Cryptocurrency in India – Real Money but Not A Legal Tender

Cryptocurrency is a virtual currency which uses the technology of cryptography to secure its transactions, and these transactions are further stored in a digital ledger. The cryptocurrency can be classified into two categories based on centralisation-:

The centralised cryptocurrency is controlled by the appointed head of the centralised repository unit which is similar to the central bank. All the transactions, from one person to another, are carried out by the head.

The decentralised cryptocurrency is neither controlled nor regulated by any authority, rather it connects user to user and creates a peer-to-peer network eliminating the intermediaries. [1]

In this article, the author aims to discuss mainly the decentralized cryptocurrency (hereinafter referred to as ‘cryptocurrency’) which has been publicized world-wide since the inception of Bitcoin, a decentralised digital currency introduced in 2008.

Cryptography is the coding of the information for securing it and this secured information is made available only to the person it is intended to be read or processed. The evolution of cryptography was after the need for secure communication in the Second World War.[2] Later in 1983, an American cryptographer David Chaum devised an anonymous coded electronic money called e-cash. Further, in 1995, he introduced a platform for cryptographic electronic payments namely Digicash and made e-cash available through it. This platform made this currency untraceable by the government, the bank or any third party. [3]

Bitcoin

Bitcoin (hereinafter referred to as ‘BTC’) was invented in 2008 by an anonymous cryptographer Satoshi Nakamoto, whose existence has not yet been discovered. The financial crisis of 2008 is said to be the reason for the emergence of BTC. BTC aimed to furnish the market with a reliable digital currency which can be prevented from the abuse of the system.

BTC is transacted through a peer-to-peer network in a common dominion where all the transactions are recorded on a distributed ledger. So, all the users can access the transactions information at anytime. BTC is the first cryptocurrency which is based on the blockchain technology. Each transaction is contained in a block and all of these information blocks together form a ‘Blockchain’. The blockchain is defined as a public ledger which records and shows all BTC transactions happening within the BTC system.[4]

The fascinating feature of BTC is the trait of anonymity which maintains privacy. No BTC user’s identity is disclosed to any other BTC user or anyone else throughout the network. Whenever one needs to send payments through the BTC system, a BTC address is chosen from the myriad given addresses. For this, each BTC user possesses a set of private and public keys which are merely coded passwords used for dealing in BTCs.[5]

The other appealing aspect of BTC is its highly fluctuating value which has majorly shown a burgeoning phase since its inception. In 2009, the value of BTC was just a few dollars and did not rise much for the first few years. From 2013, the value started to hike consistently and the price outstretched to nearly $20,000 per bitcoin in 2017.[6]

All these foreground features of BTC have made it the most successful cryptocurrency today with the highest market capitalization of more than $170 billion.

Emergence of BTC In India

In 2012, there was insignificant trading of BTC in India. In 2013, the unusual and stupefying rally of the BTC value from $100 to $1075 in only two months (Oct-Dec 2013) proved to be great excitement for the worldwide investors. Consequently, it was so popularised that even the streamline businesses started accepting bitcoins in India. For eg-  In Mumbai, a vintage era pizza shop namely, Kolonial became the first food outlet in India to take payment through the BTC system.[7] Moreover, the time saw a massive surge in the establishment of cryptocurrency exchanges which escalated crypto trading in India. Also, the installation of platforms like over-the-counter (OTC) crypto shops and BTC ATMs in prime Indian metropolises boosted the crypto market in India.

