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Key Takeaways

  • Cryptocurrency or crypto can be defined as a collection of binary data which is designed to work as a medium of exchange.
  • The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users.
  • Japan has a favorable environment for cryptocurrencies and recognizes Bitcoin and other digital currencies as legal property under the Payment Services Act (PSA). China on the other hand has banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and facilitation services were asked to shut down.
  • The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (‘Cryptocurrency Bill, 2019’) was formed, it raises certain issues like whether holding, selling, disposing of, or any kind of trade through cryptocurrencies in India is to be considered legal or not. The current legal position of cryptocurrency in India is ambiguous, it has not been out rightly banned, but it cannot be classified as legal either.
  • In India, the fate of crypto is still unsure. Experts project that India will most likely allow the use of government-issued digital currency, due to the security concerns of private players.

Introduction

Cryptocurrency or crypto can be defined as a collection of binary data which is designed to work as a medium of exchange. The individual ownership records are stored in a computerized database. The use of cryptography secures transactions, controls creation of new coins, and verifies ownership and transfer. The Cryptocurrency Bill, 2019, defined the term ‘cryptocurrency’ as “any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value, or functioning as a store of value in a financial transaction.” Cryptocurrency does not exist in a physical form, like paper money, and it's not issued by a national authority. It is a virtual decentralised currency, that works on block chain technology. Bitcoin released the first open-sourced decentralized crypto in 2009, after which many other currencies were created.

By its design, block chain is resistant to any unwarranted change and is highly observable. Data once recorded can’t be block chain altered retroactively. It functions over a peer-to-peer network, adhering to a protocol for validating new blocks. While the introduction of cryptocurrency has made strides in how business can be done, governments have been cautious to adopt these techniques. Since cryptocurrency lacks any central governing mechanism, its subsequent regulation is a task for governments. Regulators in several countries have warned against cryptocurrency and some have taken measures to dissuade users. The exercise of such caution is due to the relatively new nature of the technology and many countries are also menaced by crypto-scams. Governments are additionally less enthusiastic to support it since it has many black-market applications.

International Status of Cryptocurrency

Most countries do not have a concrete stand on cryptocurrency. While some oppose, others are opening up to the idea of cryptocurrency. These opinions depend on their personal cost-benefit analysis of the technology. The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The United States, Senator Elizabeth Warren, has addressed a letter to SEC Chairman, asking for answers to a series of questions related to cryptocurrency regulation. Warren sees the increased use of cryptocurrency as a risk to consumers. They are wary of the lack of a regulatory framework for cryptocurrency. Wallstreet has also increased its exposure to the crypto market. The SEC’s current stand on cryptocurrency is friendly, though no regulatory framework exists yet.

Europe is the world's biggest cryptocurrency economy, and the European Commission is working on regulation for cryptocurrency.This has included draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU. France is recommending that cryptocurrency be regulated with the same money laundering and KYC requirements as other financial institutions.

Japan has an especially conducive environment for cryptocurrencies and recognizes Bitcoin and other digital currencies as legal property under the Payment Services Act (PSA). Recent regulations include amendments to the PSA and to the Financial Instruments and Exchange Act (FIEA), which took effect in May 2020, togetherthey cover both businesses and cryptocurrency providers. These added the term “crypto-assets” replacing “virtual currency”, and provided greater restrictions on managing users’ virtual money. Crypto-exchanges in Japan have to be registered and comply with Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT) obligations.

El Salvador made headlines when it became the first country to adopt Bitcoin as legal tender. The transactions happen over a local app, the holder of the wallet can use it to pay for services, to buy and sell products, and to make transfers to bank accounts without paying commission fees. The parliament has said that "any economic agent must accept bitcoin as a form of payment when it is offered by the person who acquires a good or service." This means, legally any service payable in dollars will also be payable in bitcoin. Shortly after, Cuba was the second country to accept crypto as a legal tender. Under Resolution 215, the Central Bank of Cuba now will recognize and regulate cryptocurrencies.

On the opposite side of cryptocurrency,the debate lies in China. Going against the grain, cryptocurrency-related activities receive little tolerance from the Chinese government. China has banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and facilitation services were asked to shut down. Under the ban, such institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrency, such as registration, trading, clearing, and settlement, etc. All crypto-transactions were made illegal, and before the ban, there was already heavy regulation on the use of cryptocurrency in China. But after the ban, many exchanges chose to relocate to jurisdictions that are more favorable to cryptocurrencies than China. The ban coincides with the news of China introducing a digital version of its own currency. Turkey has similarly banned the use of cryptocurrency. In Russia, though cryptocurrencies are legal, purchasing goods with a currency other than the Rubel is illegal.

