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Legality of cryptocurrency in India and RBI’s recent guidelines to banks

It is known that there is little clarity as far as cryptocurrency regulations in India are concerned. What one needs is a well-structured framework along with the knowledge of the digital currency.

With the increasing technology there’s also seen big development in the Fin-Tech sector. With the gaining popularity and awareness of online trading it’s majorly used by people in India. The popularity of virtual currencies such as Bitcoins, Ethereum, Doge, etc, has considerably increased both in India and globally. No wonder, more people have starting investing and giving their valuable time and money in these virtual currencies. According to media reports, there are various platforms where people can buy and sell these cryptocurrenices in India: Wazirx and CoinDCX. These trading platforms however claim that there are between 60 lakh to 1 crore cryptocurrencies holder in our country with the holdings of over Rs 10,000 crore. However, according to various media reports around 7 million Indians have already invested in over $1 billion into these cryptocurrencies. This increase in the growth of cryptocurrencies is tremendous which cited that it estimated that Fin-tech sector will grow tremendous in India in future which predicates India’s GDP will increase by additional $730 million by 2025 from Fin-tech itself.

WHAT ARE CRYPTO-CURRENCIES?

A cryptocurrency is a form of digital asset which is not issued by central government but designed to stimulate as a medium of exchange, that is secured by cryptography. These currencies are decentralized and non-administered that is based on blockchain technology. A blockchain technology is like a type of database, a database where collection of information that is stored electronically on a computer system. It means that this technology that is suitable for decentralized and transactional data shared across a large network around the world. This technology also allows distributed software architecture capable of finding concurrence on their shared without need to establish online trust with any participant. This eliminates any circulation of third party to validate transactions person-to-person.

WERE CRYPTOCURRENCIES EVER BANNED?

When cryptocurrencies started to rose up in India in 2017, investors were relishing upon them. But there illicit activities that happened by which people’s took undue advantage of it. Since from this time to curb these illicit activities, the government took measures which seen when in 2018 Finance Ministry followed by RBI released a statement which illustrates that “The government doesn’t consider cryptocurrencies as a coin” and they will take all necessary steps to eliminate the use of crypto assets in financing “illegitimate acts” and also the government will explore the use of blockchain technology. It was suggested by tem that all entities governed by them stop offering any kind of service to entities associated with virtual currencies.

KEY TAKINGS FROM THE GOVERNMENT STATEMENT

1) The government was never against this technology, they only intended to prevent the wrong usage of cryptocurrencies and blockchain by people.

2) It was clarified by the government that it nowhere mentioned that buying and selling or holding cryptocurrencies were prohibited.

3) They said that they don’t consider it as a part of the payment system. Meaning one can’t use crypto to buy and sell things; however, they never said it couldn’t be held as an asset.

RESERVE BANK GUIDELINES

With the enormous usage of cryptocurrencies within India and its potential revenue loss, the Government of India, the regulators and authorities began to take notice and as a consequence, in 2013 the Reserve Bank of India had issued a press release, admonishing to the public against dealing in virtual currencies including Bitcoins. In the year 2017, the Government of India did a high-level Inter-Ministerial Committee to report on various issues pertaining to the use of virtual currency and subsequently, in July 2019, this Committee submitted its report recommending a blanket ban on private cryptocurrencies in India. Despite of the fact Reserve Bank of India framed and issues certain guidelines to the Banks such as commercial, co-operative, small finance, payment banks etc, to not accept or deal in virtual currencies but also direct them to stop providing services to all entities which dealt with virtual currencies. This thus broke down the crypto industry as these exchanges needed banks services for sending and receiving money. It necessary for crypto industry that bank support it as it created a difficulty in exchange crypto in money, money which uses to buy accessories and paying for different services etc.

However, the whole scenario changed when on 4th March, 2020, when the Apex Court of India i.e. Hon’ble Supreme Court of India, quashed the earlier ban on crypto by Reserve Bank of India. The court examines the matter from the perspective of Article 19(1) (g) of the Indian Constitution. According to Article 19(1) (g) it specifies the freedom to practice any profession or to carry on any occupation, trade or business and Doctrine of Proportionality.

LEGAL POSITION OF CRYPTOCURRENCIES IN INDIA

The pattern of cryptocurrency of reluctance exhibited by India is evident through various events as:

RBI Press Releases: This press release on December 24th, 2013, when Reserve Bank of India, in a press release cautioned users, holders and traders about virtual currencies such as Bitcoins, dogecoins etc, and the risk related to it.

CONCERNS DEFINED BY RBI IN A PRESS CONFERENCE

• That there was no authorized central agency which regulates such payments.

• That there is no established framework for dispute solving.

• Digital wallets which have no regulation are prone to hacking, loss of passwords, cyber attacks etc.

• High scope of illicit activities and unintentional money laundering activities etc.

BILLS PROPOSED BY INTER-MINISTERIAL COMMITTEE

On November 2, 2017 the centre constituted an Inter-Ministerial Committee which introduced two bills. However, neither of two bills implemented.

