Cryptocurrency in India: Its Conundrum & Way Forward

Samrat Sengupta, Titash Mukherjee | March 2020

MEANING

Cryptocurrencies, or virtual currencies, are digital means of exchange created and used by private individuals or groups. Because most cryptocurrencies aren’t regulated by national governments, they’re considered alternative currencies – mediums of financial exchange that exist outside the bounds of state monetary policy.

Bitcoin is the preeminent cryptocurrency and first to be used widely. However, hundreds of cryptocurrencies exist, and more spring into being every month.

ADVANTAGES

Cryptocurrencies are very secure as they are secured by the cryptography codes and they are locked by using a public cryptographic system with every owner having their own private key.

There is no need for permission While using a cryptocurrency. This specific feature gives users a lot of freedom and they are able to use cryptocurrencies as they wish.

Cryptocurrency is Super-fast Another great feature of it is that they are superfast.

DISADVANTAGES

Cryptocurrencies are not location centric: The cryptocurrency works irrespective of the owner’s physical location. From a regulators point of view therefore forming rules for regulation becomes challenging.

Transactions in cryptocurrencies are irreversible: Once a confirmation is granted by the owner then the transaction becomes irreversible. In case of a misuse the currency cannot be recovered or reversed upon.

Real-world identities can be hidden: This is a regulator’s nightmare as the unaccounted money can be used for trading of cryptocurrency leaving no traces of the owner.

HISTORY IN INDIA

The entry of Bitcoin in 2013 marked the entry of cryptocurrency in India. However by the year-end of 2013 the authorities started warning the use of cryptocurrency which may incur risks and danger, but no official regulatory policy was introduced.

Then the whole India crypto industry walked in the three-year gold age, with crytocurrency exchanges and start-ups coming one after another; the coins and the technology introduced into more use cases in practical terms. The crytocurrency even became an alternative to Rupee to a smaller extent when the government announced to demonetize 80% of currency in circulation. However 2017 was a turning point for the development of the industry when severe regulations were imposed worldwide on crypto tradings owing to irregular fluctuation in terms of token value and trading volume as the trend went negative.

ACTION BY RBI

This RBI by 4 Press Releases cautioned the public at large about the potential dangers of dealing in crypto-currencies: –

Press Release dated 5.04.2018
Press Release dated 5.12.2017
Press Release dated 1.02.2017
Press Release dated 24.12.2013

Thereafter the RBI by way of Circular dated April 6, 2018, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 (hereinafter, “RBI Act, 1934”) and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

JUDGEMENT BY HON’BLE SUPREME COURT OF INDIA

This Circular came to be challenged in Internet and Mobile Association of India (IMAI) v RBI, WP No. 528/2018, by the writ petitioners.

The Supreme Court by way of its Judgment dated 4.03.2020, held the following: –

Broadly accepted the submission of RBI with respect to existence of power to regulate/prohibit and that there has been application of mind on part of RBI before taking the impugned decision
- The RBI has the statutory power under the RBI Act, Banking Regulation Act and Payment and Settlement Systems Act, to regulate the activity and/or transactions in relation to crypto assets
- RBI is the sole repository of power for the management of currency. Anything that may pose a threat to the financial system of the country can be regulated or prohibited by RBI, despite the activity not forming part of the credit system or payment system
- In the facts of the case, it cannot be held that the RBI had not applied its mind before issuing the impugned circular

However, on the aspect of proportionality, the Court hold against RBI and in favour of the writ petitioners.
- Has considered the position of Cryptocurrency prevailing in different countries across the globe
- RBI has a special status as a regulator and its actions/decision cannot be kept at lower pedestal than that of the Executive
- The impugned circular had a major economic impact on crypto asset industry which was booming prior to the ban
- Applying the four-pronged test propounded by the CB Judgment in Modern Dental case: –
- Takes note that RBI has not so far found in the last 5 years, any actual adverse impact of the activity of crypto exchange.
- Takes note of the Crytpo-token Regulation Bill, 2018 suggested by the Inter-Ministerial Committee which proposed regulations and thereafter a year later the same Committee proposed complete ban
- VCs have not been banned, yet the lifeline, i.e. banking channels of the exchanges has been cut. This has been done despite (i) RBI not finding any problem with the functioning of the exchanges, and (ii) VCs not being banned.
- RBI has not provided any detail of any of its regulated entities, i.e. Banks have suffered any loss or have directly or indirectly been adversely affected by VC exchanges

In view of the above the Hon’ble Supreme Court Of India observed that when both RBI and government have taken a consistent stand not to ban VCs, then the impugned circular cannot be held to be proportional an is accordingly set aside.

CONCLUSION

Now as RBI notification stands quashed consequently the banks and financial institutions can provide their services to crypto-exchanges and other ventures dealing in cryptocurrencies. This will certainly make the Indian market more prospective for crypto-ventures.

However two perspectives remains in the subject; firstly during the period of ban the crypto-market has been decimated in India to an large extent and secondly the judgment seeks revival of the cryptocurrency ecosystem in India only theoretically and practicality remains to seen.

Therefore presently it is imperative to rebuild the conducive ecosystem for thriving cryptocurrency business in India within the proper regulatory framework as may be framed by RBI and Government Of India.

Tags: S. Jalan & Co.

About Author

Samrat Sengupta

Samrat Sengupta is a Partner with S. Jalan & Company, Delhi with experience in Commercial arbitration and Corporate litigation and has dealt with Infrastructure, Banking, Telecom and Real Estate laws.

Titash Mukherjee

Titash Mukherjee has eight years experience and is a Principal Associate with S. Jalan & Co. She has completed her post graduation in Business Law from the University of Calcutta and focuses primarily on insolvency, dispute resolution, real estate as well as general corporate advisory.