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  • Harsheeta Rai Sharma & Madhavi Wadhawan

The ‘Oscillatory’ Legal Stance of India on Cryptocurrency: A Critique

Introduction

Blockchain, also known as ‘distributed ledger technology’, has been the most acclaimed revolutionary coinage after the internet. But like any other piloted technology, it also has its own set of benefits as well as vulnerabilities. In common jargon, blockchain is like a universally present ‘ledger’ which records entries in a systematic order and stores them in the form of blocks. Each of these blocks is connected to one another through mathematical encryption in the form of a long never-ending chain. Blockchains can be used as reliable digital databases in a vast array of fields like land ownership, supply chains, agriculture, decentralized uber-like businesses, voting in elections, or even birth certificates.


What internet is to emails, blockchain is to cryptocurrencies. Email is an essential service facilitated by the internet technology, but the utility of internet is not limited to only sending emails. Similarly, blockchain is the technology behind cryptocurrency but is not limited to it. Rather, blockchain needs a cryptocurrency to incentivise its entries.


Bitcoin is the first and most known cryptocurrency, created in 2009 by an anonymous person or group of people called Satoshi Nakamoto.[i] It can be used to buy, sell, and share instantly through a simple procedure not involving any intermediaries. The value of bitcoin quadrupled last year, even during the pandemic, and now it stands at 44,36,438 INR. This is why it attracts heavy investments from Indians, especially the youngsters.[ii]


It must be noted at this juncture that bitcoin is only one of the most popular virtual currencies.[iii] Ethereum, Litecoin, Cardano and Polkadot are a few other known ones.[iv] Additionally, many other countries, like Ukraine, South Africa, and Nigeria (Africa’s largest economy) have shown faith in cryptocurrencies, and it seems to have a long promising journey into world markets.[v]


Cryptocurrency in India: Legal Developments Prior to the Bill

The most contentious of the cryptocurrency issues in India has been the April 6, 2018 circular of Reserve Bank of India (RBI) that was titled ‘Prohibition on dealing in (VCs) Virtual Currencies’[vi]. Using provisions of the Banking Regulation Act, 1949 [vii], the Reserve Bank of India Act[viii], and the Payment and Settlement Systems Act, 2007[ix], the Reserve Bank of India (RBI) had notified all its regulated entities to exit within 3 months if they were providing services such as “maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges…”[x] dealing with Virtual Currencies (VCs).


The same was challenged[xi] by the Internet and Mobile Association of India (IMAI) in IMAI v. RBI. It had stated that this circular was beyond the powers of the RBI, because in the absence of any law illegalizing cryptocurrency, the Constitution’s fundamental right under Article 19(1)(g)[xii] would be violated if the circular is allowed.


Before a three-judge bench comprising of Justices RF Nariman, Aniruddha Bose and V Ramasubramanian, Senior Advocate Shyam Divan defending the RBI, argued that though there was no formal law banning cryptocurrency, the RBI’s stand had been consistent that it would not validate VCs transactions in view of the ‘money laundering, tax evasion and fraud’ concerns.[xiii]


When giving its judgement, the Supreme Court considered the fact that the VCs exchange platforms were impacted by the RBI circular and that the platforms had not found another means of operation if they are cut off from the banking channels. It was noted by the Court that the RBI’s action must pass the test of proportionality, as this circular had almost struck a fatal blow to the VCs exchanges, and considering that “the total number of investors in Indian crypto-market was approximately 20 lakhs and the average daily trade volume was at least Rs 150 crores, at the time when the writ petition was filed”, with Indian users contributing anywhere around 2% to 10% to the total global market capitalisation of the crypto asset industry which is around 430 US$ billion.[xiv]


As of the 4th of March, the Supreme Court quashed the RBI ban on transactions with VCs. Thus, proclaiming the circular issued by RBI on the 6th of April invalid on the grounds of proportionality. It was also noted that even the Inter-Ministerial Committee which had been set up on 2nd November, 2017 had in its initial stance held the view that an ‘extreme tool’[xv] like a ban should not be resorted to, if regulatory measures could be framed.


Union Budget 2021 and Virtual Currencies

The Government is considering a new bill of The Cryptocurrency and Regulation of Official Digital Currency, being introduced in the Budget session of 2021. Finance Minister Nirmala Sitharaman revealed that a proposal of a digital version of the Rupee regulated by RBI was in the works and that Secretary of Economic Affairs from the Ministry of Finance would helm an Inter-Ministerial Committee to study issues with VCs and their legal framework.


