In Conversation with Ms. Preeti Ahluwalia – Legal Framework on Cryptocurrency: Regulation and Challenges in India

Ms. Preeti Ahluwalia is an Advocate currently practicing under a Senior Advocate at the Delhi High Court. She completed her LL.M in International Business Law from the University of Leeds, United Kingdom and secured a distinction in her Master’s Thesis titled, ‘Bitcoin – A Global Currency’ – Evaluation of its Legality. 

In this interview with the IJLPP she discusses findings in her thesis, regulation scope for cryptocurrency in India after the Supreme Court judgment, challenges to such regulation and inspirations from foreign law, if any.  

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Your thesis at the University of Leeds was on “Bitcoin: A Global Currency? – Evaluation of its legality” under Professor Andy Campbell (Emeritus Professor of International Banking and Finance Law). If you could share in brief with us what were your findings and conclusions in it?

Ms. Ahluwalia: The purpose of my dissertation was to find out what exactly virtual currency, such as Bitcoin is? Since half of the world was trying to convince others that Bitcoin is simply a ‘Bubble’ whereas few had already proclaimed it as the future of money. But back then there existed a few important questions for example, is cryptocurrency genuine? Can I use Cryptocurrency just like debit and credit cards? Can I buy anything with it? All the above-mentioned questions curtails out from one question, i.e. is it possible for bitcoin to gain mass acceptance and how it is treated from a legal and regulatory perspective around the world.

My findings can be summarized as follows: 

1. What makes Bitcoin so special? – This can be answered by knowing the features of it. For example; firstly there is little to no transaction costs, you have 24/7 access to money unlike the traditional system where you can’t just walk up to your bank at 3 A.M. in the morning, no limits on purchases and withdrawals, freedom for anyone to use (like if you want to open a bank account there are number of paper works but with cryptocurrency all this can be avoided), and international transactions are much faster, as wire transfer takes almost half a day to transfer money from one place to another but with the help of cryptocurrency it only takes a `matter of few minutes or say seconds. 

2. It cannot be denied that Bitcoin has many benefits but it is also rational to say that Bitcoin has a long road to mass acceptance. There are many things that need to be done from a technological, psychological, utilitarian and security point of view. At the moment, we can just say that Bitcoin has reached ‘mass awareness’ instead of ‘mass acceptance’. 

3. From the case study conducted, it was observed that the status of bitcoin is actually the main problem, which is faced by many countries. The word Bitcoin was entirely a new concept for the industries; different countries had different opinions with regards to the status and setting up a regulatory framework for Bitcoin. Back then, Japan was the only country where Bitcoin was classified as a legal means of payment, which is relatively equal to fiat currency. In the United States, all the five authorities had their own classifications of Bitcoin. First up is the U.S Treasury who classified Bitcoin as ‘convertible currency’. Then comes the IRS who treated it as a ‘property’ for taxation purposes. Likewise, The Financial Crime Enforcement Network (FinCEN) regarded it as “Money Transmitters”. The Securities and Exchange Commission (SEC) said it is a ‘security’. And lastly, The Commodity Futures Trading Commission (CFTC) classified it as a ‘commodity’. When it comes to the European Union, the status varied according to member states. According to the Netherlands, it was like a “barter transaction”, for Germany it was regarded as ‘Private currency’, for Switzerland it was like a ‘foreign currency’. Rest all member states of the EU had a neutral mindset in relation to the Bitcoin status. Next up, Canada, which treated it as a ‘barter transaction’ and on the other hand, Canadian Parliament classified it as ‘Money Service Businesses’. The Canadian banks treated it as ‘securities’. Then comes China where Bitcoin is completely illegal, and India had a neutral mindset. The IRAS treated it as ‘goods’. Finally Australia, which was following the footsteps of Japan, regarded it as a legal tender in terms of ‘property’. Therefore, it was difficult for Bitcoin to become a global currency. The main reason was that there are many countries and every country had their own rules and regulations. For Bitcoin to become a global currency there has to be consistency and uniformity between all the regulatory authorities.

