The present era of advanced digitalization and rapid technological growth has merged a majority of day-to-day activities with the online platform, making exchanges more flexible and time-saving. The demystification of intricacies associated with cryptocurrency has been a comparatively recent development in the Indian scenario. To provide a prefatory foundation before delving into the technicalities and developmental trends of cryptocurrency, it is essential to familiarize oneself to the basics of what constitutes cryptocurrency in a layman’s term. Cryptocurrency is a form of virtual money that uses decentralized technology to enable users make secure payments so as to facilitate virtual buying, selling and trading. The cryptocurrency market has been estimated to be the next potential trillion-dollar industry in the world by 2025, with an average market size of 1.5 Trillion USD. At the same time, the trend of market regulations in India (relating to cryptocurrency) has been an interesting subject of study in commercial and corporate law. The latest development in this field has been the constant deliberation around the introduction of a new legislation that would ban the trade of cryptocurrencies.
The Next Potential Trillion Dollar Industry
An overview analysis of the statistics is enough to formulate a coherent picture of the current status of the cryptocurrency industry, which presently records 2,60,000 plus smart contracts, 5000 plus listed tokens and coins, and 350 plus Digital Asset Exchanges. However, the same has received specific legislative responses and clear regulatory norms from less than ten countries globally, and India is certainly not one amongst them. The economic renaissance in India has also attracted many Indians to the potential commercial benefits that can be drawn from the use of the intangible digital currency. There have been a number of notable developments surrounding cryptocurrency, including Bitcoin, Litecoin, Unocoin and Ethereum.
Key Developments in the Indian Crypto Space
In the Indian Backdrop, the development graph traces back to the proliferation of the crypto trading and exchange platforms in 2013, with country’s Apex Banking Institution issuing regular digital asset risk warnings. The process saw a setback in 2018 when the RBI decided to impose a ‘ban’ on regulated entities from providing services in digital assets. The issue also received attention from an Inter-Ministerial Committee that recommended a complete ban on digital assets following which a sandbox-framework was formulated by the RBI in 2019, excluding digital assets owing to the high level of volatility and price fluctuations associated to cryptocurrencies. While deliberations and debates surrounding the pros and cons of digital trading were on the rise, the attention of crypto enthusiasts was drawn to the landmark Judicial pronouncement by the Supreme Court that declared the RBI regulation against the principles enshrined under Article 19(1)(g) of the Indian Constitution. The judgment came as a boon for the industry, illuminating a ray of prospective growth through digital trading. The long-standing debate around the nature of currency received a valuable perspective of the Apex Court which upheld that though not legal tender, cryptocurrencies are a form of intangible currencies that can be brought under the radar of the Reserve Bank of India irrespective of whether it qualifies to be included within the ambit of the credit system of the country. The Court further clarified that the effect of the RBI circular does not extend to peer-to-peer transactions but is restricted to Banking services utilized to trade or convert cryptocurrencies. However, it must be noted that the Judgement has only provided a short-term relief to the industry and cannot be viewed as a definite green signal to cryptocurrency exchanges within the country.
Underlying Mechanism of Crypto-trading
Cryptocurrency has been a revolution in the digitalization of financial transactions across the globe, which has also brought up various issues and concerns along the line. Since cryptocurrency is cryptographed through blockchain technology, it allows users to maintain the privacy of their transactional details. The details of these transactions shall be stored in the software network of the blockchain technology, accessible only to the parties who have made financial transactions upholding privacy and non-interference of third parties and other financial institutions.
The crux of this advanced technology is based upon a decentralized network, i.e., a system in which transactions are locked through private and public keys which are controlled by the people using it or the organization that has developed it and does not involve any exterior control. This invariably prevents monopoly and keeps a check on the market regulations as the value of the coin is not depreciated by one particular individual or organization. Digital currency makes it easier for conversion of monetary value, thereby creating ease in doing business and trading across the globe. Another major development in digital currency is the removal of speculated interest that is charged by other financial institutions, such as banks. In this system, there is complete avoidance of third parties, and the transactional costs and interest rates are extremely minimal in nature, thereby increasing liquidity. Cryptocurrency is subjected to a thorough understanding of digital transfers, and the parties indulging in the same must have the requisite knowledge and understanding of the market before trading.
