Legality Of Cryptocurrency

With the government announcing its decision to introduce the bill on cryptocurrency, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, Indian crypto investors find themselves in a fix. The bill essentially aims to eliminate all private holdings of cryptocurrency imposing a blanket ban. This uncertainty coupled with lack of proper regulations, taxation and legal status have complicated the matters further.

WHAT IS CRYPTOCURRENCY?

A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.

Instead of being physical money that is carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database that describe specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. You store your cryptocurrency in a digital wallet. Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into blocks and time stamped.

Some of the most popular cryptocurrencies are Bitcoin, Ethereum, XRP, Cardano, Stellar. The most known and commonly used being Bitcoin which was established in 2008 by a group of people or a person using the name Satoshi Nakamoto.

LEGAL ISSUES OF CRYPTOCURRENCY

• Jurisdictional Issues

One principal feature of blockchain technology is that it is not, in a traditional sense, located in a particular geographic location. This feature gives rise to jurisdictional challenges. In addition, the country in which cryptocurrency software resides may be difficult to determine in light of the ledger’s lack of a specific physical location.

• Decentralized Status

In the case of electronic money, a trusted financial institution is involved in creating and settling deposits and debt claims. Neither of these concepts applies to cryptocurrency transactions. On one hand, this frees investors from being beholden to those institutions. On the other hand, however, this status could result in legal complications.  Once again, because of the decentralized state of these currencies, the path of legal recourse in these situations can be difficult to assess. Without a central authority backing the value of a digital currency, investors may be left in the lurch should complications with transactions or ownership arise.

• Fraud and Money Laundering

There is a widespread belief that cryptocurrencies provide criminal organizations with a new means of committing fraud, money laundering, and a host of other financial crimes. The Financial act Task Force (FATF) has also observed that crypto assets are being used for money laundering and terrorist financing. A globally coordinated approach is necessary to prevent abuses and to strictly limit interconnections with regulated financial institutions.

 However, investors who find themselves in the unfortunate position of being a victim of financial crime do not likely have the same legal options as traditional victims of fraud.

• Privacy

Privacy concerns are closely related to data theft in the cryptocurrency space. Many users prefer cryptocurrencies because of their perceived anonymity. However this anonymity is, at the very least, often greatly overstated; for example, a blockchain analytics firm has claimed that it can trace the vast majority of Zcash and Dash transactions, making “privacy coin” a misnomer.

• Intellectual Property

The use of cryptocurrencies in IP-intensive industries raises concerns about IP ownership and authorship, controlling and tracking the distribution of registered or unregistered IPs, and establishing and enforcing IP agreements, licenses, or exclusive distribution networks through smart contracts.  Indeed, there are often fundamental questions about blockchain technology ownership.

LEGAL STATUS IN INDIA

Currently it is reported that Indian has over a 200 million userbase for various cryptocurrency and hold more than $1.5 B in trade value. With a young tech savvy population, this userbase is increasing day by day as people are starting to diversify their investment.

Trading in cryptocurrency is not illegal, however there are no governing regulations for the same. The government had constituted an Inter-Ministerial Committee (IMC) headed by Shri Subhash Chandra Garg on November 2, 2017, to study virtual currencies. The Group’s report, along with a Draft Bill, flagged the positive aspect of distributed-ledger technology and suggested various applications, especially in financial services, for its use in India, including banks and other financial firms. The committee also stated that private cryptocurrencies should not be allowed.

In 2018, The Finance Ministry released a statement saying:

“The Government does not consider Cryptocurrencies as Legal Tender or Coin and will take all measures to eliminate the use of these Crypto Assets in Financing Illegitimate Activities or a Part of the Payment System. The Government will explore the use of Blockchain technology proactively for assuring in Digital Economy.”

In the statement released by the Finance Ministry, it nowhere said that buying, selling or holding cryptocurrencies were prohibited. They said that they are taking measures to eradicate the use of crypto in financing illegal activities: a great step towards a healthy crypto ecosystem.

This statement was followed by a circular passed by the RBI in 2018 preventing commercial and co-operative banks, small finance banks, payment banks and NBFC from not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies.

