INTRODUCTION
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Blockchain is the technology that underpins digital currencies or cryptocurrencies like Bitcoin, Ehtereum etc.
Cryptocurrency and blockchain, although inter-linked are different concepts. When Bitcoin was the only blockchain, there wasn’t much of a distinction between the terms and they were used interchangeably. As the technology matured and a variety of blockchains bloomed, the uses quickly diverged from the pure money aspect. Blockchain technology started gaining more attention for its potential for uses like online voting and crowdfunding.
Contrasted with blockchain, cryptocurrency has to do with the use of tokens based on the distributed ledger technology. Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time.
POSITION OF THE RBI
After several warnings issued against the potential risks associated with cryptocurrency transactions, RBI, on April 6, 2018, issued a notification banning all RBI regulated authorities to deal with or provide services to any individual or business entities dealing with or settling cryptocurrencies. The entities already dealing in such transactions were allowed to exit the relationship within 3 months of the notification.
The risks highlighted by RBI included terror funding and money laundering via cryptocurrencies. According to RBI, crypocurrency has been historically used to purchase illegal and illicit goods ranging from guns and ammunition to drugs. RBI claims that there is no ban on cryptocurrency, but in fact the bank has only tried to ringfence RBI regulated entities and their dealings in activities that pose reputational, financial and operational risks. This circular was issued by the RBI in the interest of consumer protection and safeguarding the financial monetary/payments/credit system.
In another notification immediately following the one, RBI also stated that an interdepartmental group would be set up to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency. The ban bulldozed several companies and exchanges dealing with virtual currencies out of the country.
POSITION OF THE SUPREME COURT
Supreme Court passed a judgment on March 4th, 2020 overturning the RBI notification and lifting the ban upon cryptocurrencies. Definitions and viewpoints on cryptocurrency from jurisdictions all over the world have been analysed. This judgment has fuelled new energy into the crypto-market. The volatility in the market due to covid-19 is also encouraging more people to trade in the exchanges. India’s largest cryptocurrency exchange, by volumes, WazirX has seen its daily volume grow by over 470% within 30 days from the day of the judgment. However, this surge in crypto-trading might be a little premature. Some key takeaways from the Judgment-
- It was the petitioners’ contention that RBI exceeded its authority in banning cryptocurrencies as the activities carried on by them were outside the purview of RBI. While rejecting the contention, Court concluded that some institutions accept virtual currencies as valid payments for the purchase of goods and services and therefore, the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the Reserve Bank of India. cryptocurrencies have features of money under certain circumstances thereby making RBI the appropriate regulatory authority for governing all crypto transactions. The Court further went on to add that anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system
- The Supreme Court while impugning RBI’s order concluded that the bank had failed to assess any alternative measures to curtail the threat upon the economy or its regulated entities from cryptocurrencies. For imposition of such severe measures the possibility of any alternative, less intrusive measures must be thoroughly explored first which the RBI failed to do. The bank should have considered regulation measures and measures to strengthen the financial system instead of a blanket ban.
- The Court also held that RBI had failed to show any empirical evidence of threat in the last 5 years upon the regulated entities to functioning of cryptocurrencies. There is no demonstrable harm suffered by any of the regulated entities shown by RBI and therefore it hasn’t been able to substantiate the threat from cryptocurrency.
- The proportionality of the measures enforced by the RBI were primarily in contention. The Court took a 4 pronged test to assess the proportionality– The measures are designated for a proper purpose.
– The measures were rationally connected to the fulfilment of the purpose.
– Are alternative and less invasive measures available.
– Is there a proportional relation between importance of achieving the purpose and importance of limiting the right. - It was held that mere ritualistic incantation of money laundering and black money did not satisfy the tests and therefore was not enough for a blanket ban measure.
- Vastly, the premise of the petitioners case was that RBI vide their circular banning Virtual Currencies was a violation of Article 19(1)(g) of the Indian Constitution. infringement of the right to carry on trade, business or profession. On this contention, the Court held that, while the right to carry on trade is not infringed upon for those merely trading in virtual currency, the notification did run most exchanges and legitimate cryptocurrency businesses in the country out of business thereby violative of their right under Article 19(1)(g).
- Lastly, RBI claimed that the ban was on cryptocurrency and not blockchain technology claiming that somehow the two aren’t inter-linked which the petitioners contended to be an irrational argument. The Court backed RBI on this. It was held that cryptocurrency was a by-product of the blockchain technology and the RBI is not irrational in accepting technological advancement (blockchain technology) while rejecting the by-product (cryptocurrency).
The Supreme Court concluded that there remains a lack of unison on the position of cryptocurrency amongst the lawmakers, the government and the RBI despite several committees being setup and two draft bills having completely opposite positions. While overturning the RBI notification and lifting the ban the Court implied that it would take a backfoot if there were to be a successful legislation passed governing virtual currencies in India.
POSITION OF THE LEGISLATION-
Inter-ministerial Committee Report and Draft Bills
An inter-ministerial committee was formed on 2nd November, 2017 to study the issues related to virtual currencies and actions to be taken in regards thereof . They contemplated measures for regulation of Virtual Currencies as opposed to a total ban through Crypto-token Regulation Bill, 2018.
However, a year later, the committee submitted a report along with the draft bill called Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 suggesting a total ban on virtual currencies. The report highlighted the benefits of blockchain technology and DLT but suggesting a ban on private crytocurrencies. It also spoke about the future of a national digital currency. The draft bill was scheduled to be introduced in the winter session of 2019 but was delayed.