Further, in 2016, the Indian government declared demonetization of nearly 86 per cent of the nation’s paper currency. This move by the government was a great shock to the 1.33 billion countrymen. However, the 40 per cent bracket with access to the Internet was triggered to look for an alternative currency and resultantly most of them ended up getting involved in crypto business for its quality of decentralization. Many of them secured their large untaxed cash holdings by investing in BTC and over the time it became a common practice to evade taxes.[8]

Some publications in 2018 disclosed that the rupee-denominated bitcoin business has become the third-largest in volume after the trading of the American dollar and Japanese yen.[9]

Outlook of Regulatory Authority of India (RBI)

After 2013, the outpouring crypto-economy seemed to raise concerns for the Reserve Bank of India as its BTC market grew massively, inculcating more Indians to move towards BTC investments. Also, when some tech analysts acknowledged the potential of the BTC, stating that it can be a substitute for the existing centralised currency. It became a distressful situation for the RBI.[10] RBI never approved cryptocurrency and consistently warned the investors and exchanges dealing in such currencies through public notices.[11]

In 2016, Raghuram Rajan, RBI Governor of that time mentioned in an interview[12] that shifting away from paper currency would stupendously help the economy as the printing, transporting and storing of paper currency incurs a huge cost. He added that moving to the traceable electronic currency from the untraceable paper currency would help the authorities. However, he also stated an inconsistent prospect, that this modification will paralyze the central bank to an extent where it will have to ask for funds from the government, to whom it is supposed to provide funds.

Most likely the latter outlook of Mr Rajan stated above was the ground for the RBI circular[13] of April 6, 2018, which declared a complete ban on all the cryptocurrency trading for the institutions regulated by RBI. The ban erupted great panic among the investors which affected the crypto market and further disabled the whole crypto industry of India.

In response, the Internet and Mobile Association of India (IAMAI) with other stakeholders of the crypto industry challenged the RBI circular in the Hon’ble Supreme Court.

 The Government’s Stance

No opinion was recorded on the part of the government until 1st February 2018, when the Finance minister Arun Jaitley, in his budget speech declared that the government endeavours to suspend the use of Bitcoin and other virtual currencies in India for criminal uses. He emphasised that India does not recognise them as a legal tender.[14] In contrast, he acknowledged the blockchain technology and added that it would be encouraged in financial institutions.

Most of the media houses displayed the aforementioned 2018 budget news in a frame where it indirectly reflected that practices in virtual currencies are an illegal activity from now. Consequently, several tech experts had to come up to clarify that not being a legal tender doesn’t make it illegal.[15] The Indian government only wanted to warn people that dealing with such types of non-fiat currencies can prove to be a great risk because there is no law protecting their interest in that currency. Also, no assistance could be provided from the government’s end if someone faced fraud in dealing. 

After a year-long ban on cryptocurrency by RBI circular, a high-level panel constituted in November 2017 under the chairmanship of Subhash Chandra Garg, former Finance Secretary of India submitted its report and advanced a draft bill “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019″ (hereinafter “Ban bill”) in 2019. In its report, it suggested-

  • That implementing the ban may not be easy as VCs and its technology is still in its evolving stage.
  • That all private cryptocurrencies except the ones issued by the state be banned in India.[16]
  • That the stand taken by the RBI to eliminate the use of cryptocurrency for the institutions regulated by the central bank is valid.
  • That the Distributed Ledger Technology(DLT) is very beneficial and can be used by financial entities for fraud detection, etc.[17]

The Draft Bill proposed by the committee stated that any individual who “mines, generates, holds, sells, transfers disposes of, issues or deals in cryptocurrencies” will be sentenced to 10 years prison ban.[18]

Fortunately, the draft bill has not been presented in Parliament yet. Consequently, it gave an edge to the crypto community traders to convince the authorities to reevaluate the bill.[19]

On the contrary to the aforementioned committee report, the Indian government is scrutinizing the cryptocurrency and the blockchain technology to introduce its cryptocurrency similar to BTC called “Lakshmi”.[20] This approach suggests that the government is inclined towards developing its regulated cryptocurrency to curb illegal activities and to control tax evasion. Several people are enticed by the new booming BTC but they do not understand it much and are oblivious about its downhill trends. For eg- the value of BTC dropped from $20000 to less than $3500 from Dec 2017-Nov 2018.[21]

Involvement of the Supreme Court

Due to the lack of legislation over cryptocurrency trading, the crypto market was highly vulnerable and could be ransacked by exploiters anytime. It had no relief mechanism in case one had any grievances. Thus, it had to experience extreme conditions since its emergence in India. However, the ban of RBI in 2018 was not welcomed by the crypto traders.

