Authored By – Shivangi Sinha, SNDT Law College
Introduction
In recent times, there has been a significant shift towards digital finance. Cryptocurrency has revolutionized the way one perceives money, offering a decentralized and accessible alternative to traditional currencies.
As of 2024, the total number of cryptocurrency users worldwide has surpassed approximately 162 million. From Bitcoin’s remarkable rise to the advent of thousands of digital coins, these virtual assets have disrupted the financial landscape. This surge in cryptocurrency usage has sparked debates worldwide, and India is no exception. With growing investments and potential risks, regulatory clarity has become crucial. Cryptocurrencies have raised concerns regarding legality, investor protection, and economic implications.
Focusing on India, it is expected to have around 270 million crypto users in 2024, surpassing the combined total of users in the United States and Europe. Despite this rapid growth, cryptocurrency regulations in India remain unclear. The Reserve Bank of India (RBI), the Ministry of Finance, and the Securities and Exchange Board of India (SEBI) are the primary regulatory bodies overseeing cryptocurrency activities.
India’s initial concerns regarding cryptocurrency were first expressed by the RBI in 2018 when it prohibited banks from facilitating cryptocurrency transactions. This decision caused significant disruption in India’s growing crypto market, leaving businesses and investors in uncertainty. However, in 2020, the Supreme Court overturned the RBI’s ban, revitalizing the industry and offering it a fresh start. Despite judicial intervention, India still lacks a comprehensive legal framework for cryptocurrency regulation. The country does not consider cryptocurrency as legal tender, and discussions about a bill to regulate or ban private cryptocurrencies remain ongoing.
India’s approach to cryptocurrency is diplomatic—it acknowledges the opportunities associated with crypto while also considering the risks. There is a need to strike a balance between fostering innovation and implementing regulations for shaping the future of crypto in India. This article discusses the legal validity of cryptocurrency in India, judicial interventions, and the government’s involvement.
Meaning and Definition
In the simplest terms, cryptocurrency is a virtual or digital currency used for purchasing goods and services. It functions as a medium of exchange without any physical counterpart. Transactions are conducted entirely online, with cryptographic techniques ensuring security, verification, and the creation of different cryptocurrency units.
Cryptocurrency operates as a decentralized financial system, meaning it is not regulated by any authorized body. While decentralization is one of its greatest strengths, it is also a major concern for regulators worldwide.
There are several motivations behind the rise of cryptocurrency, including:
- The need for financial privacy
- A preference for decentralized financial systems
- The potential for high returns on investment
History of Cryptocurrency in India
The origins of cryptocurrency can be traced back to 2009 when Bitcoin was introduced by an anonymous entity known as Satoshi Nakamoto. In India, Bitcoin started gaining attention around 2013 when it gradually entered the market. The decentralized nature of Bitcoin—free from central authority control—attracted investors. However, the lack of legal clarity led to confusion and skepticism among the public.
In 2013, the Reserve Bank of India (RBI) issued its first warning against cryptocurrency, cautioning users about potential legal, functional, and financial risks. The primary concerns raised by the central bank included:
a) Consumer protection
b) Money laundering risks
c) Cybersecurity threats
Despite regulatory warnings, cryptocurrency trading continued. However, on April 6, 2018, the RBI issued a circular prohibiting banks and financial institutions from facilitating cryptocurrency transactions. This decision significantly restricted the availability of cryptocurrency exchange through formal financial channels.
In response, the Internet and Mobile Association of India (IAMAI) challenged the RBI’s decision in the Supreme Court. On March 4, 2020, the Supreme Court ruled in favor of the crypto community, declaring that the RBI’s 2018 circular violated Article 19(1)(g) of the Indian Constitution, which guarantees the right to practice any profession or carry out any trade or business. This ruling allowed banks to resume services for cryptocurrency traders and investors. However, it did not grant cryptocurrency legal status.
Comparison with Other Countries
The legal status of cryptocurrency varies widely across the world. While some countries have embraced it, others have imposed stringent restrictions.
El Salvador
El Salvador made history by becoming the first country to recognize Bitcoin as legal tender, allowing its use for everyday transactions.
China
On the other extreme, China has implemented strict prohibitions on cryptocurrency transactions and mining, making it illegal to engage with digital currencies.
United States
In the U.S., cryptocurrency is considered a taxable legal asset. It is regulated by various authorities, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
- Taxation: Cryptocurrency is classified as property for tax purposes, and capital gains tax is levied on its sale.
