17 October, 2019
Cryptocurrencies are digital representations of value created by means of cryptography and are intended to secure financial transactions or transfer of assets. The treatment and regulation of cryptocurrencies in India can be broadly segregated into two time periods:
(a) Pre-April, 2018; and
(b) Post-April, 2018.
While the Pre-April, 2018 period accounted for a rise in cryptocurrency trade in India, development of cryptocurrency trading markets and had limited governmental or regulatory oversight, the Post-April, 2018 period witnessed a complete prohibition on transactions involving cryptocurrencies in India and a consequent shut-down of cryptocurrency trading markets and aggregators. This note provides a brief overview of the regulatory regime governing cryptocurrencies in India and the proposed legislative measures contemplated by the Government of India (“GOI“).
Developing position of the Reserve Bank of India (“RBI”)
It would be safe to say that the RBI and other governmental and regulatory authorities in India never held a positive approach towards trade, use or development of cryptocurrencies in India. On December 24, 2013, the RBI issued a press release, wherein for the first time, users, holders and traders of cryptocurrencies were cautioned of the potential risks associated with the same. Following the release of this press note, various cryptocurrency aggregators operating in India shut down their operations. In February 2017 and December 2017, the RBI once again cautioned users of cryptocurrencies and explicitly stated that no licenses had been granted to operators trading in cryptocurrencies in India.
A subsequent white paper released by the RBI provided a greater insight into how the GOI and regulatory authorities intended to treat cryptocurrencies in India.
The white paper released in 2017 noted that cryptocurrencies were volatile in nature, were not backed by any authority and lacked any intrinsic value. The RBI also noted that the use of cryptocurrencies could be a potential threat to the Indian monetary policy. The white paper however did highlight the benefits associated with use of block-chain technology and recommended the development of an official national digital currency, similar to the model adopted by Canada.
After years of issuing advisory press releases to users and holders of cryptocurrencies in India, the RBI took a definitive stand on the issue in 2018 and through a notification dated April 06, 2018, prohibited all entities regulated by the RBI from dealing in virtual currencies or providing services to facilitate any transaction involving virtual currencies. Such services, as per the notification, included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with cryptocurrencies and transferring / receiving of money in accounts relating to sale or purchase of virtual currencies. The RBI directed all entities that were engaged in these services to cease activities within a period of three months from the date of the notification.
Position of the GOI
The GOI constituted a high-level Inter-ministerial Committee (“IMC“) on November 02, 2017 to study issues related to cryptocurrencies. The IMC was given the mandate of examining the policy and legal framework required for the regulation of cryptocurrencies in India. The IMC released its report on February 28, 2019 wherein it categorically noted that there was no underlying intrinsic value attributable to private cryptocurrencies and that these should not be allowed. While the analysis of the IMC primarily revolved around treatment of private cryptocurrencies as legal tender in India, the recommendations included in the report were significantly broader and suggested that all cryptocurrencies, except those issued by the GOI be banned in India. The IMC also recommended the introduction of an official digital currency in India by the RBI.
In view of these recommendations by the IMC, the GOI proposed the introduction of a legislation banning the use of cryptocurrencies in India. A draft of the ‘Banning of Cryptocurrencies and Regulation of Official Digital Currency Act, 2019’ (“Crypto Bill“) was included with the report of the IMC and prohibits any person from mining, generating, holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrency in the territory of India. A cryptocurrency has ben defined to mean “any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.“
The Crypto Bill prohibits the direct or indirect use of any cryptocurrency (a) as a payment system under the Payments and Settlements Systems Act, 2007; (b) to buy or sell or store cryptocurrency; (c) to provide cryptocurrency related services to consumers or investors; (d) to trade cryptocurrencies with Indian currency or any foreign currency; (e) to issue cryptocurrency related financial products; (f) as a basis of credit; (g) as a means of raising funds; and (h) as a means of investment.
The draft legislation proposes imprisonment for a term of up to ten years for anyone involved in the above mentioned activities in relation to cryptocurrencies.
Position of the Supreme Court of India (“SC”)
A number of cases have been filed before the SC against the notification dated April 06, 2018 issued by the RBI. These cases challenge the power of the RBI to impose prohibitory orders on otherwise legitimate businesses, prior to a determination of legality by the parliament. It has been argued before the SC, that the notification issued by the RBI, restricting banks from providing services to cryptocurrency businesses is a colourable exercise of power, in the guise of consumer interest and must be struck down. The arguments in this matter are presently underway and the Internet and Mobile Association of India, one of the petitioners has contended before the SC that the action of the RBI in passing the notification dated April 06, 2018 was ultra-vires its powers set out in the Banking Regulation Act, 1949. The argument of the petitioner is based on the reasoning that since the RBI itself admits that a cryptocurrency is neither a coin nor a currency of legal tender, the RBI does not have any powers to regulate it under the RBI Act, 1934 or under the Payment and Settlement Systems Act, 2007. The arguments before the SC have not been completed and the matter has been posted for August 20, 2019.
In a separate proceeding initiated before the SC in relation to the treatment of cryptocurrencies in India, the GOI has submitted a copy of the report issued by the IMC with the SC and has indicated that it proposes to introduce a legislation governing cryptocurrencies in the winter session of the parliament. This matter has now been posted for hearing in January, 2020 and hearings will commence once the winter session of the parliament has concluded.
Roadmap Ahead:
The RBI ban imposed on cryptocurrency exchanges and related businesses from having access to banking channels in India has already resulted in a number of entities closing down their operations over the course of the last year. This, coupled with the release of a draft bill which proposes to criminalize the use and trade of cryptocurrencies in India, has resulted in a drop in cryptocurrency trade, holding and interest in India.
While the future looks bleak for private cryptocurrencies in India, related features including block-chain technology and distributed ledger technology seem to hold favour with the GOI. The IMC report noted that the development of the distributed ledger technology must be the focus of regulatory authorities in India. The GOI also seems to be in favour of launching an official digital token or virtual currency that will be regulated by the RBI. A fair amount of regulatory clarity will however only be achieved post conclusion of the winter session of the parliament where the GOI proposes to introduce the Crypto Bill.
For further information, please contact:
Adoksh Shastry, Partner, AZB & Partners
adoksh.shastry@azbpartners.com
