryptocurrencies are very much like a speculative or gambling contract working like a Ponzi scheme. In fact, it has been argued that the original scheme devised by Charles Ponzi in 1920 is better than cryptocurrencies from a social perspective.
Earlier a leading Public Policy Expert from India commented like Cocaine, Cryptos are not yet legal.
India’s Love-Hate relationship with Cryptocurrency is much known. Given the intense complexity of the matter, the debate on the legal aspects continues. Let’s look back at some of those decisions, announcements, and Supreme Court judgments that shaped the journey of the currency in India.
A look-back at Cryptocurrency’s regulatory journey
2013 – the year RBI took note of crypto activities
On Dec 24, 2013, RBI’s in a Direction cautioned users of Virtual Currencies against Risks:
The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.
As such, they may pose several risks to their users, including the following:
VCs being in digital form are stored in digital/electronic media that are called electronic wallets.
Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.
There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
2017 – Reinforcing the previous stand
On February 1, 2017, in another circular, RBI clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any VC.
Reserve Bank cautions regarding risk of virtual currencies including Bitcoins
Attention of members of public is drawn to the Press Release issued by the Reserve Bank of India (RBI) on December 24, 2013, cautioning users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.
A year later – RBI’s positioning continues
Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include 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 VCs.
3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.
4. These instructions are issued in exercise of powers conferred by section 35A read with section 36(1)(a) of Banking Regulation Act, 1949, section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949, section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.
Supreme Court Judgement – A big relief
However, On March 4, 2020, a three-judge bench of the Supreme Court quashed the ban RBI had imposed on trading in cryptocurrencies since 2018.
RBI revises its stand
Post this judgment, RBI circulated another notice clarifying its revised stand:
It has come to our attention through media reports that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular DBR.No.BP.BC.104/08.13.102/2017-18 dated April 06, 2018. Such references to the above circular by banks/ regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India). As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from.
2. Banks, as well as other entities addressed above, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.
The draft Bill sought to prohibit mining, holding, selling, trade, issuance, disposal, or use of cryptocurrency in the country. Cryptocurrency is defined as any information, code, or token which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.
Under the draft Bill, mining, holding, selling, issuing, transferring or use of cryptocurrency is punishable with a fine or imprisonment of up to 10 years, or both.
A person must declare and dispose of any cryptocurrency in his possession, within 90 days from the commencement of the Act.
Proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
Post the Supreme Court’s Judgment overturning a blanket ban on crypto in 2020 imposed by the RBI, this is a much-awaited bill. Throughout 2021, it was expected the bill would appear on the agenda – the Monsoon as well as the Winter Session of Parliament. However, the government did make some progress in terms of consultation with Crypto and tax experts. The finance ministry formed a new committee to analyze if the incomes generated from trading cryptocurrencies could be taxed as capital gains or would they need to be classified under a newly created tax category.
February 1, Budget: Announcment: More towards taxation
- A new digital rupee powered by blockchain technology will be issued by the Reserve Bank of India starting 2022-23.
- Income from transfer of digital assets will be taxed at 30 per cent rate. This will impact gains from cryptocurrency and NFTs as well.
- No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income
- In order to capture the transaction details, the government has also provided for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold. Gifting of virtual digital asset is also proposed to be taxed in the hands of the recipient.
Budget Session 2022: Bill not included
The government has listed 15 new bills for the budget session of Parliament. However, the Cryptocurrency and Regulation of Official Digital Currency Bill does not appear.
As per a circular from the Lok Sabha, the Parliamentary Research and Training Institute for Democracies group is organizing a training this week on crypto and its effects on the Indian economy.
February 11, 2022: Cryptocurrency not legalized yet
Finance Minister Nirmala Sitharaman said in Parliament on February 11 that the government has not done anything to legalize or ban cryptocurrencies at this stage. “We have only taxed the profit emanating from the transactions,” she has been quoted in media.
Ms. Sitharaman stated, “The government has sovereign right to tax profit made from cryptocurrency transactions, and the decision on banning or not banning will be taken based on feedback from consultations. I’m not doing anything to legalize or ban cryptocurrencies at this stage. We have only taxed the profit emanating from the transactions.”
February 14, 2022: RBI’s new comment
Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, delivered a keynote address at the Annual Banking Technology Conference and Awards. He told that they examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny.
For the entire keynote address, please click here.
Here are the arguments from him that can make the crypto investors and enthusiasts worried:
Blockchain or Distributed Ledger Technology is a promising technology where Indians might have a global edge. Banning cryptocurrencies would affect the absorption of DLT technology in India.
Most major countries are not banning cryptocurrencies, but are considering some kind of regulation.
Many Indians have already invested in cryptocurrencies and banning it may lead to wealth loss for them.