4. It was expected that the growth of Bitcoin can get two reactions from the regulatory authorities: first, where the government can ban the system and bring an end to it and the second where it uses regulation to take it over. However, the former is not possible as till date the government is unable to hack the system. Therefore, it was recommended that the government should take necessary legislative and regulatory actions in regards to Bitcoin, as taking over Bitcoin is more easy than trying to ban it. At present, Bitcoin regulations are unsettled but there are various approaches being taken by the Global regulators and the authorities of different jurisdictions in regards to the Regulation of Bitcoin. 

In my opinion I didn’t think Bitcoin will take over the world anytime soon because of its disadvantages but I appreciate the fact that it was providing people with a number of options as compared with what banks have been providing. Bitcoin is considered bad because of several reasons some of which are, its decentralized feature, which makes it easy for criminals to execute their evil endeavors, massive fluctuation in prices, technological issues, illegal use, acceptance factor, no consumer protection, tax avoidance, and no legal and regulatory frameworks but on the other side it is good from an investment point of view. All these problems can be solved by framing appropriate policies and guidelines in regards to the use of Bitcoin. A regulatory structure that makes sense, protect the interest of consumers and investors and limit the use of bitcoins in illegal marketplace should be a logical next step. There is a long road ahead of Bitcoin before it becomes a globally accepted form of currency as every country has its own rules and regulations. There is no uniformity on a global level. The technology will need to improve, be more appropriate, safer and the restrictions will need to fall out. No form of currency has been left from being used in illegal activities; Bitcoin is no different in this aspect. There are a majority of people who use Bitcoin legally just like the ones who use other forms of currency legally.

“It can be concluded that Bitcoin has reached mass awareness if not mass acceptance and it might be the future of money. “Just because something doesn’t do what you planned it to do doesn’t mean it’s useless. The innovation of every technology comes with few legal and regulatory issues therefore, it is very important to comprehend the new technology in a well-timed and suitable regulatory framework so that the entire world does not miss out from a gigantic opportunity.”

 

The Government’s stand in India on cryptocurrency has been to not legalize it. Starting from RBI Circular to Subhash Garg Committee and now Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, inclination has been on ban. But considering the Supreme Court judgment in Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC Online SC 275), the government cannot resort to such a ban unless it can show real loss to its regulated entities such as banks. Thus, we may now rather see a regulation over cryptocurrency in India. What could be the possible ways to regulate cryptocurrency considering they were created with the intention of offering an alternative to traditional payments by depriving it from governmental supervision? How to maintain that balance of independence and regulation?

Ms. Ahluwalia: Possible ways to regulate cryptocurrency to maintain that balance of independence and regulation:

1. In order to regulate cryptocurrencies and its potential risks it is first important to adopt a crisp definition of virtual currencies as well as the scope of their usage. Since the Financial Action Task Force (FATF) defines cryptocurrency as a math-based decentralized, convertible virtual currency which is protected by cryptography. Such a definition unambiguously communicates that cryptocurrency is a digital medium of exchange which has an convertible value in real currency instead of being validated by an entity like a central bank is secured using cryptographic technology of Block chains. Therefore, the legislators might focus on adopting a crisp definition.

2. The enormous financial potential of the cryptocurrency industry is clearly evident and it is an opportune moment for the regulatory authorities, in consultation with the government and the stakeholders concerned, to adopt a fresh outlook towards the regulation of the sector in India to maintain a balance between the traditional payment and cryptocurrencies.

3. An exhaustive set of regulations should be introduced that would define what constitutes cryptocurrencies in a clear and unambiguous manner, the range of permissible services that may be offered by organizations, how the operations of engaged entities would be supervised and monitored, and finally, the taxation structure for the investors concerned.

4. In order to design comprehensive know-your-customer (KYC) norms for cryptocurrency companies, any legislation for the industry must clearly outline the scope of the roles for the all the participants, which compose the cryptocurrency ecosystem, namely, the exchange, the administrator, the user, miner, wallet provider.

5. In order to align with global practices, India must design a comprehensive regulation framework in such a way that the use of cryptocurrencies as a payment mechanism continues to be governed by the RBI while their use as a financial asset, which can be bought and traded on an exchange, is regulated by the Securities and Exchange Board of India. India has been behind the curve in cryptocurrency adoption vis-à-vis its regional counterparts like China as well as the rest of the world. The time has now come to bite the bullet and let the cryptocurrency sector flourish in the country.

