Cryptocurrency

Background:

In line with developments in other parts of the world post-2008, India saw the beginning of interest in cryptocurrency with the opening of multiple cryptocurrency exchanges between 2012 and 2017 such as Zebpay, Coinsecure, Unocoin, Koinex, and Bitxoxo. The initial official response to this development, characterising much of the period of 2013-17, was one of extreme caution. The RBI issued a series of circulars in this period, notifying the public about cryptocurrency not being a legal tender and the potential financial, operational, legal, customer protection and security related risks that users, holders and traders of Virtual currencies (VCs) could be exposed to. It highlighted and reiterated that no regulatory approvals, registration or authorisation had been obtained by entities carrying on cryptocurrency activities in the country. In view of ransomware attacks in that period where payment was demanded in cryptocurrency, certain PILs were also filed, demanding a ban on crypto. In light of these issues, the government constituted a high-level Inter-Ministerial Committee in November, 2017 to delve into the various aspects of Virtual Currencies, the concerns and propose a course of action.

Landmark events: In the period of 2018-2020, official attitude towards cryptocurrency largely remained in favour of a complete ban, prompting PILs and a subsequent judgement from the Supreme Court that put it at odds with the executive and monetary authority. A summary of these events are as follows-

• The Finance Minister in the Union Budget speech of 2018-19, signalled the government’s tough stance on cryptocurrency by highlighting that it would not be considered as a legitimate means of payment and that all possible measures would be taken to eliminate use of crypto-assets in financing illicit activities. A panel of the Central Board of Direct Taxes (CBDT) submitted a draft scheme in 2018 to the Finance Ministry for banning virtual currencies.
• On April 6, 2018, RBI issued a notification- ‘Prohibition on Dealing in Virtual Currencies’ prohibiting entities regulated by it, from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling VCs. Such 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
  VCs.
• The Inter-Ministerial Committee submitted its report titled ‘Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies’ on 28 th February, 2019. Following are some of the key observations and recommendations that were made by the Committee-

a) Issues related to Virtual Currencies (VCs)- It observed that cryptocurrencies cannot replace traditional currencies due to various issues such as- being subjected to market fluctuations, decentralised and thereby difficult to regulate; design vulnerabilities leaving consumers open to cyber-attacks and the nature of irreversible transactions which make it impossible to reverse wrong transactions; need for large amount of storage and processing power; greater anonymity with its associated vulnerability to ease of use for money-laundering and terrorist funding activities.
b) Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019- The Committee also proposed a draft Bill to ban cryptocurrencies in the country and provide for an official digital currency. Besides banning its use as a legal tender, the Bill prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency and makes such activities punishable with a fine or imprisonment of up to 10 years, or both. The Bill provides for a period of 90 days since commencement of the Act for a person to declare and dispose of any cryptocurrency in his possession. The Bill however, recognises the importance of the underlying technology (DLT) and
permits its use for experiment, research, or teaching.

• On 4 th March, 2020, the Supreme Court in its judgement on a writ petition (IAMAI vs RBI) overturned the 2018 RBI circular that had banned bank payment systems from being used for cryptocurrency-related payments. The bench observed that in the past 5 years, RBI had failed to find evidence of how activities of VC exchanges actually adversely impacted the entities regulated by RBI and hence deemed the Central Bank’s stand as ‘disproportionate’. It was also highlighted that the Inter-Ministerial Committee in its initial report had considered a ban to be an extreme tool and instead favoured regulatory measures with a proposal for a new law- the Crypto-token Regulation Bill 2018.

Recent Developments:

• In pursuance of the final recommendations of the Inter-Ministerial Committee, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was slated to be introduced in parliament. However, it was deferred.
• The Standing Committee on Finance in November, 2021 met with stakeholders to examine the subject ‘CryptoFinance: Opportunities and Challenges’.
• A tax regime for transactions relating to Virtual Digital Assets (VDAs), which includes VCs, was introduced via the Finance Bill, 2022. This taxation system subjected the transfer of any virtual currency/cryptocurrency asset to be subject to 30% tax deduction, with a 1% Tax Deducted at Source on payments towards virtual currencies beyond Rs. 10,000 a year. The Bill also does not allow any losses from transfer of a VDA to be set- off against the income earned from another.

¹ This Bill is yet to be tabled in the Parliament and hence, the text of the bill is currently unavailable.