Reasons backing India’s present stance
India’s stance towards cryptocurrency trading is currently centered around the introduction of a novel legislation that would prohibit the trading of cryptocurrencies in the country. Interestingly, through the proposed bill, the government intends to encourage blockchain technology but put an end to unregulated cryptocurrency trading. This development follows a period of spike in the value of cryptocurrency, subsequent to the favorable decision rendered by the Apex Court of the Country, which saw a 400% hike in cryptocurrency trading within two months from the date of the pronouncement. The legislation, if introduced, would be a heavy blow to investors and dealers who are currently drawing profits out of crypto trading. As mentioned earlier, less than ten countries around the world have a designed legal framework relating to cryptocurrencies, which shows the lack of consensus in so far as crypto trading is concerned. There are a number of concerns that are bothering the Financial Authorities of the country from giving a clean chit to the trading of virtual currencies.
Cryptocurrency has prompted many attached risks, such as that of illegal transactions that cannot be deciphered due to decentralization of the network. Due to the lack of a proper framework in the regulation of cryptocurrency transactions, there have been several cases of fraudulent transactions that have put the parties who invest in bitcoins and other forms of cryptocurrencies at risk. The transactions taking place through these means are also subject to being hacked and there is an inherent risk of cyber-crimes that can take place despite the lucid system of decentralization. Data thefts of this nature can pose a significant threat to the security of a state. Further, as per a report published by Nature Climate Change, the use of cryptocurrencies has a severe impact on the environment due to the heavy consumption of electricity and use of exhaustible resources such as fossil fuels in order to support the computers that decode heavy and complex calculations.
Regulatory issues crippling the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
Pursuant to the recommendations of a high-level Inter-Ministerial Committee in 2019, the proposed bill aims to impose a ban on “private” crypto trading. However, the bill fails to address the meaning and scope of “Private” cryptocurrencies. The cloud of confusion covers the ambiguity that surrounds the fact that any non-sovereign digital currency could be termed as “private currency.” The design of the definition can have an effect to outlaw popular cryptocurrencies like Bitcoin.
Going by the definition of what constitutes cryptocurrency, the bill seeks to prohibit “mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. However, the definition is way too broad as the same can be interpreted to include other forms of digital tokens that are not generated through cryptography, such as gift cards and loyalty points, the value of which is ascertained from their digital representation. Further, the definition stands very different when compared to international standards that other jurisdictions have incorporated.
Another question that arises from a preliminary reading of the bill is whether the same proposes to restrict the holding or trading of crypto assets within India only or whether it would extend to Indians holding or trading in other jurisdictions as well. Moreover, there is a lack of clarity in so far as the tax implications are concerned. The nature of the income qualifies to be brought under the ambit of business income or gains from capital assets and hence the uncertainty persists.
The enforceability of the ban proposed by the bill is also questionable. The draft backed by the recommendations of the Committee allows certain exemptions to continue with the promotion and operation of the underlying crypto technology despite the anti-private approach. A mere ban on digital currencies is going to affect investors who own about 1$ billion worth of crypto assets and disposing off the same in a period of 90 days (as prescribed by the Bill) is going to result in huge losses for the said investors.
Recommendations and Conclusion
The authors suggest that a strong regulatory and constructive framework should accompany the adoption of trading in virtual currencies being legalised. A secure method of maintaining a check on the flow of transactions must be essentially considered to avoid illegal usage of this system. Cryptocurrencies are the face of a changing financial industry, due to which a lot of people are keenly awaiting to invest in the same. They must be made aware of the foundations of the system and risks associated with it, and therefore, education on the subject is a good way forward. The use of virtual currencies as a medium of exchange and acceptance as a legal tender can provide for many investors to show interest for various purposes that invariably contribute to the development of the nation. Hence, cryptocurrencies definitely show a ray of bright hope for a revolutionised future with the digitalisation of the medium of exchange.
(This post has been authored by Sulagna Dutta and Anushree S. Nair, penultimate year students pursuing BA.LLB at Symbiosis Law School, Hyderabad)
CITE AS: Sulagna Dutta and Anushree S. Nair, ‘Demystifying India’s Stance to Ban Cryptocurrency Trading: A Detailed Analysis of What the Future Holds’ (The Contemporary Law Forum, 5 April 2021)<https://tclf.in/2021/04/05/indias-stance-to-ban-cryptocurrency-trading-what-does-the-future-hold> date of access.