Internet and Mobile Association of India v. Reserve Bank of India

The IAMAI filed a petition in the Supreme Court against the above circular issued by the RBI. The reason given by the RBI was that cryptocurrencies might disrupt the existing financial institutions. Whereas, IAMAI’s legal counsel had argued before the court that RBI had itself failed to adequately research the matter before deciding to take action. The court held that the restrictions imposed by the Reserve Bank of India on banks and other entities in regard to the trading of virtual currency is unfair and therefore declared the restrictions to be un-viable.

However, in spite of the decision several banks such as HDFC Bank, ICICI Bank, Axis Bank, Yes Bank and RBL Bank, have halted crypto trading.

In 2017, Siddharth Dalmia and Vijay Dalmia approached the court under Article 32, for a writ of mandamus to issue direction to the government to ban all forms of cryptocurrency trading in the country. The matter is still pending after SGI Tushar Mehta for the government informed the court of the proposed bill and the case was adjourned.

TAXATION

RBI has not termed Bitcoin or any cryptocurrency the status of a legal tender hence there are no clear guidelines regarding the same. However, the Ministry of Corporate Affairs has made it mandatory for companies to disclose their crypto trading in the year end financial statements. The chairman of Central board of Direct Taxation has said that anyone making profits from Bitcoin will have to pay taxes on them. Experts have speculated upon various possibilities in which cryptocurrency transactions can be taxed under the Income Tax Act 1961 as well as the Central Goods and Services Tax (CGST) Act, 2017 depending on the type of transaction.

Most sources and officials from the Income Tax department have suggested that it may be taxed under capital gains to be treated as a capital asset held for investment under Section 2(14) of the Income Tax Act. Another great possibility is to be included under Income from Other Sources which would include mining of cryptocurrency, dealing in cryptocurrency solely for the purpose of investment, and receipt of cryptocurrency in the form of gifts.

Also, the exemptions from tax on gifts received may apply on cryptocurrency as well. Some of the exemptions from tax liability on gifts are gifts received:

• Gifts received from relatives
• If the aggregate value of gift is less than 50,000
• On the occasion of marriage
• Gifts received under a will or by way of Inheritance or in contemplation of death of payer

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

The purpose of the Bill is to prohibit all private cryptocurrencies in India and provide a regulatory framework for the launch of an official digital currency to be issued by the RBI. However, the Bill will allow certain exceptions to promote cryptocurrency’s underlying technology and its uses.

There have been speculations of a complete blanket ban on cryptocurrency trading altogether. The use cases allowed are limited to study, research and pilot projects. The bill has not yet been introduced in the parliament due to the government planning to introduce the Digital Rupee, a digital form of currency.

A lot of cryptocurrency startups and other institutions including IAMAI are in constant touch with the ministry to ensure better regulation, transparency and accountability. At such a stage, a ban would not be viable for any of the stakeholders. Nirmala Sitharaman, the Finance Minister of India has been quoted as saying “A lot of fintech companies have made a lot of progress on it. We have got several presentations. Much work at the state level is happening, and we want to take it in a big way in IFSC or Gift City in Gandhinagar,”.

CRITICISM

The essence of the bill is to impose a blanket ban on all private cryptocurrency in India. However, categorizing the cryptocurrencies as public or private is inaccurate as the cryptocurrencies are decentralized but not private. Decentralized cryptocurrencies such as bitcoin cannot be controlled by any entity, private or public.

Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban. Back then, blockchain experts moved to countries where crypto was regulated, such as Switzerland, Singapore, Estonia and the US. With a blanket ban, blockchain innovation, which has uses in governance, data economy and energy, will come to a halt in India.

A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world, including by some of the largest enterprises such as Tesla and MasterCard. In India, the funds that have gone into the Indian blockchain start-ups account for less than 0.2% of the amount raised by the sector globally. The current approach towards cryptocurrencies makes it near-impossible for blockchain entrepreneurs and investors to acquire much economic benefit.

CONCLUSION

The RBI has cautioned the general public regarding the possible misuse of private cryptocurrencies in different possible ways. In spite of the growth in crypto adoption, the country is behind others in terms of regulations and the number of successful crypto start-ups. India needs its own crypto unicorns and better regulations, and for this, the country must encourage its entrepreneurs to build for crypto. In conclusion, for a crypto investor, the future is uncertain and is highly unlikely that the courts would give any decision against the provisions of the Bill. If anything, the bill might end up complicating the process and imposing new restrictions. However, several industry experts are of the view that cryptocurrencies would not be banned and the regular investors would continue dealing in them, either through monitored markets or through illegitimate means.

By Bhavya Jha