A cryptocurrency is digital or virtual currency which is used for online transactions and is secured by a cryptography which makes it impossible to counterfeit the currency. It is a medium of exchange that is digital, decentralized, and encrypted. Cryptocurrency is a form of payment which can be made for online goods and services. Certain companies provide their own currency, often called ‘tokens’ which can be traded for a specific good or service that company provides. Cryptocurrency works on the technology called “blockchain” which is a type of database. A blockchain collects information together in groups, known as ‘blocks’, that hold sets of information. Blocks have a certain storage capacity and when it is filled, it gets linked to the previous block, forming a chain. Every new information that comes after the previous one is added as a freshly new block and that is also added to the chain once filled. Blockchain is a decentralised technology that is expanded over many computers that manages and records transactions. One of the best features of blockchain is its security. There are more than 10,000 cryptocurrencies over the internet, but out of which only a few have the highest market capital. Bitcoin, Dogecoin, Binance Coin, Ethereum, Tether, etc., are few of the largest trading cryptocurrency by market capitalization.
Bitcoin is the most popular digital currency which was introduced in 2009 by a group called “Satoshi Nakamoto”. One of the features of cryptocurrency is the anonymity of the issuing authority. Like the Treasury Department’s Bureau of Engraving and Printing looks after the currency in the United States and the Reserve Bank of India is the sole issuing body of currency in India. This feature makes the regulation of cryptocurrency by the government difficult.
Even though the technology of ‘blockchain’ makes the transactions in cryptocurrency extremely secure, it comes with a few downfalls which makes dealing in cryptocurrency a risky business. The threat of hackers and computer crash can instantly erase all the data of the virtual currency of an individual. It is believed that digital currency can be used for certain illegal purposes such as money laundering, smuggling, tax evasion, drug peddling and terrorism. Most governments warn the people of the risk involving high volatility associated with cryptocurrency and of the fact that the organizations that deal with such transactions are unregulated. So, the individual who invest in such cryptocurrency, do so at their own risk as there would be no legal recourse available to them in any event of loss.
There are different methods through which cryptocurrencies can be purchased. The most common one is through “Mining”. It is using one’s computer prowess to crack computationally difficult codes and puzzles. In simple terms, ‘mining’ works by using a computer’s hardware to do complex calculations in exchange for a reward.
Cryptocurrency has various legal elements to it which are different for every country. Many countries have made laws related to them which define it as either legal or illegal, and some countries have not yet made laws for its regulation. Some nations have imposed restrictions on their investment such as barring the companies and individuals from engaging in any kind of activities involving cryptocurrency, and by imposing indirect restrictions like barring the financial institutions within their borders from facilitating transactions involving cryptocurrency.
India witnessed a massive growth in cryptocurrency exchanges during the COVID- 19 pandemic, as the cryptocurrency market is not regulated and monitored which has a potential of trillions of dollars. In 2013, the Reserve Bank of India (RBI) cautioned the public against the virtual currency, after witnessing massive inclination towards the crypto market and realised possible revenue loss for the Government of India. In 2017, a high level Inter-Ministerial Committee was set up by the Government of India to report issues pertaining to the usage of virtual currency. The interdisciplinary committee was chaired by the Special Secretary of Economic Affairs and had nine members including the representatives from Department of Economic Affairs, Department of Financial Services, Department of Revenue, Ministry of Home Affairs, Ministry of Electronics and Information Technology, Reserve Bank of India, State Bank of India and National Institution of Transforming India (NITI Aayog). It was established “to examine the existing frameworks with regards to Virtual Currencies”. As a result of which in 2019, the committee recommended that the there should be a blanket ban on private cryptocurrencies in India. In 2017, the Supreme Court of India admitted a Public Interest Litigation writ petition under Article 32 of the Constitution against the Union of India and issued a notice to various Ministries. The petition seeks “a regulatory framework to be laid down on Crypto Currency and wanted that the virtual currency be made accountable to the exchequer.” In April 2018, the RBI also issued a notice preventing all the commercial and co-operative banks, small finance banks, payments bank and the Non-Banking Financial Company (NBFC) to stop dealing in virtual currencies and also to stop providing services to the entities which deal in it. The Apex Court i.e., the Honourable Supreme Court of India, on 4th March 2020 in the case of Internet and Mobile Association of India V. Reserve Bank of India, a well contrived judgement gave an order quashing the earlier ban imposed by RBI. The matter was scrutinized from the perspective of Article 19 (g) of the Indian Constitution, which deals with the freedom to practice any profession or to carry on any occupation, trade of business, and the doctrine of proportionality.
