Legal Framework Governing Cryptocurrencies in India
This article discusses the evolution of legal framework that (un)governs cryptocurrencies in India
As on date, cryptocurrencies in India are only governed through circulars issued by the Reserve Bank of India (RBI) which had issued public notices cautioning the users, traders and holders of Virtual Currency before introducing the prohibition vide circular RBI/2017-18/154 DBR.No.BP.BC.104 /08.13.102/2017-18 (“RBI Circular”).
Under the RBI Circular, the entities regulated by RBI (banking and non-banking companies) are prohibited to provide any services for facilitating any individual or businesses in dealing with or settling virtual currency.
Prohibited services include “maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of virtual currencies (VCs)”
Therefore, the restriction placed by the RBI on VCs is only to the extent of prohibition on banks, financial institutions and payment system providers from dealing in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.
There is no inherent ban or regulation on use of or maintaining of VCs against which only a cautionary advisory had been issued by the RBI previously through its press releases dated December 24, 2013, February 01, 2017 and December 05, 2017 to the users, holders and traders of VCs the risks associated with such VCs.
However, the prohibition imposed under the RBI Circular was considered to have a virtual ban on VCs due to non-availability of banking infrastructure to deal in VCs. The said RBI Circular was challenged before the Supreme Court of India on various grounds including the power of the RBI to impose such a ban.
The Supreme Court of India held today (on 04th March 2020) that while the RBI has wide powers under the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, and the Payment and Settlement Systems Act, 2007 and that such powers can be exercised by the RBI in the “form of preventive as well as curative measures”, the manner and the extent of exercise of such power was disproportionate especially in the light of no evidence of any “damage suffered by its regulated entities” the position of the RBI that it has not banned the VCs.
Therefore, as on the date of this article, the RBI Circular stands set aside and non-effective. Basically, there is no legislation or legal framework that either bans, prohibits or otherwise governs the VCs in India.
However, it must be brought to attention that a draft law has been proposed in the form of a proposed bill named “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” the (“Bill”). The Bill (Section 6) proposes to put a blanket ban on use of Cryptocurrency “in any manner, including, as,- (a) a medium of exchange; and/or (b) a store of value; and/or (c) a unit of account. (2) Cryptocurrency shall not be used as legal tender or currency at any place in India.”
The above restriction is in addition to the general restriction to mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India.
The Bill defines “Cryptocurrency” as,
“Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”
As one can see the definition of ‘cryptocurrency’ is very wide and is likely to include any virtual token/code/information/number that may be used in any financial transaction. The term “Financial Transaction” has been defined under the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 as,
“Regulations 2 (d): ‘Financial transaction’ shall mean making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.”
Therefore, making of any payment by means of any information or code or number or token that has digital representation of value has the potential of being considered as a cryptocurrency given the rather unrestricted definition under the Bill.
However, one must note that the Bill has not been debated in the Parliament yet and there may be changes in the Bill before it becomes a law. Moreover, no draft rules have been notified that could provide any clarity on the extent of regulations or restrictions proposed to be imposed under the Bill and therefore it remains to be seen how the authorities and the courts in India interpret the final law.
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