By Sayantika Ganguly on January 2022
The regulation of virtual currencies (“VCs”) has encumbered a chequered history throughout the world and India is no exception. The Indian government has been moving back and forth between the decision of completely banning all VCs to introducing stringent regulations. While a bill was to be introduced in the 2021 winter session of the Parliament, it hasn’t been tabled as of date. With new developments happening almost every day, this post aims to capture the journey of VCs in India thus far.
1. Developments between 2013-2018
|2013||VCs garnered focus in India in 2013 when the Reserve Bank of India (“RBI”) took note of the risks involved with them in its Financial Stability Report. The report states that developments in the VC space bring new challenges and regulators are studying the impact to determine potential risks. This was followed by a press release dated December 24, 2013 wherein the RBI cautioned against the risks of using VCs.|
|2016||In the December 2016 Financial Stability Report, the RBI stated that “fast paced innovations such as VCs have brought risks and concerns about data security and consumer protection on one hand and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand.”|
|2017||A press release dated February 01, 2017 was issued by the RBI cautioning the public against the use of VCs. In April 2017, an Inter-Disciplinary Committee was constituted by the Ministry of Finance to submit a report on the status of VCs. This report was submitted on July 25, 2017 and recommended warning the public that (i) VCs are not considered legal tender, and (ii) all activities being carried out by exchanges and by individuals must be stopped. Interestingly, the committee recognised the utility of blockchain technology even back then. This was followed by another similarly worded press release dated December 05, 2017. Two writ petitions were filed before the Supreme Court of India (“SC”) with one of them seeking a complete ban on VCs and the other to consider the prohibition/regulation of VCs. On November 13, 2017 notices were issued in both petitions. Both these cases are presently pending before the SC.|
|2018||On March 05, 2018, the Central Board of Direct Taxes submitted a draft scheme to the Department of Economic Affairs proposing a structured ban on VCs. On April 05, 2018, the RBI issued a statement directing entities regulated by it (i) not to deal with or provide services to any individual or business entities dealing with or settling VCs; and (ii) to exit the relationship, if they already have one, with such individuals/business entities dealing with or settling VCs. This was followed by a circular on April 06, 2018 (“2018 Circular”) reiterating the contents of the April 05 statement. Prohibited activities included 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. Regulated entities already providing such services were directed to exit within three months from the date of the 2018 Circular. 2018 Bill: An Inter-Ministerial Committee submitted a draft bill known as the Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018. This bill was never introduced in the Parliament|
3. Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (“Draft Bill”)
The Draft Bill was part of an Inter-Ministerial Committee Report released on February 28, 2019 and was a step-in line with the aim of the government to ban VCs. The report, while highlighting the various beneficial use-cases of the distributed ledger technology, cautioned the government against permitting private VCs. The primary areas of concerns were:
- VCs are not backed by a sovereign entity;
- They hold no intrinsic value. Neither do VCs function as a store of value nor as a medium of exchange;
- VCs show extreme fluctuations in prices, often influenced by unrelated forces;
- Lack of accountability can result in illegal transactions that can even impact the security and sovereignty of India.
In view of the above, the Draft Bill sought to impose a complete ban on any and all VC transactions in India. Some key provisions were:
- Cryptocurrency was defined under Section 2(a) of the Draft Bill as any information or code or number or token, generated through cryptographic means or otherwise, providing a digital representation of value and having utility in a business activity, or acting as a store of value, or a unit of account. However, this definition explicitly excluded any official digital currency, including a Digital Rupee or an official foreign digital currency as may be notified by the RBI.
- Section 3 of the Draft Bill imposed a blanket prohibition on all activities that could possibly be undertaken via cryptocurrency, whereunder specifically included were the activities of mining, generating, holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrencies. Section 7 further prohibited cryptocurrency activities such as usage as a payment system, buying or selling cryptocurrencies, providing cryptocurrency related services to consumers or investors, trading, issuing, or using as a form of investment, etc. The use of cryptocurrencies for the purpose of research or teaching remained permitted.
- The Draft Bill also made mining, holding, selling, issuing, transferring or use of cryptocurrency punishable with a fine or imprisonment of up to 10 years, or both. The act of promotion or advertisement of cryptocurrencies had also been made punishable by fine or imprisonment which may extend up to seven years or both. The Draft Bill was however, like its 2018 counterpart, never presented before the Parliament.