- State Regulations: Some states have their own licensing requirements. For instance, New York has introduced the “BitLicense,” imposing strict compliance standards for businesses operating in the crypto sector.
European Union
- Regulation: The European Union is working on the Markets in Crypto-Assets (MiCA) Regulation, which aims to establish a uniform regulatory framework across member states.
- Taxation: The taxation policies vary among EU nations, with some treating cryptocurrencies as currency and others as taxable property.
- Consumer Protection: The EU enforces strict transparency requirements for crypto platforms to ensure consumer safety.
Japan
Japan recognizes cryptocurrency as legal and has a comprehensive regulatory framework managed by the Financial Services Agency (FSA).
- Regulation: Crypto exchanges must register with the FSA to operate legally.
- Taxation: Cryptocurrency earnings are classified as miscellaneous income and are subject to progressive taxation ranging from 15% to 55%.
- Consumer Protection: Japan mandates strict security protocols for cryptocurrency exchanges to safeguard investor funds.
Types of Cryptocurrency
Several types of cryptocurrencies exist, each serving different purposes:
- Bitcoin (BTC): The first and most widely known cryptocurrency.
- Altcoins: Cryptocurrencies other than Bitcoin, including Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).
- Stablecoins: Cryptocurrencies pegged to stable assets (e.g., the U.S. dollar) to reduce volatility.
- Tokens: Digital assets built on existing blockchains, designed for specific applications or services.
Current Regulatory Framework in India
Currently, India lacks a specific legal framework governing cryptocurrency use. However, several regulatory initiatives indicate the government’s stance on crypto regulation.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
This bill aimed to regulate cryptocurrency-related businesses and proposed a ban on private cryptocurrencies while allowing the RBI to issue a Central Bank Digital Currency (CBDC). However, the bill was never passed, leaving the legal status of cryptocurrency uncertain.
Taxation of Cryptocurrencies
The Indian government has introduced taxation measures for crypto transactions:
- A 30% tax on income generated from cryptocurrency trading and mining.
- A 1% TDS (Tax Deducted at Source) on cryptocurrency transactions exceeding a certain threshold.
These taxation policies suggest that while cryptocurrency is not banned, it is heavily regulated.
RBI’s Central Bank Digital Currency (CBDC) Initiative
The RBI is developing a Central Bank Digital Currency (CBDC) as part of a broader effort to modernize India’s financial sector. The CBDC will function as a government-backed digital currency, providing a regulated alternative to decentralized cryptocurrencies.
LEGAL AND PRACTICAL CHALLENGES
1. Security Threats
As a digital asset, cryptocurrency is vulnerable to cyber threats and can be easily manipulated by hackers. Users must exercise caution and avoid unreliable sources or websites that could jeopardize their digital wealth.
2. Lack of Comprehensive Legislation
The absence of dedicated legal guidelines leaves investors and traders in a regulatory grey area, increasing uncertainty and risk.
3. Real Money Impact
Striking a balance between virtual and real economies is imperative to ensure financial stability in both sectors.
4. Cryptocurrency’s Illicit Activities
The unregulated nature of cryptocurrencies raises concerns about their potential use in money laundering, terrorism financing, and tax evasion.
5. Unstable Value
In the volatile world of virtual assets, the value of cryptocurrencies often mirrors their popularity. A decline in user interest leads to depreciation, making them a risky investment.
6. Global Coordination
As cryptocurrencies are inherently global, addressing cross-border regulatory issues requires a standardized framework of guidelines.
WHY IS CRYPTO REGULATION IMPORTANT IN INDIA?
1. Prevention Against Financial Crimes
- Regulations incorporating Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) measures help curb illicit activities by strengthening cooperation between authorities and cryptocurrency exchanges.
- Well-defined tax policies for crypto assets promote fair economic contributions and reduce the risk of tax evasion.
2. Financial Stability
- Unregulated crypto markets pose risks to the broader economy, creating potential instability.
- Regulations ensure that financial institutions have adequate reserves to manage risks and provide investor protection.
- Regulating crypto can also enhance financial inclusion by offering unbanked individuals access to alternative financial services.
3. Innovation and Growth
- Clear regulations attract legitimate businesses and traders, fostering a healthy ecosystem within the crypto space.
- Establishing India as a global competitor in the cryptocurrency market is possible with a well-regulated framework.
4. Revenue Generation
- Taxation on cryptocurrency transactions allows the government to generate revenue.
- A controlled regulatory environment can promote the growth of blockchain technology in India.