 In 2019, a petition was filed with the Supreme Court of India demanding the nullification of the ban on cryptocurrencies.[22] The contention made by the petitioner were-

  • The RBI circular was an ultra-vires act as the ban on entities related to RBI affects the whole market which is out of RBI’s jurisdiction.
  • The cryptocurrency was more similar to property.[23]
  • Art 19(1)(g)[24](Right to practice any profession) and Art 21[25](right to carry on the profession of  one’s choice) have been violated.

In an argument, the RBI mentioned the spread of Cryptocurrency equivalent to “Contamination” but blatantly failed to provide a ‘proportional cause’ for the ban. Hence, in a judgment dated March 4th, 2020, the apex court reversed the RBI circular, stating it as an unproportional move on the part of the central bank and abolished the ban on cryptocurrency. The three-judge bench stated that RBI did not explore the availability of alternative and less intrusive measures and banned the cryptocurrency with no proper research. However, the central bank was acknowledged to have acted within its rights in achieving its objective under the law to protect the “public interest, interests of depositors and interests of the banking policy[26]

After the judgment, several businesses have approached the RBI to clarify its stance regarding the status of the ban and also about the taxation of cryptocurrency as certain tax authorities have been scrutinizing, how to tax bitcoin and other cryptocurrencies.[27]

Now the IAMAI, the petitioner is looking forward to a formation of constructive policy on cryptocurrency jointly by RBI and the government. In contrast, the government can still ban cryptocurrency by an ordinance or by presenting and assenting the drafted ban bill of 2019 in the parliament. However, the re-ban will again be challenged in the court of law.[28]

Conclusion

The latest judgment of the Supreme Court of India has served a temporary relief to the crypto traders but there is still an absence of a definitive law on the cryptocurrency trading. The draft bill proposed by the IMC in 2019 is a globally inconsistent stand and outrightly banning this currency would be a step back from financial technology advancement. Precisely, it would be downhill to move away from such a flourishing market which has grown above most of the currency systems and has already been adopted widely around the world.

So with such an enthralling development of cryptocurrency in India, there is a demand for a strict regulation embodied with a restrictive legal framework, to curb the negative impacts of a cryptocurrency over the existing economy. An evolved and secured network of currency exchange has to be developed to avoid the risk of frauds by malicious users. 

The issue of price fluctuation, which is the main concern as well as the excitement factor for most of the people, is naturally based on investment, withdrawals and mining. The 2013 excessive rally of the BTC value was because of the new emerging exchanges and miners from the People’s Republic of China. [29] Hence, there can be no certain speculation about the future value of this currency. Nevertheless, some experts suggest that it is most likely to improve with time and regular updates.

In the end, the author believes that there are still multiple challenges experienced by the crypto market and now it lies on the legislative and executive branches of the government to formulate a strategy to ensure that the country and its countrymen do not lose a chance to grow.


[1] Shailak Jani, The growth of Cryptocurrency in India: Its Challenging & Potential Impacts on Legislation, 4, 2018.  https://www.researchgate.net/publication/324770908. (hereinafter “Growth of CC”)

[2] Dr Arvind Kumar Singh and Karan Veer Singh, Cryptocurrency in India- Its Effect and Failure on Economy with special reference to Bitcoin, Vol. 06 Issue-02, JOURNAL OF ADVANCED MANAGEMENT RESEARCH, 262, 264, 2018. (hereinafter “CIIB”)

[3] Dr.Anil Kumar V.V & Swathy. P, A Study on Opportunities and Challenges of Cryptocurrency in India with special reference to Bitcoin, Vol. 6 Issue I,INTERNATIONAL JOURNAL OF RESEARCH AND ANALYTICAL REVIEWS, 774,774, 2019. (hereinafter “IJRAR”) 

[4] Id. at 776.