With the uncertainty among the Indian investors who hold large amounts in the Crypto market, they could be breathing space to exit their holdings in the event of a ban on trading, mining, holding cryptos. On the other hand, RBI had declared that they are “very much into the game” and plan on launching its own digital currency. The Indian Government is planning to introduce the new bill titled “Cryptocurrency and Regulation of Official Digital Currency Bill,2021” which will prohibit all private cryptocurrencies with certain exceptions to promote underlying technology and trading of cryptocurrency, and lay down the regulatory framework for the launch of an “official digital currency” which will be issued by the RBI. The lack in the cryptocurrency laws is identified by the new bill and thus the provision of banning all the private cryptocurrencies in their entirety is brought about. But even so, it is ill defined as to which all cryptocurrency will fall under the scope of private cryptocurrency.
The Reserve Bank of India has warned the public about the misuse of private cryptocurrencies, in many different ways, which may pose a threat to financial stability. But if this new bill imposes ban on the private cryptocurrencies, it would lead the investors dealing in virtual money, to invest and deal in cryptocurrencies in an unmonitored or unregulated markets. The RBI had said central banks are exploring DLT (Distributed Ledger Technology) for application to ameliorate financial market infrastructure, and considering it as a prospective technological exposition in implementing Central Bank Digital Currency (CBDC). Various start-ups dealing with cryptocurrency have come up in India, such as Unocoin in 2013 and Zebpay in 2014 (Tracxn, 2019). The government as well as the Reserve Bank of India have said that they have not authorised or issued any regulations for any organizations to deal with cryptocurrencies, and individuals marketing in them would bear all risks, and have further cautioned the general public of its risks. Government officials and experts maintain that cryptocurrency prices are too volatile to serve as a fiat currency (government issued currency which is not backed by gold or any commodity) even as its promoters say volatility would dwindle over time with higher acceptance. Further, to simplify the process of trading and holding in a safer technological environment related to cryptocurrency, the new law would fulfil that goal. However, the risk factor which is involved in investing and holding of cryptocurrency would remain the same even with the introduction of state-owned cryptocurrency which would be regulated by the Reserve Bank of India.
According to the latest amendments to the Schedule III of the Companies Act, 2013, in March 2021, the companies are directed by the Government of India to disclose their investments in the cryptocurrencies beginning from the new financial year. This means that the companies have to divulge profit or loss on transactions entailing cryptocurrency or virtual currency, the amount of holding, and details of deposits or advances from any person for the purpose of trading or investing in cryptocurrency/ virtual currency. It is understood that this particular move would open the door for all Indian companies to have Crypto on their balance sheets, and thus has been welcomed very warmly by the Indian investors.
There was and still is lack in the clarity of regulations related to cryptocurrency. The need of the hour is to furnish well-structured cryptocurrency regulation in accordance with crypto trading exchanges, blockchain technology, investors, and the people employed in such sector and it needs the utmost attention. The Ministry of Electronics and Information Technology published the Draft National Strategy on Blockchain, 2021 with a view that India will be one of the leading countries in the world in innovation, education, commercialisation, and adoption of blockchain technology in private and public sectors by 2025. The NASSCOM’s report of 2019, showed that the blockchain technology is witnessing a rapid growth. The National Payment Corporation of India (NPCI) launched Vajra, a blockchain based payment platform in December 2019. The RBI, during deliberations over the legitimacy of cryptocurrencies, had earlier shown interest in developing India’s national digital currency. The government should deem it necessary to take an effective step towards regulating cryptocurrency as a means to have the confidence of investors and the general public in the developing nation, thus banning global virtual currency which has definitely impacted the world is not the best solution for a country like ours. Union Finance Minister Nirmala Sitaraman said, “we will allow a certain amount of window for people to experiment on blockchain, bitcoins and cryptocurrency” and there will not be a complete ban on the cryptocurrencies. Its in the best interests of the investor that they do not take any further actions in this regard as there still hasn’t been given any clarity on dealings and holding of cryptocurrency, and the laws which regulate the crypto market.
SUBMITTED BY: SUKESHI BHARTI