Cryptocurrency, especially Bitcoin, has gained popularity throughout the world. It is essentially a form of digital currency or cash that provides an opportunity to its users to make payments without the involvement of banks by utilising encryption technology. Cryptocurrency is like an asset that acts as digital money wherein the currency's ownership is stored, transferred and recorded using a computerised database and encryption technology to secure a transaction. Its main features include the non-involvement of a central authority/ bank to complete the transaction. In this manner, cryptocurrency uses a decentralised control that differentiates it from digital banking under the control of the Central Bank. Bitcoin was the first open-source software released in 2009, facilitating users to make payments through a private currency. Cryptocurrency works through Blockchain technology which acts as a transaction database. Blockchain enables the existence of cryptocurrency since it acts as a distributed ledger technology to maintain records of the transactions made using this digital currency. According to the draft National Strategy on Blockchain, 2021, Blockchain is a distributed ledger technology appropriate for sharing decentralised and transactional data across large networks. This technology removes the need for a central authority to validate the transactions over various networks. Transactions are validated by taking into account the record of transactions kept at each node of the network and the consensus of the participants.
In India, cryptocurrency has become especially popular since demonetisation in 2016, after which the volume of the Indian rupee being traded in cryptocurrency was the highest. Nonetheless, cryptocurrency suffers from various drawbacks such as unreliability, uncertainty, lack of regulatory authority, taxation of cryptocurrency, and speculation. There is no law governing cryptocurrency in India but attempts have been made to regulate it.
Regulation of Cryptocurrency in India
In India, cryptocurrency has been met with reluctance on the part of governmental bodies, especially the Reserve Bank of India (RBI). On 24 December 2013 had issued a press release to warn the users, holders and traders of digital currencies of the potential legal, financial, security and consumer protection issues arising from its use. The press release highlighted the absence of an established regulatory framework and a central authority to control these transactions or redress consumer disputes and grievances. The RBI cautioned the public of high volatility in the value of cryptocurrencies which increases the risks associated with its use. Additionally, it was stated that virtual currencies are prone to illegal and illicit intervention, losses due to hacking, malware attacks etc. It also makes money laundering easier.
Two additional press releases in 2017 were also issued by the RBI reiterating the risks and issues associated with virtual currencies and even clarified that it has not authorised any entity or organisation to operate schemes or deal with cryptocurrency.
Bills proposed to regulate cryptocurrency
The Union government, in November 2017, set up an Inter-Ministerial Committee to formulate drafts of legislation governing digital currencies. The Committee first recommended the Crypto-token Regulation Bill, 2018. This Bill did not propose a complete ban on the use of cryptocurrency but recommended regulation of sale and purchase of these currencies, whether individually or through a broker. Further, the Bill also laid down a prohibition on persons dealing in cryptocurrency from falsely presenting it as securities or investment schemes because of the lack of a regulatory framework. However, these proposals of the Committee were not accepted and, the Bill lapsed.
Subsequently, a second draft Bill, titled the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, was recommended. This Bill entailed an absolute ban on the use of cryptocurrency as legal tender. Sale, purchase, mining, holding, issuance, and otherwise dealing in cryptocurrency was also prohibited. The use of digital currency as a medium of exchange, unit of account or store of value was also not allowed. One could not even trade with Indian or foreign currencies as a basis of credit or for raising funds. The Bill also provided for penalties and offences committed concerning cryptocurrency and its use. It also proposed the introduction of a new digital rupee by the RBI that would act as a legal tender.
Supreme Court quashed the ban imposed by RBI on cryptocurrency
The RBI released a circular on 6 April, 2018 imposing a complete ban on dealing in virtual currencies. In this circular, the RBI directed all entities governed by it to stop facilitating any person in dealing with cryptocurrencies. As a result, all individuals or entities involved in the sale and purchase of cryptocurrencies were barred from operating them. This led to a great decline in the exchange of digital currencies, and many businesses suffered losses.
The RBI circular was challenged before the Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India. The Court quashed the ban imposed on dealing in cryptocurrency in light of the freedom of an individual to practice any profession, trade, business and occupation of his choice guaranteed under Article 19(1)(g) of the Constitution. The Court agreed to the fact that virtual currencies are not a widely accepted medium of exchange, but nonetheless, they have the potential to develop a new and parallel system to money currency, and thus RBI has the authority to regulate its use. The Court held that the impugned circular negatively impacts businesses of all persons engaged in the exchange of cryptocurrency and thus, violated their fundamental right under Article 19(1)(g). Furthermore, the Court also took into consideration that the RBI could not substantiate its claims of any actual harm or loss suffered by it using any data. Thus, the basis of prohibitions imposed by RBI is insufficient and uncorroborated.
The Cryptocurrency and Regulation of Official Digital Currency Bill is set to be introduced in the Lok Sabha in its upcoming session. It seeks to provide for a framework that facilitates the creation and operation of digital currencies to be issued by the RBI. All private cryptocurrencies are prohibited under this Bill except for the promotion of the underlying technology used in cryptocurrency. Although the Bill is a welcome measure, the ban on private trading of cryptocurrency is being heavily criticised. This will ensure a complete monopoly of the RBI on dealing in virtual currency and largely affect businesses in India, considering that India contributes about 2-10% of the world's virtual currency market, which amounts to the US $430 billion.
While the provisions of the Bill are yet to be brought into the public domain, it is being treated as a positive measure as experts believe it is better than a complete ban on the same.