This Article is Written by Saba Alam (a student of BALLB from Aligarh Muslim University, Murshidabad Centre)
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The recent increase in the exchange of cryptocurrencies has encouraged the world to evolve the legal regulations to govern virtual currencies. Crypto in India has gained momentum and retail investors are adding to the fire. There are an estimated 10 million cryptocurrency users in India and the number keeps soaring high. While the crypto market is booming but million more Indians are holding back because of the future of the unregulated digital asset.
A cryptocurrency or crypto is a digital currency that can be used to buy goods and services but uses an online ledger with strong cryptography to secure online transactions. These are capable of functioning as a medium of exchange akin to money. The lack of a bank-backed systemor traditional government to regulate its use makes cryptocurrencies the target of several concerns such as it being a source for black money or anonymously funding terrorism. Despite the odds, cryptocurrencies have gained popularity worldwide and the cryptocurrency market in India has also been slowly escalating.
Former Reserve Bank of India (RBI) governor and eminent economist Raghuram Rajan said some cryptocurrencies may have a “potential future” as the industry gets regulated and crypto money finds more real-world use cases.
Cryptocurrencies are unregulated and there is no such framework to govern them as for the present. However, the government of India is exploring its regulation.
Was cryptocurrency banned?
When cryptocurrency blew up in 2017, tech-savvy retail investors were taking undue advantage and using it in illicit activities. At that time, they were at a very nascent stage and the regulations were yet to be decoded for adoption. So, various warnings were issued by the RBI through its press releases regarding the potential risks of the use of cryptocurrencies to the financial system of the country. The Inter-ministerial Committee on February 28, 2019, had also released a report recommending certain measures in relation to cryptocurrencies, which included a complete ban on private cryptocurrencies.
In 2018, The finance ministry released a statement saying
“The government does not consider Cryptocurrencies “as Legal Tender or Coin” and will take all measures to eliminate the use of these Crypto Assets in Financing “Illegitimate Activities” or a Part of the Payment System. The government will explore the use of Blockchain technology proactively for assuring in the digital economy.”
What did the RBI’s 2018 circular say?
In April 2018, the RBI issued a circular banning regulated financial institutions from providing services to businesses dealing in the exchange/trading of cryptocurrencies, which put the entire Indian cryptocurrency trading industry in turmoil.
The central bank has repeatedly warned about the supposed risks that these unregulated private currencies pose to investors and the financial system. The 2018 circular was seen by many as an attempt to discourage citizens from purchasing cryptocurrencies. By barring banks from facilitating transactions involving cryptocurrencies, the RBI effectively banned any significant rupee investment in cryptocurrencies.
The validity of the circular was challenged before the Supreme Court in various writ petitions lead by crypto-trading entities. In its decision in Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court deliberated on cryptocurrency and struck down the circular.
Why did the SC overturn the RBI’s 2018 circular?
The Supreme Court in its judgment on Internet and Mobile Association of India vs. RBI in March overturned the RBI’s 2018 circular. The Supreme Court analyzed the role of RBI in the economy as a central bank to manage currency, money supply and interest rates and recognized that the maintenance of price stability as an objective of RBI. The Supreme Court noted that cryptocurrency is capable of being accepted as valid payment for the purchase of goods and services, and payment systems can be regulated by the RBI.
The Supreme Court held that the RBI was within its rights to issue the circular in fulfilment of its objective under the law to safeguard the “public interest, interests of depositors and interests of the banking policy”.
The Supreme Court stated that “Therefore, 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.” As the circular was found to be issued in the interest of banking policy, the depositors and of the public at large, the Supreme Court rejected the contention that there had been excessive use of power by RBI.
The circular was also challenged on the grounds that denial of access to those who trade in cryptocurrency would be 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 Supreme Court upheld this contention by stating that “There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession.” However, the Supreme Court drew a clear distinction between the three categories of persons who trade in cryptocurrency as a hobby as opposed to those who engage in trading in cryptocurrency as their business/occupation. The Supreme Court held that the first category who buy and sell cryptocurrency as a mere hobby cannot base their claim on Article 19(1)(g) as it only covers trade, occupation, profession or business. The Supreme Court further held that the second category of citizens those who trade in cryptocurrency cannot also claim that the circular had the effect of completely shutting down their businesses, as they could still continue trading in “crypto-to-crypto” pairs or use the currencies stored in their wallets to make payments for the purchase of goods and services to those who are prepared to accept them, within India or abroad. Therefore, it is only the third category i.e., cryptocurrency exchanges that suffered due to the circular, as they had no other means of survival if they were disconnected from banking channels.
Though the RBI was held to be within its rights to issue the circular, the factor that led to the striking down of the circular was the lack of proof of the “proportional damage” suffered by RBI regulated entities in dealing with businesses operating in cryptocurrencies. The Supreme Court observed that the circular disconnected the banking sector from cryptocurrency exchanges despite the RBI not having found anything wrong with the functioning of these exchanges.
Government’s recent take on cryptocurrencies
On March 4, 2020, the Supreme Court set aside the central bank’s 2018 circular and allowed banks and financial institutions from providing services related to cryptocurrencies. As a result, leading banks like HDFC Bank, ICICI Bank, YES bank and the State Bank of India have resorted their transactions with crypto exchange. In May 2021, the RBI permitted banks to facilitate cryptos. “There are no differences between the central bank and the finance ministry,” RBI Governor Shaktikanta Das had said.
The bottom line
Cryptocurrency sceptics say there is good reason to believe that governments around the world will eventually ban all cryptocurrencies. They argue that governments and their central banks will not allow the dilution of their monopoly power over money.
The Indian government has been giving conflicting signals on this matter. Finance Minister Nirmala Sitharaman in March said that there won’t be a total ban on the use of cryptocurrencies in the country. But the Centre soon plans to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is said to contain provisions completely banning the use of all cryptocurrencies. The future of cryptocurrencies in India, thus, still hangs in the balance.
“The lockdown boosted crypto adoption in India but we have not just seen the enthusiasm sustaining but rather growing. While India is a nascent market, it has matured very rapidly over the last 12 months. Retail investors are growing increasingly aware of the asset’s potential owing to its deflationary nature and making it a better hedge against market shocks,” CoinDCX Chief Executive Officer and co-founder Sumit Gupta said.
According to market analysts, the rise of cryptocurrencies is further expected to continue this year too