Crypto in India is currently booming, the market has been thriving, and retail investors are adding to the fire with their enthusiasm. India has been estimated to have over 10M + crypto investors, and this number is snowballing every day.
While a significant number of Indians are wholeheartedly affirming cryptocurrencies, one piece of misinformation is holding back many more millions. People confuse the unregulated aspect of cryptocurrencies with being illegal.
Cryptocurrencies are not illegal in India; anybody can buy, sell and trade cryptocurrencies. It’s unregulated; we do not have a regulatory framework to govern its functioning for now. However, the Indian government is exploring crypto regulation.
Read more about Crypto Currencies on here, to understand the asset, before examining the laws that govern them. From a tweet, to a rumour, all types of communications can have a bearing on a crypto.
So, who is regulating this asset class?
Is a tweet by Elon Musk considered an Investment recommendation?
Is donation via Dogecoin considered legal/ valid for Covid-19?
Let’s take a deep dive to understand this space better.
Global Laws
There is no uniform definition of “Cryptocurrency”, which is often referred to as “virtual currency”, “digital assets”, “digital tokens”, “cryptoassets” or simply “crypto”. While some jurisdictions have attempted to formulate a detailed definition for the asset class, most have wisely opted for broader, more technology-agnostic definitions, giving them the flexibility to regulate the definition as the technology evolves.
Compared to many other countries the US government has been more open and positive about Cryptocurrencies and undoubtedly one of the leading global leaders with respect to crypto adoption and its use, classifying crypto as MSB (Money Services Business). Germans treat it as a “units of account” that can be used for the purpose of payment, whereas the Chinese have banned all activities related to cryptocurrencies. UK is neutral, where digital currencies are not yet banned, but are still not considered to be legal tender.
The regulations behind crypto are to either curb or foster the use of cryptocurrency, where some countries are uncertain or developing the regulations, while a few have banned the same.
Law in India
Cryptocurrencies are not legal tender in India. While exchanges are legal in India due to the absence of a robust regulatory framework, a protracted licensing process makes it very difficult for certain cryptocurrency services and innovative technologies to operate. Although there is currently a lack of clarity over the tax status of cryptocurrencies, Central Board of Direct Taxation has said that anyone making profits from Bitcoin will have to pay taxes on them, while other Income Tax Department sources have suggested that cryptocurrency profits should be taxed as capital gains.
The pattern of reluctance exhibited by India is evident through the series of either cautionary or prohibitory circulars issued by the Reserve Bank of India, the first instance being traced back to December 24, 2013 when the RBI vide a press release, cautioned the users, holders and traders of Virtual Currencies (VC), about the potential financial, operational, legal, customer protection and security related risks that they are exposed to.
An Inter-Ministerial Committee (IMC) was also formed which proposed two bills which were contrary to each other. The first one being Crypto-token Regulation Bill of 2018 (“First Draft Bill“). It recommended to term these products as securities or investment schemes and to regulate VC exchanges and brokers, where sale and purchase may be permitted. However, this was followed by the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (“Second Draft Bill“). It proposed to ban usage of VC’s as legal tender. Further, mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency in the country would be prohibited.
The RBI has maintained that there is a high risk of money laundering, terror financing, hacking and frauds in cryptocurrency. However, the Hon’ble Supreme Court in 2020, passed a landmark judgement striking down the IMC’s circular on the grounds that
“ denial of access to those who trade in cryptocurrency would tantamount to a denial of their constitutional right to carry on any trade or profession and thus would be violative of Article 19(1)(g)”.
The Road Ahead in India
The Parliament, in the next Lok Sabha session, is proposing to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“New Bill“) which seeks to create a facilitative framework for creation of the official digital currency to be issued by the RBI. And prohibit all private cryptocurrencies in India.
While the New Bill takes due cognizance of what has been a long-standing grey area in VC laws and fosters the advent of digitalization, it proposes to ban private cryptocurrencies in its entirety. The Indian population is estimated to contribute 2-10% of the US$430 billion virtual currency market worldwide and considering the huge number of VC investors in the country, it is bound to cause a certain sense of panic.
Further, it is pertinent to note that with only one digital currency, the RBI will have complete monopoly on it. There will also be a question of whether foreign investors can invest in the Indian digital currency and how it will be regulated. Thus, the looming possibility of foreign investors being allowed to invest in the Indian digital currency while the freedom of Indian investors to invest in foreign cryptocurrencies is essentially curbed, leaves room for further complications.
Future Recommendations
While there are some countries that are still striving to construct an economic framework for digital currency, there are some countries that have already built systems that require the digital currency service providers to be licensed by the appropriate local regulatory bodies.
Though the Indian SC judgment has provided temporary relief, there is currently an absence of definitive regulation on the cryptocurrency market. Considering such a vacuum, it is unlikely that financial institutions and the banking sector would be inclined towards investing in virtual currencies. The Indian Parliament is yet to approve the New bill, and it would be interesting to think through the role of digital currencies in the post COVID-19 economy.
One thing is for sure, retail investors are already allocating a considerable size of their portfolio, to crypto, and it is a matter of time before institutional investors join the party!
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This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.
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Hi, Raj. A very interesting read. But it would help if The Financial Pandora team can do an article on the future of cryptocurrency viz. will it become mainstream, how long will it take for it to become mainstream, is it possible for it to shed its ‘speculative’ characteristics & evolve into one becoming an instrument for value investing, will the involvement of big financial institutions lead to it becoming an even more complex financial instrument? The reason behind this request is to shed my Gloom & Doom view of cryptocurrencies especially in relation to the way people are treating it currently & take a more balanced view. Thanks.