[5] Dr Mohan Kumar, Bitcoins in India: A Study of Legal and Economic Aspects, Vol. 20, Issue 2, IOSR JOURNAL OF BUSINESS AND MANAGEMENT, 75, 75, February 2018.

[6] John Edwards, Bitcoin’s Price History, INVESTOPEDIA(May 30th, 6 pm). (hereinafter “BTC Price”) https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp

[7] Growth of CC at 4.

[8] Growth of CC at 4.

[9] CIIB at 273.

[10] Kyle White, Crypto Will Eventually Replace Fiat, but How Soon and Where? COINTELEGRAPH (May 31st, 9 pm) https://cointelegraph.com/news/crypto-will-eventually-replace-fiat-but-how-soon-and-where

[11] Reserve Bank of India, Prohibition on dealing in Virtual Currencies(VCs), RBI/2017-18/154 (Issued on April 6th,2018) (hereinafter “Ban on VC”)

[12] AJsMixx, Future of Cryptocurrencies- Dr Raghuram Rajan, YOUTUBE (May 31st, 10 pm) https://www.youtube.com/watch?v=fQyNYyDs-pQ

[13] Ban on VC at 1.

[14]  Anonymous, Jaitley’s view on cryptocurrencies splits opinion, THE HINDU (May 31st, 11 pm)

https://www.thehindu.com/business/budget/union-budget-2018-jaitleys-view-on-crypto-currencies-splits-opinion/article22619016.ece

[15] Anonymous, Budget 2018: Crypto cash not legal; but wait, it’s not illegal, TIMES OF INDIA(May 31st, 11 pm)

[16] Rahul Shrivaastav, Govt committee recommends ban on cryptocurrency in India, INDIA TODAY(June 1st, midnight) https://www.indiatoday.in/technology/news/story/govt-committee-recommends-ban-on-cryptocurrency-in-india-1572446-2019-07-23

[17] Asit Ranjan Misra, Panel favours cryptocurrency ban in India, LIVEMINT(June 1st, 12 am) https://www.livemint.com/industry/banking/government-panel-suggests-ban-on-private-cryptocurrencies-1563796292369.html

[18] Aayush Shankar, Comments | Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, METACEPT LAW (June 1st, 12 am) https://metacept.com/comments-banning-of-cryptocurrency-regulation-of-official-digital-currency-bill-2019/

[19] Kevin helms, Indian Government Delays Introducing Crypto Bill, BITCOIN (June 1st, 12 am)

https://news.bitcoin.com/indian-government-delays-introducing-cryptocurrency-bill/

[20] Mr J. P. Jaideep, Mr K.Rao Prashanth Jyoty, A Study on Cryptocurrency in India- Boon or Bane, Vol. 6, Issue 2, JOURNAL OF EMERGING TECHNOLOGIES AND INNOVATIVE RESEARCH, 412, 413, Feb 2019.

[21] BTC Price.

[22] IJRAR at 777.

[23]  Internet and Mobile Association of India v. Reserve Bank of India decided on March 4th, 2020. https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf

[24] INDIA CONST. art. 19, § 1, cl. g.

[25] INDIA CONST. art. 21

[26] Id.

[27] Kevin helms, New Cryptocurrency Exchanges Launch in India as Businesses Seek Answers From RBI, NEWS BITCOIN (June 1st, 9 am)  https://news.bitcoin.com/new-cryptocurrency-exchanges-india/

[28]  Gyan Tripathi, The crypto regime in India, METACEPT (June 1st, 7 am) https://metacept.com/the-crypto-regime-in-india/

[29] BTC Price.

Rishabh Gupta from Symbiosis International Deemed University

“He ventures to learn and write on different aspects of law and has a keen interest in Criminal Law.

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