CRYPTOCURRENCY LAW INSIDER IN

CRYPTOCURRENCY: LAWS IN INDIA

By Venkatesh Agarwal

Background

Cryptocurrency, is a virtual currency designed for use as digital assets. This ensures there is no coin or bill actual. Now it is both digitally and interactive. Bitcoin is the front runner and actually the most common crypto-currency. Although cryptocurrencies are unlikely to substitute conventional money, they have changed the way global financial networks digitally communicate with each other.

Technology evolves at a rapid pace, and the performance of a specific technology is determined largely by the consumer it attempts to build upon. Cryptocurrency is transforming the digital trade markets by creating, without fees, a free flowing trading system.

One may purchase cryptocurrency with a credit card or, in certain situations, acquire it via a “mining” method.  Cryptocurrency is stored either digitally, on a device or some other equipment in a digital wallet.

The main reason behind the digital currency form’s rise in value lies in its nature as being readily accessible and without any territorial constraints.

Increasing conditions have seen a significant increase in the way in which blockchain is used. Many leading national banks in many nations, including the Reserve Bank of India (RBI), had expressed their apprehensions over factors such as cryptocurrency security and regulation.

Introduction

What are cryptocurrencies?

Cryptocurrencies are virtual tokens, which can be physically processed and exchanged. Cryptocurrencies, as the name implies, operate by utilizing cryptography, i.e. mathematical concepts and computational processes by which data is processed and distributed.

Are cryptocurrencies the same as digital currencies?

There is no universal definition on Virtual currency concept yet. If digital currency is described as any money which can be stored, exchanged or digitally transmitted, therefore cryptocurrencies may be called digital currencies. The converse may not be accurate, though, because not all digital currency would be cryptocurrencies. Virtual currencies can exist and are related to fiat currency.

People’s Bank of China, for example, is trying to create a digital currency whose value will be indexed to Chinese Yuan.

While cryptocurrencies exact characteristics and functions are still mostly unsettled, currencies that are physical, decentralized, and applied by cryptography can be known as cryptocurrencies.

Are cryptocurrencies regulated in India?

Currently there are no regulated cryptocurrencies in India.

In 2018, the Reserve Bank of India (RBI), India’s central bank and monetary regulator, issued a circular (2018 Circular) prohibiting banks and financial institutions from trading in and delivering services that facilitate virtual currency trading.

In March 2020, a three-judge bench of the Supreme Court of India (Supreme Court) set down the 2018 Circular. The recommendation will be covered in more depth below. With that a vacuum has been created and there is currently no law governing cryptocurrencies in India.

On what grounds did the Supreme Court strike down the 2018 Circular?

In 2017, the RBI released press releases clarifying that it has not given any license or permission to deal with cryptocurrencies in India and customers must be careful when investing in or buying cryptocurrencies.

On 6 April 2018, the RBI issued the 2018 Circular in which crypto-currency dealers effectively shut off exposure to banking networks and exchanges.

The 2018 Circular included an extensive collection of facilities which will be protected by prohibited actions. The description covered- “maintaining accounts, logging, exchanging, settlement, clearing, investing against virtual tokens, approving them as leverage, opening market accounts interacting with them and transferring / receiving money in accounts relevant to buying/selling VCs.”

Entities which rendered services at the time of issuance of the 2018 Circular were granted three months to cease all those operations. In turn, the 2018 Circular placed cryptocurrencies exchanging and selling at a standstill.

The 2018 Circular, together with its shareholders and promoters, was challenged before the Supreme Court in separate written petitions filed by India’s Internet and Mobile Association and cryptocurrency exchange companies in India.

In a seminal decision (Decision) the Supreme Court struck down the 2018 Circular on 04 March 2020 for being unconstitutional.

The applications in writing had criticized the 2018 Circular on different grounds as unlawful.

Grounds of challenge

  • That virtual currencies fell beyond the control of the RBI Act , 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 (PSS Act), the RBI has no authority to govern or prohibit virtual currencies in India.
  • The RBI had not applied its mind and had failed to take specific factors into account while publishing the 2018 Circular.
  • The 2018 Circular was a result of RBI’s colorable exercise of control.
  • The 2018 Circular is disproportionate and fails the reasonableness check pursuant to Article 19(1)(g) of the Constitution of India, which guarantees the freedom to carry on every work, commerce or industry to all Indian people.

The Supreme Court on application of the ‘doctrine of proportionality’

The Decision states that the (i) hobbyists who purchase and sell cryptocurrencies as a hobby, (ii) cryptocurrency dealers, and (iii) individuals who operate cryptocurrency exchanges opposed the 2018 Circular.

In the Judgment, the Supreme Court observed that (i) while cryptocurrency hobbyists do not have the locus standi to challenge the 2018 Circular pursuant to Article 19(1)(g) of the Constitution, cryptocurrency traders and individuals operating cryptocurrency exchanges do have the locus standi; (ii) cryptocurrency users and traders-can reach avenues other than cryptocurrency exchanges; Yet individuals operating cryptocurrency exchanges have no other means of subsistence; and (iii) RBI has essentially shut down cryptocurrency exchanges by refusing access to banking and payment networks, while there is no proof that cryptocurrency exchanges have had any negative impact on RBI controlled entities.

The Supreme Court went on to conclude that depriving cryptocurrency exchanges from accessing banking and payment channels would be disproportionate, since cryptocurrencies are not banned in India. Despite this, the RBI’s 2018 circular were set down by the Supreme Court.

Conclusion

It will be fascinating to see how the next step of the cryptocurrency story will proceed now that the country’s Apex Court lifted its moratorium on cryptocurrency. While the decision is being praised by the crypto-currency players in India, the possibility that RBI has a legitimate right to file a review petition cannot be fully ruled out.