4. Internet and Mobile Association of India v. Reserve Bank of India – A Summary
On March 8, 2020, the SC delivered a landmark judgement bringing relief to the VC ecosystem, especially investors and exchanges across the country. The petitioner, Internet and Mobile Association of India (“IMAI”), is a body constituted to protect the interests of those involved in the digital services industry. It challenged the constitutionality of the 2018 Circular of the RBI.
IMAI submissions: The submissions by the petitioner were primarily founded upon the following grounds:
- The regulation of VCs is outside the purview of the RBI as these do not constitute legal tenders or payment systems so as to be regulated under the Banking Regulation Act, 1949 or the Payment and Settlement Systems Act, 2007 (“PSS Act”). VCs do not qualify as money, as they do not fulfil the four characteristics of money namely medium of exchange, unit of account, store of value and constituting a final discharge of debt.
- The RBI does not have the power to impose a blanket ban in the interest of the public.
- Assuming that RBI does have the power, the mode of exercise of such power needs to be tested upon the proportionality, application of mind, malice in law, etc.
- A total prohibition falls foul of the restrictions under Article 19(6) of the Constitution of India.
RBI submissions: The counsel for the RBI made the following submissions:
- The RBI is within its powers to regulate VCs.
- The 2018 Circular and statement are not violative of any fundamental rights of the petitioner.
- Highlighted the dangers behind usage of VCs such as lack of accountability and potential of being used in illegal activities.
- The action taken by RBI is not disproportionate in nature as it gave three months to the stakeholders to comply with the 2018 Circular. This is apart from the repeated cautions issued by RBI since 2013.
- The SC held that the RBI Act, 1934, the Banking Regulation Act, 1949 and the PSS Act cumulatively recognize and confer very wide powers upon RBI. These powers essentially include regulation of the financial system of the country, operation of the currency and credit system of the country to its advantage, issuing directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country, etc.
- With respect to the contention that VCs do not constitute a legal tender, the court highlighted that what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. The court stated that though VCs are not recognised as legal tender, they are still capable of performing some or most of the functions of real currency.
- The court held that if an intangible property can, under certain circumstances, act as “money”, the RBI can definitely take note of it and regulate it. The court further observed that anything that might have an impact on the financial system of the country squarely falls under the purview of the RBI.
- The court also observed that RBI has power to regulate VCs under the overall scheme of the PSS Act. Citing Section 18 of the PSS Act the court held that RBI has the power to frame policies and issue directions to banks who are system participants.
- Mode of exercise of power – The court refuted the contention of the petitioners that there was no application of mind or a colourable exercise of power. It was held that the RBI has power under Section 35A(1) of the Banking Regulation Act, 1949 to safeguard the public interest. Further, the 2018 Circular cannot be viewed in isolation. The RBI had released reports and circulars in the past highlighting the dangers of VCs and warning traders and users of its risks. It cannot be said that there was no application of mind by the RBI before the impugned circular was issued.
- Proportionality and Article 19(1)(g) – The court observed that severing the banking channels of a business is equivalent to severing its lifelines, thereby resulting in trade or business automatically shutting down. Consequently, the SC conferred the burden on the RBI to demonstrate that larger public interest warranted such a serious restriction. The court then went ahead and created a distinction between those who engage in buying and selling VCs just as a hobby and those who trade in them as their occupation and/or operate exchanges. It stated that only the latter would come under the protection of Article 19(1)(g). The SC further opined that the traders of VCs were only partially impacted by the 2018 Circular but crypto exchanges were significantly hit.
The SC then concluded that the RBI has power to regulate VCs, both in the form of preventive and curative measures, under various legislations. However, the “availability” of powers is different from the “manner and extent” to which it can be exercised. The court observed that while the RBI had conceded that it had not banned VCs, it cut-off the functioning of crypto exchanges without evaluating the extent of damage caused. It finally held that in the absence of any evidence of damage caused by crypto exchanges, a complete ban is a disproportionate use of the RBI’s powers. Consequently, the 2018 Circular was set aside.