MAXIMS/PRINCIPLE INVOLVED
The principle of “caveat emptor” (let the buyer beware) is particularly relevant to cryptocurrency, emphasizing the need for investors to conduct thorough research before investing.
CASE LAW
Background of the Case
In April 2018, the Reserve Bank of India (RBI) issued a circular instructing banks and financial institutions to prevent businesses and individuals from dealing with cryptocurrency. This move effectively cut banking support for crypto exchanges and traders, making operations within the formal financial system nearly impossible.
In response, the Internet and Mobile Association of India (IAMAI), along with several cryptocurrency exchanges, filed a petition in the Supreme Court, challenging the RBI directive as unconstitutional and detrimental to their businesses.
Key Legal Issues
The case raised several important legal questions:
- Did RBI have the legal authority to ban cryptocurrency transactions?
- Did the ban violate the fundamental right to trade and profession under Article 19(1)(g) of the Indian Constitution?
- Was RBI’s decision proportionate to the risks posed by cryptocurrency?
- Should cryptocurrency be classified as property, currency, or another financial instrument, and how should it be regulated?
Arguments by IAMAI and Crypto Exchanges
The petitioners, including IAMAI and major cryptocurrency businesses, presented the following arguments:
- Violation of the Right to Trade: The RBI decision infringed upon Article 19(1)(g) of the Constitution, which protects the right to practice any trade or business. Cryptocurrency exchanges were operating legally before the restriction, and the ban unjustly crippled their businesses.
- Lack of Legal Basis: There was no law passed by Parliament explicitly banning cryptocurrency, making RBI’s action excessive and unfair.
- No Proven Risk: RBI failed to provide concrete evidence that cryptocurrency posed a direct threat to India’s financial stability. The risks were speculative rather than fact-based.
- Regulation Instead of Prohibition: Instead of an outright ban, the government should regulate the sector through measures such as Know Your Customer (KYC) compliance and AML policies.
Arguments by the RBI
RBI defended its directive by highlighting the risks associated with cryptocurrency transactions:
- Threat to Financial Stability: Cryptocurrencies could destabilize the financial system by facilitating unregulated transactions, potentially leading to economic disruptions.
- Investor Protection: The cryptocurrency market was highly volatile and speculative, exposing investors to significant financial risks.
- Regulatory Authority: As India’s central bank, RBI asserted its authority to regulate banking and financial services. While cryptocurrency was not explicitly banned, restricting its access to banking channels was a preventive measure against potential misuse.
Supreme Court Verdict (March 4, 2020)
After reviewing the arguments from both sides, the Supreme Court ruled in favor of IAMAI, overturning RBI’s banking ban on cryptocurrencies.
Key Takeaways from the Judgment
- Violation of Fundamental Rights: The Court ruled that RBI’s directive violated Article 19(1)(g) and imposed unjustified restrictions on a legitimate business activity.
- Lack of Adequate Evidence: RBI failed to provide sufficient evidence proving that cryptocurrency transactions harmed India’s economy or financial system.
- No Legislative Ban: The Government of India had not passed any law banning cryptocurrency, meaning RBI’s directive lacked legal backing.
- Need for Regulation Instead of Prohibition: The judgment emphasized regulating cryptocurrency transactions instead of imposing a blanket ban, suggesting a more balanced approach by financial authorities.
Impact of the Judgment
- Revival of Crypto Businesses: Following the Supreme Court’s decision, banks resumed services for cryptocurrency exchanges, allowing the industry to recover and grow.
- Increased Regulatory Focus: Although the ruling lifted banking restrictions, the government continued discussions on regulating cryptocurrency assets to prevent misuse.
- Introduction of Crypto Taxation: In 2022, India imposed a 30% tax on cryptocurrency profits and 1% TDS on transactions, signaling a shift towards regulation rather than prohibition.
- Uncertainty: Despite the ruling, the future of cryptocurrency in India remains uncertain, especially with the introduction of a Central Bank Digital Currency (CBDC) and ongoing regulatory debates over private cryptocurrencies.
CONCLUSION
The legal status of cryptocurrency in India is an evolving narrative shaped by judicial decisions, regulatory actions, market demand, and public interest.
On one hand, cryptocurrency trading continues to thrive in India despite the lack of clear legal recognition. On the other hand, if proper regulations are introduced, cryptocurrency could play a significant role in India’s financial ecosystem.
A well-balanced regulatory framework will be crucial in determining the extent and speed of adoption. While challenges persist, India’s legal and regulatory landscape presents vast opportunities for cryptocurrency growth and innovation.