The Bill prohibits the mining, generating, holding, buying or selling or dealing in, issue, transfer, dispose of or use cryptocurrency in the territory of India and proposes a ten-year prison sentence.
The draft clarifies that the provisions of the said Bill will not applicable to any person using technology or processes underlying any cryptocurrency for the purposes of experimenting or research including education, provided that no cryptocurrencies are used for making or receiving any payment in such activity.
The Bill also clarifies that any law would not target blockchain or the use of Distributed Ledger Technology (DLT) for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency for making or receiving payment.
It is opined that since the Bill criminalises dealing with an asset in which millions of Indians have already invested as a legitimate economic avenue, it tends to take a severe position. The rough estimate of the number of Indians who have already invested in crypto assets stands to about 5 million. The Bill would lead to uncertainty since it does not make any provisions for offloading the investments already made.
POSITION OF THE GOVERNMENT
Apart from financial regulators and legislators many governments support progressive approach to blockchain in India. Many state-level governments, especially those with a strong IT sector and startup footprints, have been actively trying to build blockchain ecosystems.
The federal ministry for IT recently released a Draft National Strategy for Blockchain. This report looked at more advanced applications of blockchain, for example around data monetization, and pushed for building a global developer hub of blockchain talent in India.
The state of Telangana, has designated an entire area as its blockchain district, with infrastructure geared for blockchain startups. Another state, Tamil Nadu, has announced an ambitious blockchain backbone on e-governance, which could be one of the largest projects in the world, covering 10 million citizens.
POSITION OF CRYPTOCURRENCIES IN VARIOUS ECONOMIES
Countries like the United States of America, United Kingdom and Japan have been able to regulate crypto-asset activity to mitigate the risks and promote the benefits. Regulating cryptocurrencies has been heavily recommended by the G20 and Financial Action Task Force which is the global anti-money laundering regulator or watchdog so to say. Recently, South Korea legalised cryptocurrency.
Countries like Switzerland have gone ahead and allowed its citizens to pay utility bills in cryptocurrency and the Monetary Authority of Singapore has an interbank system based on Blockchain. In February 2019, J.P. Morgan became the first U.S. bank to create and test a digital coin that is pegged to the U.S. Dollar, and representing fiat currency held in accounts operated by JPMorgan Chase N.A. Singapore is testing a system to tokenize its currency across Blockchain platforms, while political parties in Denmark conduct internal elections using Blockchain based systems to eliminate rigging and enhancing transparency.
NEED FOR LEGALISING AND REGULATING CRYPTOCURRENCY
The recent judgment of the Hon’ble Supreme Court of India has brought a sigh of relief amongst investors and traders. However, the Bill has caused grave panic amongst crypto-exchanges who have moved from India and registered their companies abroad in order to circumvent the adverse legislation in India.
It is imperative for India to act on regulating the current scenario surrounding crypto-asset trading and investment as well as Blockchain management. The draft Bill stands to criminalise cryptocurrency trading, investing and mining. The Government is in turn hurting its own standing in Ease of Doing Business Index since India’s Blockchain sector has almost received USD 5.3 million in venture capital funding up until 2019. Moreover, the World Economic Forum estimates that 10 per cent of the global GDP will be stored on Blockchain-based platforms by 2027.
Regulating cryptocurrency would cause more blockchain start-ups to flourish in the country, also result in more jobs and more tax revenue for the country. Further, a blanket ban on cryptocurrencies is likely to destabilise the existing infrastructure that processes and facilitates trade in digital tokens. The government’s mistrust of cryptocurrencies could set India back in its process to adapt applications based on distributed ledger technology especially when India has about 20,000 Blockchain developers of its own.
PROBLEMS WITH CRYPTOCURRENCY
The primary problem surrounding cryptocurrency is that it is not governed by a central authority, statute or expertise that determines the current amount of cryptocurrency in circulation but rather individuals privately contracting amongst themselves without any intervention of a third party thereby making the regulators unable to track the usage of such currencies.
The nature and working of cryptocurrencies makes it extraordinarily hard for the government to enforce norms and censor transactions. There lies almost complete transactional privacy and it is would be next to impossible for the government or for that matter the Reserve Bank of India to censor either through the monopoly of force or through trying to license social norms, behaviours that it might find undesirable or counter to its accumulation of power.
Moreover, like any hedge, cryptocurrencies can be used as a way to funnel out of other assets that are depreciating. When governments are under stress and when their currencies are debased as seen in Venezuela and Hong Kong, people normally jump to commodities that have global value (such as the case of silver and gold) outside of the troubles of any domestic currency which they anticipate falling. Many will go to the US dollar, a traditional hedge — still, however, tied to a physical government.
CONCLUSION
Despite the decision of the apex court to lift the RBI ban on Virtual Currencies, the current legal position of Virtual Currencies such as cryptocurrency remains vulnerable. With a looming Banning of Cryptocurrency Bill released on February 2019, RBI seeking a review of the Supreme Court Judgment and the divided stance of the policymakers on the subject, the fate of cryptocurrency is far from conclusive.
However, post the judgment, the investors remain hopeful that the policymakers of the country will revisit the Bill and find a way to regulate growth in Blockchain and Cryptocurrency instead of contemplating a blanket ban. A number of Cryptocurrency stakeholders are rallying their forces to present their case before the regulators and policymakers.