India has been behind the curve in cryptocurrency adoption vis-à-vis its regional counterparts like China as well as the rest of the world. The time has now come to bite the bullet and let the cryptocurrency sector flourish in the country.

Few grounds provided by almost every country, which has decided to not allow cryptocurrencies, or countries, which have issued warnings on it, have been money laundering and use by criminals. When we talk of India where the menace of black money is pervasive unlike countries, which have allowed cryptocurrency, a unique set of challenges, build up. Then there are their own set of unique challenges that cryptocurrency offers such as Data Security or Transaction Malleability. What are the challenges that India uniquely faces according to you and what set of measures can be taken to tackle them? 

Ms. Ahluwalia: It is no secret that cryptocurrencies carry considerable money laundering, consumer protection and terror financing risks given that they facilitate shadowy peer-to-peer transactions which are completely secure and outside the reach of government interference. The risks are compounded by the fact that these transactions happen in a digital universe in an international financial system where it’s often difficult to establish jurisdiction of a particular country. In order to tackle the risks enumerated above, global watchdog FATF recently came out with a report which conceives a radical KYC/ anti-money laundering framework to regulate, supervise and monitor the conduct of cryptocurrency transactions. Apart from proposing stronger international cooperation on cryptocurrency governance, the report calls on countries to adopt risk-based local regulations, which are based on the robustness of its financial system and the relative maturity of the cryptocurrency industry.

India may opt to have stringent licensing, compliance and inspection norms for cryptocurrency transactions, which may perhaps be warranted, given that the sector is still at a growing stage and the digital literacy in the country’s population is relatively weak. However, it must endeavor to do in a way that cryptocurrencies do not lose their cost advantage in the marketplace. Finally, the government must ponder on introducing an attractive tax structure for the cryptocurrency industry in India which may augment adoption rates of cryptocurrencies as a means of payment and at the same time, improving the reportage of income earned through cryptocurrency transactions. 

 In your thesis, you did a detailed analysis in order to understand how the different countries’ governments and financial sectors have reacted to Bitcoin. What could be the best legal practices that India can adopt from other countries in order to have a comprehensive but precise law on regulation of cryptocurrency?

Ms. Ahluwalia: Well honestly, speaking, I believe that the regulatory uncertainty regarding cryptocurrencies is not exclusive to India. The case of regulatory concerns in India pretty much reads from the same script as that of other countries. Regulatory uncertainty hangs like a dark cloud over the crypto-industry in general. Just recently, the U.S. The Cryptocurrency Act of 2020 was introduced, a law that seeks to categorize and clarify federal oversight laws on digital assets. However, the proposal attracted mixed feedback due to its categorizations, with some critics arguing that the bill was “Dead on Arrival.” One critical tweet from Jerry Brito, Coin Center’s executive director, reads: “It’s not a serious bill and has almost zero chance of moving but should be opposed on principle.”

Likewise, in the European Union, the 5th Anti-Money Laundering and Combating the Financing of Terrorism rules that now apply to crypto custodians has pushed some companies to shut down, while others have relocated out of the EU. The regulations require crypto custodians, wallets and exchanges to implement Know Your Customer procedures and monitor transactions continually, arguably undermining crypto’s core principles of anonymity. There are currently no specific regulations dealing with blockchain or other distributed ledger technology in Australia nor there has been any legislation created to deal with cryptocurrencies as a discrete area of law. Recent amendments have been made to various pieces of legislation to accommodate the use of cryptocurrencies; these have predominantly focused on the transactional relationship, such as the issuing and exchanging process, rather than the cryptocurrencies themselves.

To conclude, all the countries are flowing in the same boat regarding the regulatory uncertainty. Now we all can just wait for the government to introduce an attractive cryptocurrency structure, which may augment adoption of cryptocurrencies as a means of payment and at the same time, improving the reportage of income earned through cryptocurrency transactions. 

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[This questionnaire was drafted and edited by Mr. Pranav Tanwar, Consulting Editor,  IJLPP]