Validity of Cryptocurrency under Deliberation in India

The regime surrounding cryptocurrency in India has been in a state of flux since 2013. Particularly over the last few years, the Reserve Bank of India, the Indian Government and the Indian Judicial Courts have adopted contrary stances on this subject keeping the subject matter and enthusiastic traders and investors in a state of perplexity. However, trying to keep pace with the ever-evolving world circumstances and perceiving the massive popularity of the crypto market, its usage within a year, and potential revenue loss the Government of India, the regulators have slowly progressed from advocating against cryptocurrency and implementation of a complete ban on all cryptocurrency within the country in 2018, towards the development of an officially sanctioned form of cryptocurrency potentially regulated by the Reserve Bank of India from 2019 onwards.

On 2nd August 2021, the Ministry of Finance has endeavoured to provide clarifications with respect to series of questions that were put before them in a session of the Lok Sabha including but not limited to the current and future status of cryptocurrency trading the regulatory regime and protection available for traders and investors involved therein.

Recent Development

The overturning of the ban on cryptocurrency by the Indian Supreme Court in 2020 has resulted in a tentative acceptance of private forms of cryptocurrency within India at the present date. However, regulations and protection pertaining to private traders and Indian investors involved in the trade of cryptocurrency have remained unclear. In this background, the recent response by Minister of State for Finance, Shri Pankaj Chaudhary, is relevant to infer the future regulation of cryptocurrency in India.

The previous Finance Minister, Nirmala Sitharaman had promised that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would bring clarity regarding the regulation of virtual currencies in India. Even as said Bill awaits to be tabled in the ongoing monsoon session of Parliament, by way of the speech delivered on 22nd July 2021, Reserve Bank of India’s Deputy Governor Mr T. Rabi Sankar has confirmed the Reserve Bank of India would work on issuing central bank digital currency and that central bank digital currency would be implemented in India in a phased manner.

Interestingly, one of the key questions put forth during the recent Lok Sabha session regarding an enquiry on the current status of cryptocurrency in India, the Minister of State for the Ministry of Finance Shri Pankaj Chaudhary replied, “This information is not collected by the government.”.

Nonetheless, he attempted to clarify the current regulations and protection surrounding cryptocurrency and its trading. It was explained that as part of the current regulatory regime applicable to the trade of cryptocurrency, all banks and entities regulated by the Reserve Bank of India must carry out customer due diligence processes in line with regulations governing standards for Know Your Customer, Anti-Money Laundering, Combating of Financing of Terrorism and obligations of regulated entities under Prevention of Money Laundering Act, 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act, 1999 for overseas remittances. Based on the explanation provided by Mr Chaudhary, the next question put across was in relation to the laws that are or will be implemented in order to protect traders and investors dealing in cryptocurrency from fraud and other misdemeanours, for which the Minister replied that depending on nature of fraud, the present laws in place such as the Indian Penal Code 1860 would be sufficient to offer requisite protection.

The Minister also collectively responded to inquiries on whether the Indian Government would introduce specific regulations and/or legal protections concerning trade of cryptocurrency, the parties involved therein as well as status thereof. In this regard, statements issued in the 2018-2019 budget session of the Parliament and recommendations specified in the Inter-Ministerial Committee report were reiterated by him, is “The Government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system.”.

Conclusion

To surmise, it is understood that the Indian Government will not consider cryptocurrencies legal tender and would take such measures as shall be necessary to eliminate the crypto-assets used to facilitate illegitimate activities or as part of the payment system. At the same time, it was given to understand that the Indian Government would make use of blockchain technology to usher in a digital economy. For the same, in order to promote digital economy, the Indian Government would take a decision based on the recommendations of the Inter-Ministerial Committee (viz. whether to ban all private virtual currencies in India, except any virtual currency regulated by the Indian State) and introduce the same in the Parliament in due process, to develop and implement a state-sanctioned form of cryptocurrency regulated by the Reserve Bank of India viz. central bank digital currency.