Cryptocurrency in India

The Reserve Bank of India was historically not in favor of the use of cryptocurrency, in the Indian economy. The country has proceeded cautiously with it. In 2013, the RBI expressed concerns regarding the legal and security aspects associated with virtual currencies. Then in 2017, an inter-ministerial committee was formed to study the risks of cryptocurrency in India, and to propose specific action, if any. Their analysis report was published in 2019, and it recommended a complete ban on cryptocurrencies in India. Pursuant to this the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (‘Cryptocurrency Bill, 2019’) was formed, it raises certain issues like whether holding, selling, disposing of, or any kind of trade through cryptocurrencies in India is to be considered legal or not. The current legal position of cryptocurrency in India is ambiguous, it has not been out rightly banned, but it cannot be classified as legal either, as it has not been approved by any central legislation. Bitcoins and other cryptocurrencies are beyond the purview of legal regulation in India. Due to this crypto transactions are risky, as they do not have the requisite legal recourse available.

But some recent judgments and political chatter indicate that India may not adopt the path taken by China when it comes to cryptocurrency. In the case of Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court declared that a circular issued by the Reserve Bank of India (RBI) directs banks not to deal with the transactions involving the trade of virtual currencies, was illegal and unenforceable. The circular barred the banks from providing any kind of services to any individual or entity dealing or selling virtual currencies. The court was of the view that although RBI has a wide spectrum of powers, they did not show any damage suffered by entities. The judgement did not declare Cryptocurrency as legal, but it simply struck down the RBI circular that declared so.

In the ongoing case of Arnav Gulati v. SBI & Ors, the petitioners have sought direction from the RBI to regulate and govern the cryptocurrency sector, and make provisions for payment interfaces. The petitioner argues that prohibitingthe use of UPI platform for dealing and settling of funds impacts his fundamental rights under Article 14, right to equality, and article 19(1)(g), freedom to practice any profession, or to carry on any occupation, trade or business.Although India is yet to impose regulations on cryptocurrency transactions, it has asked for transparency in all such undertakings. The ‘Companies Act’ was amended to compel companies to disclose virtual currency/cryptocurrency transactions.

Another crypto-related bill is intended to be introduced in the Parliament's winter session. The Official Digital Currency Bill, 2021 (Cryptocurrency Bill, 2021)aims to define and classify cryptocurrency according to the technology involved. The objective of the Cryptocurrency Bill, 2021 is to create an enabling framework for the official digital currency which will be issued by the RBI and will prohibit all private cryptocurrencies.Finance Ministry officials are projecting that law for cryptocurrencies is likely to come around the time of the next general Budget. The Ministry wants to avoid people being cheated on by private cryptocurrency creators. Thus, regulation is being discussed.

Crypto-currency is however already starting to be utilized in India. India's oldest crypto exchange, Unocoin, allowed users to recharge their ‘Fastag’ accounts using Bitcoin. It also gave an option of using Bitcoin transactions for bill payments, and e-commerce. This is already starting to gain traction amongst users. Unocoin also offers vouchers that can be brought through cryptocurrency and exchanged for items from major fast-food chains. There are many businessesthat are starting to accept bitcoin and other cryptocurrencies, although this is limited to only some businesses, this mode of payment is becoming more attractive. In the absence of dedicated cryptocurrency laws or any specific ban on the same, cryptocurrencies in India fall in a grey area. The acceptance of the same as a mode of payment is at the discretion of the acceptor. Legal experts say that currently, the lack of relevant statutes makes crypto transactions similar to barter deals where the acceptance is purely at the discretion of the recipients.

Advocates of cryptocurrency believe that if the government sees the existence of reliable businesses willing to accept crypto, then they will be likely to implement laws that support cryptocurrency in India. Professionals in the field think that crypto has to be regulated as an asset or commodity in India. The policy according to them will be guided by national security concerns. Its goal is to balance stability and growth in the larger picture. The government has emphasised the need for strong vigilance against the misuse of cryptocurrencies and crypto-assets for error financing and domestic security threats. The government has regularly released warnings against the risks associated with virtual currencies. The released Cryptocurrency Bill, 2021 is seeking to remove private crypto providers. The RBI has in the past been released vocal about its concerns regarding cryptocurrency, and it is in favor of banning the useof private cryptocurrency. The projection is that government-enforced crypto coins may become the norm. However, on the other hand, the amendment to the Companies Act is mandating disclosure with respect to virtual currency/cryptocurrency transactions undertaken by a firm. The government has also indicated an interest in classifying crypto as an asset class, similar to gold.

Conclusion

Some experts say that the perspective about using bitcoin in illicit finance is an overstatement, and that block chain can be an effective tool in fighting financial crime and gathering intelligence. But still across the globe, the legal status of cryptocurrencies varies substantially from country to country and it is still undefined. Some are more open to cryptocurrency and explicitly allow their use, while other countries are hesitant to endorse it. In India, the fate of crypto is still unsure, and experts project that India will most likely allow the use of government-issued digital currency, due to the security concerns of private players. However, until such legislation comes, cryptocurrency has already started spreading through markets, increasing its user base. While the RBI treads carefully around the topic, the judiciary has shown its inclination towards crypto. Although it too has not openly declared it as legal, it has prevented it from being banned. It is hoped that the new cryptocurrency bill will be tabled in the winter session and more discussions about it will clarify its position in the Indian market.

Questions

  • Which was the first country to accept Bitcoin as a legal tender?
  • Do you support the spread of cryptocurrency in the Indian economy?

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