Virtual currencies are accorded different legal treatment by different countries, which may include barter transactions, mode of payment and even legal tender. Cryptocurrencies like bitcoin and ethereum are considered to be a part of the virtual currency group. A cryptocurrency is a virtual currency designed to work as a medium of exchange which uses cryptography to secure and verify transactions through blockchain technology. A number of cryptocurrency exchanges have been operating in India post the launch of Bitcoin. There was no specific clarity on the legal regime surrounding cryptocurrency until 2018.
The Reserve Bank of India (“RBI”) by a circular dated 6th April, 2018 (“RBI Circular on VCs”) provided that “entities regulated by the RBI shall not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies”. Thereby providing a blanket ban on bank payment systems from being used for crypto currency related payments and providing banking services to those who trade in virtual currencies. This has been the stance of the RBI from the beginning, and RBI has repeatedly through its public notices on 24th December, 2013; 1st February, 2017 and 5th December, 2017; cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various security, legal and operational risks associated in dealing with such virtual currencies. In light of this, various players in this market have stopped trading of cryptocurrency or withdrawn operations in India over the last two years.
However, the Hon’ble Supreme Court (“SC”) by its judgment dated 4th March, 2020 overturned this ban and stated that though the RBI has the power to regulate virtual currencies, the absolute prohibition imposed by the RBI Circular on VCs was disproportionate and ultra vires the Constitution. The SC observed that RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs have suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them. Nonetheless, the SC judgment did not make crypto currency legal tender and simply quashed the RBI Circular on VCs. It is expected that the RBI will be filing a review against this decision of the SC. Despite the judgment of the SC, there is still uncertainty regarding the status of cryptocurrency in India.
In the month of August 2019, a draft bill titled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019” (“Crypto Ban Bill”), has been proposed which contemplates a complete ban on crypto currency and related activities in India. Section 3(1) of the Crypto Ban Bill clearly states that “No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India.” The penalty prescribed under the Crypto Ban Bill can extend to fine or imprisonment which shall not be less than one year but which may extend up to ten years, or both. At the same time, the Crypto Ban Bill contemplated (i) the creation of a digital rupee as a legal tender, by the central government in consultation with RBI and (ii) the recognition of any official foreign digital currency, as foreign currency in India.
To sum up, currently in India, there is no specific legal regime which governs cryptocurrency. There are relevant provisions from laws like the Foreign Exchange Management Act, 1999, the Payment and Settlement Systems Act, 2007, notifications / circulars enacted by the RBI which may be attracted towards the dealing and settling of cryptocurrency, but there is no clarity on the application of the same.
Due to the regulatory uncertainty, followed by the RBI Circular on VCs, various exchanges have moved out of India in the past 2 -3 years. Despite the uncertainties, many players who are interested in deriving benefits from virtual currency, have incorporated exchanges which are based out of a country where crypto currency is regulated / permitted like the USA or Singapore. Once the exchange is set up, the Indian consumer base can always be targeted.
In the present scenario, while assessing whether to deal in or facilitate trading of cryptocurrency in India, it is to be kept in mind that the RBI may file a review petition against the SC judgment which overturned the RBI Circular on VCs and the fact that a draft bill contemplating a complete ban on crypto currency has been proposed and is pending introduction in the Parliament. However, if we were to consider the scale of Indian players and citizens who actively engage/trade in crypto currency, the authorities may feel the need to regulate virtual currency with appropriate safeguards rather than imposing a complete ban on it.
In a recent welcome development, the RBI on 22nd May, 2020, has responded to a Right to Information query questioning whether RBI had prohibited banks from providing accounts to crypto exchanges or crypto traders, stating that “as on date, no such prohibition exists”. The actual implementation, along with legislative changes, are still pending.