Cryptocurrency- brief overview of regulation.
Cryptocurrencies have gained a lot of traction in recent times in India which is home to one of the largest markets for cryptocurrencies in the world. According to a report, the country currently ranks second in cryptocurrency adoption. On Feb 01, 2022, the Indian authorities (for the first time) acknowledged the cryptocurrencies in India by considering them as Virtual Digital Assets (VDA) and providing an elaborate taxation regime specifically targeted at these VDAs. As of the date of this article, these tax proposals are still in the draft stage and are yet to become law.
At the outset, currently, there is no specific law/regulation/licensing requirement that is applicable to the crypto exchanges/businesses which are operating in India. Depending on the form of entity, the crypto exchanges would be required to obtain customary approvals from the applicable authorities for doing business in India. For instance, if a crypto exchange is operating in the form of a company then it shall have to adhere to the necessary provisions of the Companies Act, 2013, and its underlying rules.
The Reserve Bank of India (RBI), which is the central bank of India and is the chief authority responsible for regulating the financial sector in India, officially acknowledged cryptocurrency in India through a press release in 2013 for the first time. The RBI cautioned the users, holders, and traders of cryptocurrencies regarding the potential economic, financial, legal, and security-related risks associated with dealing in such cryptocurrencies and discouraged people from indulging in the same. Subsequently, the RBI reiterated its strict stand vide press releases in 2017.
Thereafter, the RBI issued a ‘Statement on Developmental and Regulatory Policies’ on April 5, 2018 (Statement), which expressly prohibited banks (being a regulated entity) from dealing in cryptocurrency or providing any services to any market participants in support thereof. The RBI instructed the bankers to exit their relationships within a specific time limit. This instruction from the RBI made it practically impossible for private crypto exchanges and traders to do crypto business in India.
All these complications led to the filing of a petition before the Hon’ble Supreme Court of India (the apex judiciary in India) against the Statement of the RBI. Hon’ble Supreme Court of India in a landmark ruling, in the case of Internet and Mobile Association of India v. RBI, set aside / quashed the Statement on March 4, 2020.
During the pendency of the proceedings before the Supreme Court, on February 28, 2019, the legislature proposed to introduce a draft bill known as ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’ which prohibited mining, holding, selling, trading, issuance, disposal or use of cryptocurrency in the country i.e. a complete blanket ban. However, owing to industry objections and complaints, the draft bill was never introduced in Parliament.
Further, cryptocurrencies have been broadly defined in the Finance Bill, 2022 under the Income Tax Act as under :
Section 2 sub-section (47A) “virtual digital asset” –
a. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
b. a non-fungible token or any other token of similar nature, by whatever name called
c. any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Explanation.- For the purposes of this clause,–
a.“non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
b. the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m), and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).]
The regulators in India has neither considered dealing in cryptocurrency as illegal nor as legal. With the introduction of new crypto tax regime in India, it is highly anticipated that new regulations / law / clarifications with respect to crypto transactions would be soon introduced by the Government. Interesting times ahead