A cryptocurrency is a type of digital asset based on a network which is scattered across a huge number of computers. Because it is decentralized, cryptocurrencies can exist without being governed by a single entity, such as the federal government. In recent years, the India market has witnessed a surge in cryptocurrency investment, particularly during the COVID-19 pandemic. This was carried out both nationally and globally. Shri Pankaj Chaudhary, the Union Minister of State for Finance had recently commented that “Crypto Assets are by definition borderless and require international collaboration to prevent regulatory arbitrage.”[1]
Concerns have been raised by the Indian government about the risk associated with cryptocurrency transactions, such as money laundering, fraud, and other economic crimes. It underlines the need for investor protection and consumer awareness in the cryptocurrency ecosystem. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, with the aim of creating a legal framework for cryptocurrencies and issuance of digital currencies issued by the Reserve Bank of India has been introduced in the Lok Sabha.
History of cryptocurrency
Going back to the global financial crisis in 2008, financial markets were in turmoil and people had lost confidence in financial markets. At that time, Satoshi Nakamoto, the father of Bitcoin, paved the way for the first cryptocurrency using blockchain technology. The first Bitcoin block, often referred to as the “genesis block”, was mined in 2009 for the very first time. Cryptocurrency is a digital currency that individuals can hold in their digital wallets. It is the most important digital representation of value that can be effectively stored and virtually transferred.
The functioning and operation of cryptocurrencies is based on the use of a complex digital system called “blockchain”, which is an online cryptocurrency database that stores all detailed information, including transactions. Therefore, every time a cryptocurrency transaction is completed, the transaction is recorded in the blockchain database. Cryptocurrencies are not backed by any country or government and are therefore not accepted as legal tender in many countries.
Are cryptocurrency transactions legal in India?
Cryptocurrencies, including Bitcoin, are not accepted as legal tender in India. The government of India has made it clear that virtual currencies are not officially backed and are not regulated by any government agency. However, this is not the case with the legal status of cryptocurrencies all over the country, in Argentina and Canada cryptocurrencies are considered currency but not legal tender. In 2018, the RBI issued the Crypto Ban Notification[2], “Prohibition on dealing in Virtual Currencies (VCs)” prohibiting banks from providing services to individuals or businesses engaged in cryptocurrency trading. This circular was however quashed by a three-judge bench of Supreme Court in 2020 in a landmark judgment Internet and Mobile Association of India v Reserve Bank of India, dated 4 March 2020,[3] that resumed the cryptocurrency trading and investment activities. Despite the circular being quashed, the RBI has always expressed concern about the risks associated with cryptocurrencies. The central bank has issued a warning to individuals and investors about the potential risks of investing in cryptocurrencies. It has expressed concerns about price fluctuations, lack of regulation, cybersecurity risks and money laundering.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021[4]
The government, grappling with the rapid rise of digital assets, introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This highly anticipated legislation promised to define the future of crypto in India, a nation with over 100 million crypto investors.
Key features of the Bill are:
- The bill intends to create a favorable structure for the creation of the official digital currency that can be issued officially by the Reserve Bank of India.
- It prohibits the use of all other private cryptocurrencies. Private cryptocurrencies are defined as any digital currency that is not issued by a government. This will prevent the use, trading and mining of popular cryptocurrencies such as Bitcoin and Ethereum.
- Establishment of Digital Currency Board of India (DCBI) a regulatory body to monitor and manage the digital currency ecosystem of the country. DCBI will have the power to issue guidelines, monitor activities and ensure compliance with the provisions of the Bill.
- Introduction of an official digital currency.
- Promotion of blockchain technology, the bill recognizes the potential of blockchain technology and supports its adoption in many sectors. It recognizes the importance of distributed ledger technology (DLT) and encourages research and development in this field.
- This bill allows the government to elect exemptions for certain purposes or activities. It also provides a flexible period or a transitional period during which individuals or entities holding private cryptocurrencies can declare and dispose of their assets in accordance with the guidelines issued by the regulatory body.
- The bill provides penalties for various crimes such as mining, possession, purchase, sale and transfer related to the use of private cryptocurrencies. Penalties range from fines to imprisonment, with higher penalties for repeated offenses.
- The bill would give investors six months to liquidate their holdings without penalty
However, the bill has not yet been passed into law, and its provisions are still under discussion and debate.
Taxation of Cryptocurrency
Indian cryptocurrency traders are facing new challenges as Income Tax Return forms (ITRs) now require the disclosure of possession of virtual digital assets (VDAs). Indian Finance Minister Nirmala Sitharaman announced that a tax will be imposed on digital assets. Many people accepted the decision to pay taxes on virtual currencies as this is considered as the first step in recognizing such virtual currencies. Since cryptocurrency assets are considered assets for tax purposes, profits from cryptocurrency trading are taxable. Cryptocurrency exchanges and traders must comply with reporting obligations and maintain appropriate business records.
According to the 2022 Union Budget, the Indian government has announced 30% tax on cryptocurrency earnings and 1% tax deducted at source. In the same meeting the Finance Minister presented a tax regime for virtual or digital assets that include cryptocurrencies. Cryptocurrency investors are now required to report their profits and losses as part of their income. When reporting income from the transfer of virtual assets, only the amount received is reported and no deductions are allowed. A cryptocurrency received as a gift or exchange must be taxed by the recipient and any loss occurred due to virtual investment, cannot be offset by other income.
