Making Cryptocurrencies Legal in India

Introduction

Money predominantly has become an essential part of our lives today. For making any purchases or availing of any services we require money at our disposal. Every currency that has been in circulation in the market has been issued by a centralized bank under authorization by the government of the country issuing it. Therefore, it acts as a ‘legal’ tender in the sense that the money printed is backed by a government. There have also been efforts to curb the circulation of black money by introduction of plastic money as well as digital wallets / e-wallets which are directly linked to the bank accounts of the individuals or the companies or the institutions operating it. In a nutshell, money is widely accepted as a mode of payment by every country in the world and no questions arise regarding its legality and authenticity.

Cryptocurrency on the other hand is quite different. It is a relatively new form of payment method which is neither being issued by a central banking authority, nor is it being backed by any government. It is based on a blockchain system where the data entered is stored in form of blocks which once full is then chained to previous blocks thus forming an entire chain of data being stored in a chronological manner and no single person or a group has control over this system- rather all the users collectively retain control over it. Bitcoin is the most famous form of cryptocurrency founded in 2008 based on this system and the most widely used. Current market value of bitcoin has crossed USD 60,000 and it is predicted that it may cross USD 100,000 mark soon. Others like shiba inu, dogecoin and ripple are following suit.

Due to its decentralized nature, governments around the world have started growing wary of their popularity primarily because they have no means to gain control over it and due to its potential to disrupt the current financial system thereby subverting their role in it.

Today, there are more than 6500 types of cryptocurrencies in existence with a total market capitalisation in excess of USD 2 trillion and having more than 300 million users around the world. Several businesses have even started to accept crypto as a mode of payment. More and more people are starting to join the network of investing and trading in cryptocurrency since they consider it to be an attractive investment having very high returns albeit the high risks it involves due to its highly volatile nature.

Legality of Cryptocurrency Around the World

The legitimate status of crypto varies from one state to another. While most nations have not made its usage illegal, the status as a recognized mode of payment differs. While a few nations have unequivocally permitted its utilization and exchange, others have prohibited or limited it. European Union for example considers cryptocurrency as legal. However, the exchange regulations depend on the member states. The method of taxation charged by individual member state also differs as some members charge tax anywhere in the range from 0-50% on the profit earned as capital gains. In 2015, the Court of Justice of the European Union ruled that “The exchange of traditional currencies for units of the ‘bitcoin’ virtual currency is exempt from VAT” and that “Member States must exempt, inter alia, transactions relating to ‘currency, bank notes and coins used as legal tender'”.

United Kingdom

The UK in 2020 confirmed that crypto assets as property, although they are not considered as a legal tender and no specific regulations have been passed. According to Bank of England, cryptocurrency don’t share characteristics with that of fiat money and don’t pose a very high risk to the financial system. However, the Deputy Governor of Bank of England owning to the sudden demand of digital currency has called for series of stringent regulations so as to prevent their unauthorized usage and to avoid any potential threats which cryptocurrency might pose.

USA

The US occupied the top spot for bitcoin miners after beating China for the very first time in October 2021, with New York being the torch bearer comprising of 19.9% of bitcoin hashrate. One of the main reasons is that mining of crypto requires huge amounts of energy and a lot of states in US have either very low tariffs for electricity or are very big producers of renewable energy and also states like Texas have proactive crypto-friendly policymakers as well as suitable infrastructure. Despite being one of the preferred choices for a lot of miners and investors, not a clear framework exists which regulates the exchange. While there has been significant interferences by agencies like Federal Trade Commission (FTC), Department of Treasury, Commodities and Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), no formal laws have been passed. The states have been more active in passing or proposing to pass laws either in favour or against the usage of cryptocurrency. Wyoming for one has passed laws to make it an attractive destination for miners. It has also stared separate depository institutions which primarily deal in digital currencies. The State of Ohio has also started to accept cryptocurrency as a method for payment of taxes. Iowa on the other had passed a bill prohibiting the state to accept payments in form of cryptocurrency. US Federal Reserve Chairman Jerome Powell had made it clear that he has no intention to ban the usage of crypto. However, several lawmakers want stringent laws to regulate the usage so as to crack down on the tax evasions and threat of ransomware attacks taking place. The Federal Reserve even has started exploring the option of launching its own CBDC (Central Bank Digital Currency).

China

Cryptocurrency is banned under the Chinese laws. In 2013, the People’s Bank of China (PBOC) took the first step in banning all the financial institutions to deal with bitcoin related transactions and further in 2017, it banned domestic crypto exchanges and ICO’s. China has very stringent laws which do not consider digital currency as a legal tender thus penalising the violators. In September 2021, it declared all crypto transactions to be illegal. The PBOC is also ready to launch China’s first indigenous digital currency- the Digital Yuan or eCNY which may be ready for use in February 2022.

India’s Perspective

Cryptocurrency has been fast gaining popularity in India. As of 2021, there are more than 100 million users of crypto in India accounting for about 7.3% of its total population making it the home to highest number of users in the world. During the 2018 Budget, former finance minister – Late Sh. Arun Jaitley announced that cryptocurrency is not recognised as a legal tender and that the government would take steps to eliminate its illegal usage, however in order to facilitate the digital economy, the features and benefits of blockchain technology will be explored. Reserve Bank of India in 2018 had issued a circular which imposed prohibition in dealing in virtual currencies. But the Hon’ble Supreme Court of India overturned this notification vide its judgement in  Internet and Mobile Association of India vs RBI  ruling that in the absence of any legislation which prohibits the exchange of cryptocurrency in India, the RBI cannot impose a ban as it would be violative of fundamental rights of citizens to carry out trade.

India from the very beginning has opposed the use of digital currency in view of the dangers associated with it like money laundering as well as financing of terror activities. There are no formal laws and regulations in place to maintain the checks and balances of crypto related transactions. Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which is also known as the Crypto Bill, 2021, is a proposed legislation which aims at imposing a complete ban on owning and trading of private cryptocurrencies and suggesting for creation of a new official digital currency as well as a proper framework for crypto related transactions and the way in which these transactions will be taxed. Recently, Schedule III of Companies Act, 2013 was also amended by the Ministry of Corporate Affairs which conflicts with the Crypto Bill by requiring companies to furnish details regarding the profits or losses earned from transactions related to cryptocurrency, the amount held in form of virtual currency till date as well as any kind of advances taken from any person for purposes of trading in virtual currencies thus leading to further ambiguity regarding the legality in India.

The Indian Government has already cleared its stand that it is not looking at an outright ban on cryptocurrency, rather it wants to explore the advantages of blockchain technology. The bill once formalized would only help in clearing the air over various questions regarding the legality and the method under which these crypto transactions ought to be taxed and might even transform the current cryptoverse in India forever.

ABOUT THE AUTHOR 

Shreyans Jain is an advocate practicing before the High Court of Delhi and the district courts in Delhi. He is a graduate of VIPS, GGSIP University, Batch of 2014-19. His interest lies in International Commercial Arbitration and International Trade Law.