Regulation of Cryptocurrency in India
Cryptocurrency is a digital asset which can be traded via secured network technology, Blockchain. It has enormous financial potential in the markets of India. A batch of questions here arises, what is Blockchain? How does it work, about its emergence and if it is legal?
Blockchain is the network of millions of blocks (nodes), which stores and encodes the information (the process is called hashing) using various algorithms when pushed into the network by creating ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus either in the centralized or decentralized schemes. Information can be in any form of financial, personal, documents, files, images, recordings etc. All these nodes perform their different functions, mine their incentives and prepare an electronic ledger through Distributed-ledger technology (DLT) which records, share and synchronise transactions in their respective ledgers.
Satoshi Nakamoto, the unidentified pseudonymous person proposed a novel way to transfer funds from one party to another without going through a financial institution in his paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2009. The bitcoin protocol is built on the blockchain technology and hence he is the presumed founder of this technology.
Since blockchain is a technology, therefore, the question of its legality is gullible, real question floating here is whether cryptocurrency/virtual currency (VC) is legal?
On March 3, 2020, in the matter of Internet and Mobile Association of India (IAMAI) v. RBI, three Judges Bench, headed by Justice Rohinton F. Nariman struck down the Central Bank’s 2018 circular which prohibited its System Participants regulated under The Payment and Settlement Systems Act, 2007 from offering their services to organizations dealing in virtual currencies on the grounds of disproportionality, that it is unreasonable or disproportionate since RBI has failed to find any adverse impact of virtual currencies exchanges. The judgment came as a respite for cryptocurrency ecosystem, it is pertinent to note that SC Judgement has not adjudicated on the legality of cryptocurrencies, which remain unregulated until the absence of any specific legislation or regulation.
A draft bill titled, “Banning of Cryptocurrency and Regulation of Official Currency Bill, 2019” continues to remain pending in Parliament seeking to prohibit the use, transfer, mining, generation, disposal or sale of virtual currencies in India. Though the draft of the bill prohibits the use of cryptocurrency, it exempts the use of the DLT underlying its development, especially in financial services.
Meanwhile, due to lifting of restrictions on the trading of cryptocurrencies due to the SC ruling and the absence of any defined regulatory framework has flared up the industry during the COVID-19(force majeure) induced lockdown in the country. Trading volumes have increased by 400 times during the lockdown months and daily estimated trading volume in India is $10-$30 million.
The government might choose to adopt stricter regulations for the non-convertible decentralised currencies like Bitcoin or Lakshmi coin, Indian crypto than centralised currencies which are governed by a single administrative authority, for instance, the Libra cryptocurrency which was supposed to be launched by Facebook in 2020 but its launch is postponed due to regulatory pressure and political pushback.
Exhaustive set of regulations taking monetary, regulatory, and technological considerations implementing cryptocurrencies clearly and unambiguously shall be laid and the range of permissible services should be supervised and monitored. The government might want to retain the provisions banning the use of virtual currencies as legal tender in India, it must re-evaluate the potential it holds as a payment mechanism or as a form of investment since it was estimated to be a $20 billion industry before being crippled by the 2018 RBI circular.
Cryptocurrencies have the potential of transforming the financial technology landscape and is efficient, risk-free and low-cost transaction services for customers and businesses alike. Further, they support a highly secure, compliance-free international remittance system, encourage financial inclusion for unbanked communities and have now also started serving as a fundraising mechanism for early-stage start-ups through initial coin offerings (ICO).
Suggested regulations and anti-abuse provisions to frame specific legislation
Data Protection Policy
In designing KYC norms for companies dealing in cryptocurrency, clear roles for the all the participants of the cryptocurrency ecosystem, namely, the exchanger, the administrator, the user, miner, wallet provider, inter alia must be legislated.
Trading Policy
It may be designed in a way where the use of cryptocurrencies as a payment mechanism continues to be governed by the RBI and traded on an exchange is regulated by SEBI or a separate recognized crypto-asset exchange can be established as set up in Japan, a matured cryptocurrency markets to regulate virtual currency.
Anti Money Laundering Policy
It is outright clear that cryptocurrencies may cause, considerable money laundering and terror financing activities; it is a risk knowing that BT facilitates anonymous peer-to-peer transactions through a secure network in which government interference may become impossible. When transactions happen on a digital universe on an international platform it is difficult to establish jurisdiction of a particular country and hence boon becomes a bane to tackle the risks enumerated, global watchdog FATF recently evolved with a report which conceives a radical KYC/ anti-money laundering framework to regulate, supervise and monitor the conduct of cryptocurrency transactions. Countries shall adopt risk-based local regulations based on the strength of its economy and the relative maturity of the cryptocurrency industry. Proper guidelines shall be laid to demarcate differences between convertible and non- convertible currencies, centralised and decentralised network and identify the participants involved in the cryptocurrency ecosystem to avoid any potential conflicts between regulatory bodies.
Strict Licensing policy
India may opt to have stringent licensing, compliance and inspection norms as framed by New York state law for cryptocurrency transactions since the sector is still at a nascent stage and the digital literacy is relatively weak in the country’s population. Much elbow grease will be required to save cryptocurrencies from losing their cost advantage in the marketplace.
Tax Structure
Finally, the government must ponder on introducing an attractive tax structure for this industry in India when cryptocurrencies are used as a means of payment and records the income earned by traders by the nodes through DLT. Canada adopted regulations where digital currencies can be treated as barter transactions and also ensured that all transactions involving them as an asset, are duly taxed.
For instance, the government may opt to introduce lower tax rate on capital gains for cryptocurrency exchange for nurturing its acceptability as an investable asset or low TDS rate for any other income linked with cryptocurrencies to amplify activity in the sector.
Conclusion
Since there are no restrictions imposed on trading cryptocurrencies and also Supreme Court has not decided its legality and with the pendency of the draft bill banning cryptocurrencies, it is left unregulated and prone to exploitation. India has been behind the curve in adopting this virtual currency vis-à-vis its regional counterparts like China. Besides it being traded via BT the time has now come to leave a crossroads and let this sector flourish in the country and ergo need to set a paradigm, by removing the ambiguity and mount a specific framework governing cryptocurrencies.
Also, NITI Aayog has been at the forefront of promoting the adoption of frontier technologies through demonstration of their efficacy because of its beneficial character involving security, accountability, transparency and impossibility to hack. Blockchain Technology is the harbinger of its true promise – seamless transactions that promote ease of doing business as well as ease of living for citizens via disintermediation and the reduction of ad-hoc bureaucracy.
