This Article has been written by Medha Biswas and Kshitij Shandilya, Second Year BA LLB Students at West Bengal National University of Juridical Sciences.
1. Introduction
Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend[1] . Cryptocurrency operates on blockchain technology that enables cash transfer without any third party involvement. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or chat the system. It is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.[2]
Cryptocurrencies are precariously balanced at the conjugation of technology and finance. It uplifts technology usage in such a way that it can be seamlessly integrated into the digitally enhanced ecosystem and is on its way to make currency both global and digital. Cryptocurrency such as Bitcoin is now becoming a global reality and an intrinsic part of the economic boom but are seen in a very negative light in many jurisdictions[3]. Cryptocurrency is an emerging reality of the ever-burgeoning globalisation of today's world and leads to a more dynamic tenet of financial inclusion in the 21st century.
2. Analysis
A bill titled 'Banning of cryptocurrency & Regulation of Official Digital Currency Bill, 2019' was tabled to impose a ban on trade and monetary exchange in cryptocurrency and to state its failed recognition as a legal tender[4]. It aims to impose a blanket ban on private cryptocurrencies[5] such as Bitcoin, Etherium[6] etc. In India, cryptocurrencies are not regarded as a legal tender[7] however and while the exchange may be legal the government has made it very difficult.[8]
This myopic view is harmful as banning will only boost the increase in cryptocurrency frauds due to the absence of regulatory and functional laws and further push it into the black market hellhole. Banning it would ensure that the market still exists, but the government is not able to tax upon and capitalise on it.
2.1 Countering Government’s Argument
The Inter-Ministerial Committee that suggested outlawing cryptocurrency, highlighted upon its volatile nature [9].
Volatility is a characteristic of any financial asset and risk associated with it simply is not a viable reason for their outlawing and dealing with them does it make it a morally corrupt thus it is not res extra commercium[10]. Thus, people dealing with crypto assets would be exercising their fundamental rights under Article 19(1)(g) and Article 301. In India, the principal legislation to govern and manage contracts is the Indian Contract Act, 1872. Section 23 of the Indian Contract Act, 1872 elaborates on illegal contracts. In the same way, a law regulating smart assets can be incorporated.
The stance of the government to propose a blanket ban on cryptocurrency is extreme as it criminalizes the use of a value-neutral technology out rightly and diminishes the international reputation of India especially in the field of IT. Digital India is a flagship programme of the government through the Ministry of Electronics and Information Technology with a vision to transform India into a digitally empowered society and knowledge economy.[11] However, the government goes back on its word by imposing this ban, as it signifies closing the doors to a new and advanced feature of monetary exchanges that would be beneficial for the people. Legislations rather than a ban should ensure that effective laws of verification are processed to determine crypto transfers money laundering or terrorist financing risk. [12]
2.2 Legal Regulations To Be Adopted
The existence of a legal vacuum in the Indian Jurisprudence with dealing with cryptocurrency would be too prudent to deny. The policy landscape remains as ambiguous and polymorphous as ever. This regulatory gap merits new, sui generis legal developments, according to the nature of the crypto-asset.
For security tokens, under the Securities Contracts (Regulation) Act (SCRA) only recognised stock exchanges should be allowed to trade in the tokens while the SEBI would be holding jurisdictional rights.
Utility and payment tokens, like Bitcoin and Ether, respectively are treated as intangible goods and trading of these would be treated under RBI's "Directions For Opening and Operation of Accounts and Settlement of Payments for electronic payment transactions involving intermediaries" (2009) or the Consumer Protection Act. There are no statutory KYC/AML requirements under the PMLA, neither any prerequisite for license and adequacy reports for the same, which in turn leads to wallet providers and exchanges made in a fiduciary capacity in a commercial transaction. This endangers market integrity.
A proper licensing regime ensures consumer protection- their financial adequacy, insurance, security standards and a complaint redressal mechanism. Compliance with KYC/AML norms must be made mandatory to prevent fraudulent activities like money laundering, terror financing and unregulated cash flow.
Proper legislation which ensures thorough levels of verification to cut out money laundering and terror financing issues are more desirable than a complete ban. Entry 36 and 46 of List I of Schedule VII of the Indian Constitution legislates matters pertaining to currency, coinage, legal tenders, foreign exchange, and other financial instruments. The PMLA regulates the banking and financial institutions and their intermediaries[13]. The Central Government imbibes within itself the power to notify activities under the umbrella of a “designated business” which are in turn regulated by PMLA. Thus, if the cryptocurrency and its associated entities are brought under the ambit and scope of ‘Client Due Diligence’ requirements under Rule 9 PMLA then proper enforcement measures can be put in place. The cross-border trading in cryptocurrency can violate the inflow and outflow of money; particularly as such transactions happen irreversibly.[14] This problem can be solved with the help of the Foreign Exchange Management Act (FEMA).[15] FEMA regulates all money or goods that are brought into and exported from India which also includes software and cryptocurrency can be regarded as software-based technology.[16]
The introduction of newer legislation or amending the ones in existence suiting our needs would effectively help in the precise mitigation of the regulatory vacuum. The amendment or introduction of newer legislations typically ensures that coercive administrative measures and jurisdictional ambiguity qualms are kept to the minimum. In the Inter-Ministerial Committee for Finalisation of Amendments of PSS Act, 2007" it was recommended that spot exchanges would be under the ambit of the bill. Hence, if the legislative body passes this law the necessity of a license would be indispensable for exchanges. The power of RBI to frame regulations [17] falls under Sections 10, 18, 38 of the PSS Act. If crypto-asset trading platforms are brought under a proper licensing regime then RBI would possess a free hand at their licensing and auditing and the platforms would become entities regulated by RBI. The RBI Act is defined by FEMA 1999, where it defines "currency". Under the Currency Ordinance 1940, bitcoins do not fall under legal tenders. The onus of the policy question rests on RBI to recognize and designate them as “decentralised digital currency” to qualify under “such other similar instruments”.