Central Bank Digital Currency (CBDC)
In February 2019, the Ministry of Finance announced the introduction of the digital rupee.[5] The growth of digital currencies or cryptocurrencies worldwide has led to many central banks deciding to launch their own digital currencies to solve existing problems and make the transition to a cashless society. Central Bank Digital Currency (CBDC) refers to digital currency in the form of legal tender issued by the central bank of the country. It is expressed in the country’s sovereign currency and recorded on the central bank’s balance sheet. CBDC operates as a digital currency that can be converted or transferred at the same rate as traditional cash and the country’s traditional bank deposits. CBDC differs from individual cryptocurrencies in that it operates on a permissioned blockchain and grants special mining and control rights to the central government and authorities. Its purpose is a stable currency pegged to the Indian Rupee, providing safe and easy currency management, unlike private cryptocurrencies that have a nominal value.
In November 2022, the Reserve Bank of India launched the Central Bank Digital Currency (CBDC) or digital rupee[6]. While CBDC is an electronic/digital version of the national currency, it will not replace cryptocurrencies but will provide legal and security benefits. The Reserve Bank of India has shown interest in exploring the development and issuance of CBDC. The Reserve Bank of India has conducted an experiment and feasibility study to assess the benefits and risks of the digital rupee. CBDC will be a digital form of the Indian rupee issued and controlled by the central bank. While cryptocurrencies are decentralized, the Reserve Bank of India will control and regulate the supply and use of CBDC. Additionally, CBDC is an electronic form of cash, while cryptocurrency trading involves investing in cryptocurrencies as an asset.
What’s latest in the field?
- According to the Global Cryptocurrency Adoption Index 2021, India has become the second largest cryptocurrency market in the world after the United States.
- Cryptocurrency adoption in India increased significantly in 2020, with the total value of cryptocurrencies adopted by Indian users increasing by more than 600% to $40 billion, according to the report. India’s share of global cryptocurrency activity also saw a notable 12% rise.
- Finance Ministers of G20 nations received the detailed information released by the International Monetary Fund’s Financial Stability Board (FSB) in Marrakesh, Morocco in 2023 October.
- Following the G20 meeting, Indian Finance Minister Nirmala Sitharaman reiterated India’s stance that a global framework is required to regulate cryptocurrencies. Sitharaman called for consensus on cryptocurrency regulation. At the end of the meeting, she asked the IMF and FSB to formulate a technical paper on crypto assets.
- The synthesis paper, prepared by the International Monetary Fund (IMF) and Financial Stability Board (FSB), was welcomed. The paper advocates for comprehensive regulatory and supervisory oversight of crypto-assets. It has also introduced financial regulations to control the use of crypto assets by criminals.
The current stance of the Indian government shows that they accept the use of blockchain technology; but is limited to treating cryptocurrencies as currencies controlled by the central bank. Cryptocurrencies are also regulated by the Prevention of Money Laundering Act (PMLA) and the crypto exchanges are mandated to report suspicious transactions to the Financial Intelligence Unit of India. Additionally, entities trading cryptocurrencies are required to comply with strict KYC requirements and act as reporting entities under the PMLA. The Indian government is still reluctant to recognize and regulate cryptocurrency as an asset class due to its volatility and the tendency of users to be attracted to the facet of speculative trading of cryptocurrencies.
Conclusion
India’s relationship with cryptocurrency has been anything but straightforward. Despite being unregulated, crypto adoption has soared, leaving policymakers scrambling to define its status. The pendulum has swung between outright bans and cautious acceptance, with the 2018 RBI ban followed by 2022’s taxation and the proposed Cryptocurrency Bill.
This bill, while still shrouded in uncertainty, represents a shift towards regulation rather than prohibition. However, its potential to ban private cryptos while promoting a Central Bank Digital Currency (CBDC) raises concerns about stifling innovation and centralizing control.
The path forward remains unclear as it involves factors like striking a balance between fostering innovation, addressing risks like money laundering, consumer protection, regulating crypto exchanges, enforcing KYC/AML norms, and fostering responsible awareness programs.
Ultimately, India has to navigate this complex landscape with both prudence and foresight. A well-crafted regulatory framework can nurture responsible crypto adoption and unlock its potential to contribute to India’s digital future.
[1] “Crypto Assets are borderless, require international collaboration to prevent regulatory arbitrage” Posted On 06 Feburary 2023 6:38PM by PIB Delhi https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1896722#:~:text=Crypto%20Assets%20are%20by%20definition,question%20in%20Lok%20Sabha%20today , Last Accessed 24th January 2024.
[2] “Prohibition on dealing in Virtual Currencies(VCs)” by Reserve Bank of India on 6th April 2018
[3] Internet and Mobile Association of India v Reserve Bank of India, Supreme Court of India, Writ Petition (Civil) No.528 of 2018 available at
:https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf Last accessed January 24, 2024.
[4]Page no 12, No. 10, https://loksabhadocs.nic.in/bull2mk/2021/23.11.21.pdf Last accessed January 24, 2024.
[5] Page no 19, No.111 Digital rupee, https://www.indiabudget.gov.in/budget2022-23/doc/Budget_Speech.pdf, Last Accessed on 24th January 2024
[6] Supra note 5
Author: Swetha S S
Juris Centre 