As alluded in the Lok Sabha Bulletin, the Bill seeks to achieve a two-fold purpose. Firstly, it aims to establish a regulatory framework for digital currencies, and secondly, to “prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”[xvi] However, these ‘exceptions’ have not been discussed in greater depth, and there is room for more clarifications and concrete announcements in the months to come.[xvii]


The Bill comes in the backdrop of a pandemic-stricken India where bitcoin emerged as the only sunshine sector amidst economic turmoil. In the beginning of COVID-19 spread in India, an atmosphere of uncertainty was perpetrated among the investors, who got so perturbed that they tried to sell holdings for liquid money. The value of bitcoin initially got slashed by half. But thereafter, VCs showed such an ecstatic rebound that they became the monetary revolution during the pandemic. Due to their independence from other classes of assets and market resilience, bitcoin and other VCs touched an all-time high, which strengthened the faith of investors in them.[xviii]


KYC Blockchains as an Antidote to Cyber Frauds and Money Laundering

The odious incidences of money laundering as well as cyber frauds in India have increased dramatically in this decade. From fugitive offences of Nirav Modi and Vijay Mallya making headlines, to a 63.5% yearly increase in the number of cyber frauds (as per National Crime Record Bureau data, 2019)[xix], there are grave concerns regarding ‘trust’ in financial transactions among Indian consumers. With news of the government allowing only government validated VCs making the rounds, the banks like HDFC, Citibank, ICICI Bank, Axis Bank, have once again started using the April 2018 RBI circular to curtail its customers’ VCs transactions despite the Supreme Court negating RBI concerns[xx].


On the other hand, axiomatically, blockchains are one of the most trustworthy friends the digital economies have. This is because cryptocurrencies are very unlikely to be hacked. Whenever a transaction is made on the blockchain ledger, it is only with consensus between the chain users and after repeated validations. If a data entry has to be hacked, it is only possible if 51% of the miners are acting in bad faith, the chances of which are scarce.[xxi]


However, “unlikely” does not mean “impossible”. The State of Michigan has implemented a new legislation which penalizes those who try to manipulate the blockchain with fraudulent intentions. But on the other side, it is also possible for a blockchain platform to “fork out a hacker’s data entry, capture the money, and leave the chain looking like the hack never occurred”. This was done by an American cryptocurrency platform called Verge in April 2018 when an attacker stole 250,000 verge, the currency unit.[xxii]


Therefore, cryptocurrencies are inherently the best method to ensure security and immutability of information, which can be utilized to develop a system of higher credibility and lower risk of frauds and hacking.


Talking about Money Laundering, it amounts to as much as $1-2 trillion (around 5% of world GDP) and banks have to spend an average of $8 billion annually to combat it. KYC (Know Your Customer) forms the bedrock for actions to combat money laundering not only in India but also globally. In search of a feasible solution, banks like HSBC, IMDA and Mitsubishi UFJ Financial Group (MUFG) conducted an experiment and it was found that KYC blockchains lead to much reduced duplication since customer data has to be entered only once and then it can be accessed digitally in real time, making this system more reliable.[xxiii]


With respect to this, in the IMAI v. RBI[xxiv], one of the parties of the petitioner Discidium Internet Labs (P) Ltd., gave certain safeguard suggestions for VCs. One of them is Aadhar based e-KYC. The suggestion for an Aadhar based e-KYC was rejected by the RBI because Aadhar is to be used voluntarily and not as a mandatory identification, and even if Aadhar is to be used the main dilemma is actually the ‘technicalities’ involved in the virtual currencies. The main concern for RBI was that to be able to mitigate the risks to these VCs, the RBI would need to understand the ‘technicalities’ of the particular VC, and since “there is still a high level of uncertainty and ambiguity surrounding VCs”[xxv] regulators have not been able to bring an effective control mechanism.


