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With the popularization of internet technologies, virtual
currency – called cryptocurrency has also been invented. A
popular form of cryptocurrency is bitcoin. As cryptocurrency became
popular, people started investing and trading in bitcoins across
the globe even though the trade was not regulated. Trading in an
unregulated sector can lead to money laundering, fraud and even
terrorist funding. This popularly growing new sector also requires
tax reforms to account for the incomes being generated by the
consumer. However, there was no existing protection – neither for
consumers nor for the business runners in India.
Acting in the interest of consumers, the government cautioned
people about the risks in dealing with virtual currencies stating
that virtual currencies are not a valid legal tender in India and
even made clear that virtual currencies do not have a regulatory
protection in India1 . The Reserve Bank of India (RBI)
through its notification dated 06.04.2018 prohibited dealing of
virtual currencies in India. As per notification, the central bank,
while exercising its power, stated that the entities regulated by
RBI will not deal in virtual currencies. Therefore, consumers could
neither process nor settle their cryptocurrency transactions as the
bank entities of the RBI cannot deal in purchase/ sale of virtual
currency2 .
There is now a small hope for consumers in India that the
cryptocurrency trading may start again. As per the latest judgement
by the hon’ble Supreme Court of India in case of Internet
and Mobile Association of India v. Reserve Bank of
India3 , the court set aside the RBI notification
dated 06.04.2018 on the grounds of proportionality. The judgement
by the apex court was regarding the future of cryptocurrency in
India, as the court highlighted that “In case the said
enactment (2019) had come through, there would have been an
official digital currency, for the creation and circulation of
which, RBI/Central Government would have had a
monopoly.”4 The 2019 draft enactment Banning of
Cryptocurrency & Regulation of Official Digital Currency Bill,
20195 prohibits mining, holding, selling, trade,
disposal and use of cryptocurrency in the country. However, the
said draft bill allows the government, in consultation with the
RBI, to issue digital rupee as legal tender.
We raise a question here, whether it is possible for the
policy-makers to regulate the virtual currency in India. The
Supreme Court judgement highlights the RBI statement regarding the
fraud of Rs.2,000 crores (Rupees Two Thousand crores) that took
place in India masterminded by Gain bitcoin which promised return
on investment, but no return ever happened and also a similar event
which happened in a country like Japan where theft of 850,000
bitcoins had occurred. But instead of banning virtual currency,
Japan regulated its virtual currency business by amending the
Payment Services Act which regularises the cryptocurrency business
in Japan.6
Like Japan, there are many other countries which have
regularised cryptocurrency in their respective jurisdiction. For
instance, Canada does not treat virtual currency as a valid legal
tender but allows trade of these currencies in the country by
making few amendments in Canada’s Proceeds of Crime (Money
Laundering) and Terrorist Financing Act. This not only allows
virtual currencies by legalising as a money service business for
protection from money laundering7 . However, there are
many countries which are recognizing and legalising this activity
and are successfully able to tax the traders under various laws.
For example, Israel taxes it as an asset, 8 while United
Kingdom taxes it under various branches like Corporation pay or
Corporate Tax while individuals pay capital gain tax9
.
The above instances from various countries show that there are
many ways to regulate this business activity which could be a
success, though admittedly, there are many challenges ahead in
regulating this business activity. The 2019 enactment introduced by
China prohibits the trading of cryptocurrency and introduction of
Digital Rupee step is similar to what China did. The Chinese
government banned virtual currency and is planning to introduce its
own first digital currency10.
From India’s perspective, a major point for consideration is
that introduction of Digital rupee as a legal tender may be a point
of conflict as by way of banning other virtual currency and
introduction of Digital Rupee, the government may have monopoly in
this business. The hon’ble Supreme Court of India has noted
this aspect while discussing this issue but evaded discussion on it
by stating that such a situation has not yet arisen11 as
enactment is still in a bill shape.
This further brings focus on a big question that why can’t
India not regulate these currencies similar to other countries by
amending taxation laws, Foreign Exchange Management Act (FEMA),
2016 etc, and also appointing an authority like RBI or (Securities
and Exchange Board of India) SEBI over this business, as just the
introduction of digital rupee does not guarantee that there will be
no frauds or laundering. The future of cryptocurrency lies totally
in the hands of legislature, whether to ban the currency or not.
Apart from this, we need to take a decision for the way forward -
the introduction of digital rupee or to regularize the sector. This
is the need of the hour to make it a viable opportunity for
investors and consumers.
Footnotes
1. Government Cautions People Against Risks in
Investing in Virtual ‘Currencies”, Press Information
Bureau, Ministry of Finance, December 29, 2017.
2. Prohibition on dealing in Virtual Currencies,
Notification, 6th April,2018.
3. MANU/SC/0264/2020
4. Internet and Mobile Association of India v.
Reserve Bank of India (MANU/ SC/0264/2020), para
6.171
5. https://www.prsindia.org/billtrack/draft-banning-cryptocurrencyregulation-official-digital-currency-bill-2019
(last visited on 19/06.2020)
6. Regulation of Cryptocurrency in Japan, Library of
Congress
7. Regulation of Cryptocurrency in Canada, Library of
Congress
8. Regulation of Cryptocurrency in Israel, Library of
Congress
9. Regulation of Cryptocurrency in United Kingdom,
Library of Congress
10. Regulation of Cryptocurrency in China, Library of
Congress
11. Supra note 5
Originally published on May 2020. Vol. XIII, Issue
V
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