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Blockchain technology, by changing the very structure of financial interaction, has been considered a major step in the Industrial Development landscape around the world. A blockchain, in simple terms means a public ledger of a digitized and decentralized nature that records all cryptocurrency transactions. This technology led to the rise of cryptocurrency and more specifically Bitcoin, a lucrative but highly volatile decentralized digital currency.
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While the early work on cryptocurrency can be traced back to the 1980s, India saw a rise in its popularity 2017 onwards, in the post-demonetization scenario. Cryptocurrency emerged as a medium of exchange without any active role of the state authorities and has therefore generated a lot of debate regarding its legality. On one hand, countries such as the United States, Singapore and Germany consider it to be a legal tender akin to money, whereas on the other hand, there are countries such as Pakistan and Egypt who have made it illegal to deal in these currencies.
If we look at the Indian scenario, the watchdog of our financial system, the Reserve Bank of India (‘RBI’), has time and again taken a stand against the use of cryptocurrencies. Through its circular of 2018, RBI seeked to limit the use of virtual currencies by imposing restrictions on its regulated entities, until the Supreme Court of India stepped in and set aside the impugned circular.
Former finance minister, Late Mr. Arun Jaitley, in his 2018 budget speech laid emphasis on eliminating the use of virtual currencies in India and stated that the government does not consider it to be a legal tender.
While the world was witnessing an unprecedented rise in the popularity of virtual currencies, the Indian Government, in the year 2017 constituted an Inter- Ministerial Committee to study all aspects of cryptocurrency and issues related to it and to provide recommendations on the basis of the study. The committee, while rooting for a complete ban on all forms of private cryptocurrencies, proposed a draft bill known as Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
The Committee, after analyzing the legal frameworks governing virtual currencies across several jurisdictions, submitted its report on 28th February, 2019. The report highlighted that cryptocurrency, also known as Distributed Ledger Technology is of Decentralized nature, i.e. there is no central authority to regulate such transactions and it therefore cannot be used as a legal tender.
Further, the report suggested that private virtual currencies cannot replace a fiat currency since they lack basic attributes of a currency and hence, should be banned and carrying on of any activities connected with such currencies must be criminalized in India. Additionally, it recommended that the government should introduce digital form of fiat money known as Central Bank Digital Currency in India.
Further, as per the draft bill, any person involved in mining, holding, selling, issuing, transferring or use of cryptocurrency could be punished with fine or imprisonment of up to 10 years, or both. It goes on to prohibit persons from using cryptography, directly or indirectly, as a medium of exchange or a store of value or a unit of account. The bill however, makes an exception as to the use of technology or processes underlying any cryptocurrency for experiment or research.
The bill provides a transition period of 90 days to Cryptocurrency holders to make a declaration and dispose of cryptocurrencies within this period.
RBI’s stance on Virtual Currencies
The Central Bank’s approach has not been very cryptocurrency-friendly from the early days. Over the years, RBI has issued a number of press releases to caution the users of Virtual Currencies (Eg. in 2013 and 2017).
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On April 6, 2018, RBI by exercising its powers^, issued a circular prohibiting all banks and other entities regulated by RBI from dealing in virtual currencies or in providing services for facilitating any person or entity in dealing with or settling these currencies. Through this circular, RBI intended to paralyze one half of the body in order to stop the usage of cryptocurrency. The aftermath of this indirect ban was a standstill in India’s virtual currency industry and it therefore witnessed a significant amount of backlash from various stakeholders. Consequently, the Internet and Mobile Association of India (IMAI), along with other associations and individuals, approached the Hon’ble Supreme Court of India to challenge the said circular.
Crypto Bros Versus Money Printer
The petitioners, in this case challenged the circular dated April 6, 2018 issued by RBI. The 3-judge bench of Justice Rohinton Fali Nariman, Justice Aniruddha Bose and Justice V. Ramasubramanian passed the judgment on March 4, 2020 and set aside the RBI notification.
The Hon’ble court stated that virtual currencies cannot just be considered as commodities and they actually constitute digital representation of value. Further, these currencies do pose a threat to the financial system of the country and are accepted as valid payments by some institutions. The petitioners had also contended that the ban imposed by RBI was disproportionate as it infringed the fundamental right of citizens to practice any profession and to carry on any occupation, trade or business.
The Honorable court relied on a number of cases such as Modern Dental College v. State of Madhya Pradesh; Md. Yasin v. Town Area Committee and Bennett Coleman & Co. v. Union of India to test the proportionality of the circular and held that the impugned circular failed to clear the test and therefore, is in violation of the right to access the banking system forms an integral part of this fundamental right.
The Way Forward
While the RBI’s circular crippled India’s Cryptocurrency industry, this judgment of the Honorable Apex Court opened quite many doors for various cryptocurrency exchanges, platforms and other stakeholders that are involved in this sector. This being said, the fate of the 2019 bill that was proposed by the Inter-Ministerial Committee is still unknown to us and the legislature is yet to take a stand on it. One could definitely hope that the judgment passed by the Supreme Court, in this regard, will have some influence on the law making body.
The need of the hour is a proper regulatory framework around the much debated sector and for that, RBI and the legislature have to join hands and they must adopt a flexible approach in dealing with the same. While the Apex Court set aside the circular issued by RBI, it recognized the wide and ample powers of RBI in regulating matters concerning the financial sector in India. And therefore, keeping aside certain inhibitions and at the same time, taking into consideration the uncertainties revolving around virtual currencies in terms of privacy concerns, tax evasion, terrorist funding, etc., it is the right time to come up with a legislative framework to govern the dealings and transactions pertaining to cryptocurrencies. This will have a great impact in strengthening India’s financial sector by opening up a plethora of investment avenues for businesses around the world.
Harsh Kumra is a fourth year student at Amity Law School, New Delhi (GGS IP University). He has previously interned with various law firms including Anand & Anand, Kochhar & Co. and Desai & Dewanji.
^under Section 35A read with Section 36(1)(a) of the Banking Regulation Act, 1949; Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949; Section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007