Banning in any case is unlikely to be effective because by its very nature cryptocurrencies can be acquired and traded in an anonymous manner.
29. Cryptocurrencies are typically native to a blockchain. For instance, bitcoin is the native coin (or token) of the Bitcoin blockchain, or, ether is the native currency of the Ethereum blockchain. They can be used as units of account to settle transactions or they can be used as tokens to reward work done in the blockchain, say, for mining. Either of these two functions do not appear to be essential to the basic function of a blockchain. It should be possible to maintain a blockchain without any native cryptocurrency if transactions are authenticated centrally. Even in case of private authentication through consensus mechanisms, accounts can be kept and rewards can be given in any legal tender currency. In other words, creating native cryptocurrencies is just one way of implementing a blockchain; it can be viewed as just one use case of the blockchain technology. To argue that banning cryptocurrencies would stunt the absorption of blockchain technology is therefore akin to saying that banning human cloning would kill innovations in biotechnology or banning nuclear weapons would hurt nuclear physics as a discipline. There are many other uses of blockchain technology or more generally, distributed ledger technology, that do not involve creation of a virtual currency. Thus, claims that cryptocurrencies must be permitted for blockchain technology to thrive are not sustainable.
30. An argument often advanced against banning cryptocurrencies is that advanced economies (AEs) are not resorting to such bans. While replicating the practices followed in AEs is often an acceptable route to reforms, as far as cryptocurrencies are concerned, it has to be noted that India is not similarly placed as AEs. We should particularly be alert to the possibility that these private currencies can be used for global strategic control. If, for example, some private currency substantially replaces the Rupee, the corporate which manages that cryptocurrency (or the country which has control of that corporate) can practically control India’s economic policy. There are a number of other reasons why it might be in the interest of AEs to not ban them, as below.
Almost all cryptocurrencies are priced in terms of Dollars (or potentially any of the freely convertible currencies). Wider adoption would actually result in wider use of these currencies. So cryptocurrencies are not a threat to convertible currencies as they are to the Rupee, which is not an international currency. Following the example of AEs in the matter of cryptocurrencies would effectively amount to working against the interest of the national currency.
Most cryptocurrencies are owned by businesses of AEs; therefore, better adoption of cryptocurrencies would add to their growth and employment. Significantly, it might be of advantage to the AEs if cryptocurrencies replace emerging market (EM) currencies as that would give AEs a better strategic control on the EMEs.
AEs have more mature markets which can withstand the potential disruption from cryptocurrencies. They are, therefore, in a better position to wait and watch.
AEs have quicker legal systems and hence concerns of misuse of cryptos can be addressed through the legal systems. In India, on the other hand none of the major instances of consumer exploitation have been redressed legally (e.g., the mis-selling of derivatives in mid 2000s).
AEs have the political power to control the crypto companies. The recent instance where the US recovered bitcoins from the hackers of the oil pipeline in US, is an example that notwithstanding claims of non-traceability of cryptocurrencies, AE Governments wield enough power to access the records. India or most other countries would lack such advantages.
31. Another argument often advanced is that so many Indians have already invested in cryptocurrencies and banning cryptocurrencies would lead to a loss of wealth for them. There are three reasons such arguments do not appear justified. One, banning in India does not mean investors would lose money, because they can be provided with a reasonable exit. Two, persons who have invested in these instruments are fully aware of the risks involved. Reserve Bank has been warning investors of the risks for nearly a decade. That an Inter-Ministerial Committee of the Government has recommended banning cryptocurrencies was widely known for the last three years, as was the fact that cryptocurrencies are not regulated products and there are no investor protection norms in place. Investors who have acquired these instruments have done so with their eyes wide open, at their own risk and do not warrant any regulatory dispensation. Three, there is no data to justify how many investors have invested in these instruments and what is the amount of investment. Data informally gathered in November seems to indicate that crypto investments by Indians is nowhere near to being significant (although the pace of growth could make it a concern in future). This data showed9 that four out of five investor accounts10 held investments of less than Rs.10,000, with an average holding size of Rs.1,566. Wealth loss, if at all it is a possibility, is likely to affect only a small fraction of these investors.
32. Interestingly, concentrated ownership appears to be characteristic of cryptocurrencies. As a January 2021 report published in The Telegraph11points out: “According to industry data, around 13% of all Bitcoin sits in the hands of just over 100 individual accounts.” They are referred to “crypto whales”. Such concentrated ownership, usually by creators or initial investors, in what is touted to be (or at least hoped to be) the alternative monetary system, would make that system prone to manipulation.
33. That cryptocurrencies should not be banned because a ban is unlikely to be effective is a superficial argument. One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated. If cryptocurrencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest will essentially be carrying out an illegal activity. Such exceptions should reinforce the need for a ban, rather than invalidate it.