Conclusion and Way Forward

The stellar performance of bitcoin during the testing times of pandemic is indeed a beacon of hope for greater recognition and utilization of blockchains and cryptocurrencies. Having been hit by economic recession, the Government can try to reap the benefits of this technology by bringing in regulatory and taxation policies, to add to the GDP. This move could revolutionize ‘Digital India’, while bringing India closer to its $5 trillion economy goal.[xxvi] Also, in the IMAI v. RBI case of 2020 cited above, further safeguard suggestions for VCs were given, which can be looked into for cancelling out the vices of this system: –

  1. Development of a dashboard and Central Repository,

  2. Formation of a Self-Regulatory Organization and Restricting trade of crypto asset to whitelisted addresses,

  3. Aadhar based e-KYC,

  4. Mandatory Capitalization Requirement,

  5. Insurance of crypto asset, and

  6. Formation of an investor protection and education fund.

That being said, the scope of cryptocurrency cannot be and must not be negated, and since the government is also thinking of venturing in the VCs arena with a digital version of the Rupee, cryptocurrencies are here to stay.

 

[i] Bernard Marr, A Short History of Bitcoin and Crypto Currency Everyone Should Read, Forbes (Dec. 6, 2017),

[ii] Value of Bitcoin, Google Finance, https://www.google.com/finance/quote/BTC-INR.

[iii] Nivesh Rustgi, Google Finance Adds Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, Crypto Briefing (Mar. 1, 2021) , https://cryptobriefing.com/google-finance-adds-bitcoin-ethereum-litecoin-bitcoin-cash./

[iv] Robert Farrington, There’s More To Cryptocurrency Than Bitcoin, Forbes ( Feb 1, 2021), https://www.forbes.com/sites/robertfarrington/2021/02/01/theres-more-to-cryptocurrency-than-bitcoin/?sh=1ea1735cb6dc.n

[v] Katharina Buchholz, These are the Countries where cryptocurrency use is most Common, The World Economic Forum (Feb 18, 2021), https://www.weforum.org/agenda/2021/02/how-common-is-cryptocurrency/#:~:text=In%20addition%20to%20users%20in,Chile%20all%20reached%20double%20digits.

[vi] Reserve Bank Of India (Circular), Prohibition on dealing in Virtual Currencies (VCs), April 6, 2018, https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11243.

[vii] Banking Regulation Act, 1949, No. 10, Acts of Parliament, 1949 (India).

[viii] Reserve Bank of India Act, 1934, No. 2, Acts of Parliament, 2019 (India).

[ix] The Payment and Settlement Systems Act, 2007, No. 51, Acts of Parliament, 2007 (India).

[x] Reserve Bank Of India (Circular), Prohibition on dealing in Virtual Currencies (VCs), April 6, 2018, https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11243.

[xi] Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) 10 SCC 274.

[xii] Art. 19(1)(g), the Constitution of India.

[xiii] Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) 10 SCC 274.

[xiv] Ibid.

[xv] Ibid, at Para 218.

[xvii] ‘Bill to regulate cryptos is likely to face delay’, The Hindu Business line (Mar. 16, 2021),

[xviii] Amitava Chakrabarty, Covid-19: What leads to Bitcoin surge during pandemic period?, Financial Express (Nov. 28, 2020), https://www.financialexpress.com/money/covid-19-what-leads-to-bitcoin-surge-during-pandemic-period/2138828/.

[xix] Crime in India: Statistics Vol. I (2019), National Crime Records Bureau of India https://ncrb.gov.in/sites/default/files/CII%202019%20Volume%201.pdf.

[xxi] Suominen, Kati, Harnessing Blockchain for American Business and Prosperity: 10 Use Cases, 10 Big Questions, 5 Solutions, Center for Strategic and International Studies (CSIS), www.jstor.org/stable/resrep22491.6.

[xxii] B Van den Berg, Willem, Blockchain for Fragile States: the Good, the Bad and the Ugly, Clingendael Institute (2018), www.jstor.org/stable/resrep17341.

[xxiii] Ibid.

[xxiv] Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) 10 SCC 274.

[xxv] Ibid at Para 216.

[xxvi] Amitava Chakrabarty, Budget 2021: Cryptocurrency sector wants recognition, framing of rules, regulations, Financial Express (Dec. 19, 2020), https://www.financialexpress.com/budget/budget-2021-cryptocurrency-sector-wants-recognition-framing-of-rules-regulations/2153056/.


This post has been authored by Harsheeta Rai Sharma, and Madhavi Wadhawan, students at Rajiv Gandhi National University of Law, Punjab. This blog is part of RSRR’s Budget Session 2021 Blog Series.


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