The Foreign Exchange Management Act describes any currency[18] other than those notified under RBI are termed as "foreign currency". If the RBI circular is amended to allow only authorized individuals to deal with these assets creating financial liability and thus expose them to a well-developed regulatory framework.
Other instances of administrative and statute backed regimes, which may require modification of the relevant acts- NBFC, SCRA, Consumer Protection Act, Prize Chit Acts etc.
Thus, the aforestated regulations and laws would ensure a safe environment for the crypto asset fintech to flourish.
3. Conclusion
An outright ban on crypto-assets is thus disproportionate and infringes upon the fundamental right of an individual. The proposed law yields no rational reasons for prohibition and if the ban is imposed, it would be counter-productive. It can bring a respite from the hegemony of the dollar as a standard global currency. It can bring about a unique opportunity for India to overcome socio-economic barriers and reassure wider financial access for the masses. Cryptocurrency is indeed a face of the ever-evolving, growing and speedily developing digital economy and is only destined to bring much more benefits to the people. It is not something negative but is truly a technological marvel.
[1] Jake Frankenfield, Cryptocurrency, Cryptocurrency (updated May 15, 2021) https://www.investopedia.com/terms/c/cryptocurrency.asp.
[2]https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain#:~:text=Blockchain%20is%20a%20system%20of,computer%20systems%20on%20the%20blockchain.
[3] https://blogs.thomsonreuters.com/answerson/world-cryptocurrencies-country/
[4] P. Suchetana Ray, Govt Plans to Bring in Law to Regulate Cryptocurrency Trade, Forms Panel, HINDUSTAN TIMES (Jan. 14, 2018), https://www.hindustantimes.com/india-news/government-plans-to-bring-in-law-to-regulatecryptocurrency-trade/story-SpAO63DDfk6Gg7lo5yNKCJ.html, archived at https://perma.cc/6HLK-G9LD
[5] Seema Jhingan et al., LexCounsel Law Offices, India: Legal Status of Virtual Currencies/Cryptocurrencies in India, MONDAQ (Apr. 6, 2017), http://www.mondaq.com/india/x/583670/fin+tech/Legal+Status+Of+Virtual+ CurrenciesCryptocurrencies+In+India, archived at https://perma.cc/5H4T-Y3TT.
[6] 1, Andreas Antonopoulos, Mastering Ethereum ( O’ Reilly Media Inc. December 2018).
[7] RBI Act 1934 § 26(2), (1934)
[8]https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.livemint.com/industry/banking/gover nment-panel-suggests-ban-on-private-cryptocurrencies/amp-1563796292369.html&ved=2ahUKEwihrbbg1YfuAhV1meYKHTDiBVUQFjACegQIAhAG&usg=AOvVaw2eOnF88dqlS_NNbMyqsSRk&cf=1
[9] Rahul Srivastava,Government Committee Recommends Ban on Cryptocurrency in India, India Today (updated July 24, 2019 9:26 IST)https://www.indiatoday.in/technology/news/story/govt-committee-recommends-ban-on-cryptocurrency-in-india-1572446-2019-07-23
[10] Khoday Distilleries v State of Karnataka 1 SCC 574 (Supreme Court, 1995)
[11] https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.digitalindia.gov.in/&ved=2ahUKEwjZq6jr6o7uAhUTgOYKHXfEDbcQFjAUegQIBhAB&usg=AOvVaw3bNmnleHRNkjrQlLp15d_A&cshid=1610194989877.
[12] Vaishali Basu Sharma, Will 2021 be the year when India Finally Clarifies Laws around Cryptocurrencies, The Wire,(December23,2020) https://www.google.com/url?sa=t&source=web&rct=j&url=https://m.thewire.in/article/tech/will-2021-be-the-year-when-india-finally-clarifies-laws-around-cryptocurrencies/amp&ved=2ahUKEwjdq4zev4_uAhWd7XMBHd5dDnAQFjADegQIEhAB&usg=AOvVaw2m5IyK841v89kGcgtDJDKK&cf=1.
[13] Section 2(wa)
[14] Id
[15] FEMA, § 7 (1999)
[16] Supra note 18, page 399.
[17] Such regulations can also be introduced under the proposed Payment and Settlement Systems Bill (when passed) since the said Bill would cover crypto-asset exchanges, as discussed above.
[18] Notification No. FEMA 15 (R)/2015 - RB.
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