• Crypto-token Regulation Bill, 2018.(First draft Bill)

• Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (Second draft Bill).

CRYPTO-TOKEN REGULATION BILL, 2018

It recommended:

(i). It prohibits persons dealing with activities related to crypto tokens or coins from falsely posing these as not being investments due to gap in the existing regulatory framework.

(ii). It regulated Virtual Currencies exchanges and brokers where sale and purchase may be permitted.

Banning of Cryptocurrency and Regulation of Official Digital Currency ban Bill, 2019:

It proposed to ban usage of Virtual currencies as legal tender.

Further, mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency in the country would be prohibited.

It specifies the use of cryptocurreny: It as a medium of exchange and payment. It provides cryptocurrencies related services to customers and investors and tech-persons for registration, trading and selling etc, and also as a basis of credit etc.

Imposition of a ban:

The Reserve Bank of India, on its press releases on April, 2018 directed that RBI shall not deal in virtual currencies. However the Hon’ble Supreme Court soon on March 4, 2020 comes with their views on this issue cited in a judgment named: Internet & Mobile Association of India vs. RBI

This judgment which was given by Hon’ble SC had a three-judge bench who lifted the ban imposed by the RBI Circular. The court principally examined the matter from the perspective of Article 19(1) (g) of the Indian Constitution. This judgment based on two issues, firstly It had been contended by the net and Mobile Association of India that RBI lacked jurisdiction to forbid dealings in cryptocurrencies. It also had been argued that cryptocurrencies can’t be equated with money as they weren’t money in its real sense. The court however also analyzed the definition of cryptocurrencies given by various regulators, government etc. On this the court held that these virtual currencies weren’t accepted mode of exchange and that they could also not be considered a final discharge of debt. Therefore, court determined as they didn’t perform 4 functions then they can’t be termed as tender. However, it had been acknowledged that Virtual Currencies have the potential to make a parallel system albeit they might not strictly be equated to currency and thus, in such a scenario the RBI can invoke its power to manage it. The court also talked about this circular of RBI didn’t protect the interests of the general public generally and also violated the Article 19(1) (g) of the Indian Constitution. Hence, it disproportionately affected the livelihoods of individuals dealing in cryptocurrencies. it had been argued that the measure by RBI was extreme and doesn’t pass the test for proportionality. It also said that reserve bank of India circular adversely impacted the business of exchanges that addressed cryptocurrencies.

CRYPTOCURRENCY AND REGULATION OF OFFICIAL DIGITAL CURRENCY BILL, 2021

A concern in the Fin-tech industry was in debate from a long time but the introduction of this new bill on cryptocurrencies by the Parliament which facilitates a framework for the creation of official digital currency to be issued by the RBI. The main proposal is to ban all private cryptocurrencies in India. However it allows surely exceptions to market the underlying technology of cryptocurrency and its uses.

CONCERNS ASSOCIATED WITH THE NEW BILL

• This new Bill takes due cognizance of what has been a long-standing within the area of cryptocurrencies.

• It aims to completely ban cryptocurrencies.

• The most concern is that if new bill imposes a ban on private cryptocurrencies.

• It can cause formation of an underground market wherein genuine investors could also be forced to operated in unmonitored environments.

RBI NEW CIRCULAR TO BANKS REGARDING INVESTING OF PEOPLE IN CRYPTOCURRENCIES

The Reserve Bank of India on June 1st, 2021 issued a clarification circular to the banks in the light of India’s biggest banks like HDFC Bank Limited & SBI Card as they had been sending cautionary electronic mails and messages to their customers against dealing in cryptocurrencies, where they gave the reference of RBI circular of 2018. That RBI circular mentioned that it prohibited dealing in cryptocurrenices. But as we all know that this RBI circular banning cryptocurrencies was later quashed by the Supreme Court order. That’s why in its new circular RBI clearly stated that its 2018 circular no longer stands and said to banks that they can’t stop people investing in cryptocurrencies.

RBI on the other hand also recommended due-diligence which was shown by banks on the matter as KYC. However the Supreme Court has scrapped RBI circular of March, 2020.

CONCLUSION

It is known that there exists a scarcity of clarity with cryptocurrency regulation in India. A framework requires with a well-structured framework associated with the knowledge of cryptocurrency. Nowadays it’s crucial to know and know the cryptocurrencies which has gained global momentum. We have seen how Bitcoin had an enormous boost in valuation in 2020, as a result of which new investors inclined towards it. Therefore, it can’t be examine whether on cryptocurrency is good or bad once we see different developments everywhere the world.

A cryptocurrency is a form of digital asset which is not issued by the Central government but designed to stimulate as a medium of exchange, which is secured by cryptography. These currencies are decentralised and non-administered that is based on blockchain technology. A blockchain technology is like a type of database, a database where collection of information that is stored electronically on a computer system. It means that this technology is suitable for decentralised and transactional data shared across a large network around the world.

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