5. Developments in 2021
|March||A Ministry of Corporate Affairs notification dated March 24, 2021 mandated companies to disclose their VC transactions, including profit or loss on VC transactions, amount of VC held at the reporting date, and deposits or advances from any person for the purpose of trading or investing in VC.|
|May||Vide circular dated May 31, 2021 the RBI asked banks not to deny banking services to customers dealing in VCs basis the 2018 Circular. In absence of any regulation in the space, the RBI advised platforms to carry out customer due diligence processes such as KYC, AML and ensure compliance with FEMA.|
|October||The month of October witnessed the highest VC ad volumes on television.|
|November||VC investments hit the $10 billion mark in November 2021. Parliamentary Standing Committee on Finance met stakeholders to discuss concerns regarding the proposed regulation.|
|December||The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021|
was to be tabled in the Parliament during the winter session of 2021. However, it wasn’t. News reports state that the bill is still awaiting cabinet clearance. Reports also state that RBI is against the regulation of VCs and is more inclined towards a ban.
The uphill journey of the Indian crypto ecosystem is far from over. While an outright ban may not be in the best interest of stakeholders given the large amounts of money that has already been invested in the sector, regulating transactions may also be tough. The predominant difficulty arises from the inability to categorize VCs into a pigeonhole and then implementing existing (or even new) legislations on it. The longer the government takes to introduce regulations, the lesser the chances for the crypto ecosystem to attract foreign capital. In our view, some key points that all stakeholders should consider are:
- Formal, structured and transparent discussions should take place between industry, government, law enforcement and policy makers. It is important for everyone to be on the same page as much as possible else we will see more instances where law enforcement officials and regulators will act prejudicially to the interest of the VC ecosystem. Clarity on taxation is certainly the need of the hour.
- Consider treating VCs as “technology” first before attempting to classify it as “asset” or “currency”. The regulators should try to think out of the box and not try to compartmentalize VCs into buckets of what already exists.
- Given the dynamic nature of technology, it would be more prudent to have a soft touch, principle-based regulatory framework governing VCs. This will lend much-needed stability to the sector.
- Enforce stringent know your customer and anti-money laundering norms.
- Till a statute is not passed by the parliament (which seems unlikely even for 2022), the Ministry of Finance and RBI should review the self-regulatory rules presently followed by exchanges so that the exchanges can be as compliant as possible with the letter and spirit of the regulators’ expectations.
- Embrace blockchain across as many government departments as possible so that the interplay of VCs and blockchain can be understood by regulators and bureaucrats through practical experience.
 Reserve Bank of India, Financial Sector Regulation and Infrastructure, https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=709, Last Accessed on December 20, 2021
 Reserve Bank of India, RBI cautions users of virtual currencies against risks, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247, Last Accessed on December 20, 2021
 Financial Stability Report December 2016, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR_166BABD6ABE04B48AFB534749A1BF38882.PDF, Last Accessed on December 20, 2021
 Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No. 373 of 2018
 Reserve Bank of India, Prohibition on dealing in virtual currencies, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243, Last Accessed on December 20, 2021
 https://prsindia.org/billtrack/draft-banning-of-cryptocurrency-regulation-of-official-digital-currency-bill-2019, last accessed on December 21, 2021
 MCA amends Schedule III of Companies Act on disclosure norms in financial statements, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1744542, Last Accessed on December 30, 2021
 October registered highest cryptocurrency ad volumes on television during July-Nov 2021, https://www.financialexpress.com/brandwagon/october-registered-highest-cryptocurrency-ad-volumes-on-television-during-july-nov-21-report/2393871/, Last Accessed on January 19, 2022
 Indian investment in cryptocurrency hits $10 billion this week, https://economictimes.indiatimes.com/tech/technology/indian-investment-in-cryptocurrency-hits-10-billion-this-week/articleshow/87446976.cms Last Accessed on January 19, 2022
 India ends Winter Session of Parliament with no crypto bill in sight, https://www.businessinsider.in/cryptocurrency/news/no-india-crypto-bill-in-sight-even-after-winter-session-of-parliament-comes-to-a-close/articleshow/88449161.cms, Last Accessed on January 17, 2022
 After raising hopes, India puts off framing cryptocurrency policy, https://qz.com/india/2104075/what-is-the-current-status-of-indias-cryptocurrency-bill/, Last Accessed on January 17, 2022