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Analysis of status of Cryptocurrency in India: The Battle of Advance Economy

Abstract[1]
The the virtual world demands regulation, banning will only curb the growth of the country
In the present article, the aim of the authors is to analyze the status of cryptocurrency vis--vis its legality in India, the article reflects upon the need for a legislative framework to regulate and govern the aspects of the cryptocurrencies as the same play a very important role in boosting the economy that too in such a difficult time when all the investors are going pro cryptocurrency. The framework is the need of the hour, the same will ensure the smooth functioning and transaction of the virtual currencies which allure the investors to invest in the country.

In the first limb of the article, the authors focus on what is a cryptocurrency and how it is different from fiat money, the authors also reflect upon the background and functioning of both the currencies and their advantages and disadvantages.

In the second limb of the article, the authors analyse the legality of the cryptocurrency putting the recent judgement of Apex court in the centre. The article praises the judgment as it nullifies the two-year-old ban imposed by the RBI over its entity which curbing them to deal in the cryptocurrencies, the same is not only violative of the fundamental rights but was also acting as a huge barricade in the growth and digitalization of the country.

Lastly, the authors gave some suggestions and recommendation that might be useful in framing the law related to cryptocurrency and also in its categorization in the country.

Introduction:
With a massive dependency on the virtual interface and growing arena of the digitization, it is pertinent to understand and reflect upon the cryptocurrencies. The importance of the same is aggrandized by the fact that that the discussion surrounding the cryptocurrencies as the currency for the future has already caught momentum. This article aims to provide a basic yet clear understanding of the cryptocurrencies including its status in India.

In light of the recent judgment passed by the Apex Court in March 2020, and consequently, the Circular passed by the Reserve Bank of India (Hereinafter referred as RBI), earlier banning its entities from providing any services to any individual or company dealing in virtual currencies has been set aside on the ground of 'Proportionality' and that it curbs the fundamental right enshrined under Article 19 (1)(g) of the Indian Constitution. Now that we can foresee the arrival of the cryptocurrencies in India, we not only need answers to several pending issues re its functionality and usage but also need to ponder upon the legal framework for it to be regulated.

Undoubtedly, where on the one hand, it seems to be a huge opportunity for the investors, on the other, the caveat for its misuse still stands. It is true that with the growth of the digital world, it is inevitable to prevent one from dealing in virtual currencies, therefore, the only plausible way is to regulate it. To understand its functioning and its anomaly, we need to understand what is meant by the term cryptocurrency and how it is different from Fiat money.

The term cryptocurrency refers to a type of virtual currency that is secured by an encryption code. These are based on a decentralized system of networks which in turn is based on blockchain technology. What segregates cryptocurrencies from the ordinary online transaction is its modus operandi.

The main difference between cryptocurrencies and the normal digital transaction is that in cryptocurrencies there is no single or central ledger available rather the recording of the transactions is been done by all the user participating in the system and at the same time which demises the chances of it getting hacked. So, this answers one of the main questions that arise when it comes to the safety and hacking of the cryptocurrency. The currencies are based on a safer interface as compare to other virtual currency.[2]

Explaining Virtual currencies and Fiat money:
Fiat Money
The concept of Fiat Money has evolved with the time and the essence of the same has shifted to trust from the object. The terminology that would otherwise mean a 'decree', can also be understood as a setup under which the people place their faith in the government, wherein the government is the sole authority to decide upon the treatment of money. To some people, the idea seemed problematic and they saw a risk of getting fooled and, or, cheated. Under this setup, the transactions will be recorded in a central ledger and no one except the government will have access to it. This gives rise to an important issue of 'Power'. The people who criticized this system were skeptical of the government action, intention and wanted a system which had the least chance of being corrupted or autocratic.[3]

As you would have guessed, this became a major reason behind the invention of the cryptocurrencies. The idea was to take away the power from one central system and in turn, distribute it to all the user interface which is based on the system called a 'blockchain'. A system that seemingly is more reliable and, or, transparent, and also curbs the chances of physical tampering. The idea of creating a virtual currency is somewhat progressive but as on date, it has not been given a status of legal tender by any country as of now. Today, one of the most popular cryptocurrencies known and, or, said to be used is Bitcoins.

Bitcoins:
Bitcoin is a form of virtual currency founded in the year 2009, and is available in a definite number. It is a digital asset that is designed by an unknown person using an alias of Satoshi Nakamoto. The medium is designed with a motive to facilitate a decentralized currency system via a digital platform in the same way we transfer our texts or emails. It is a clever system based on decentralized trust-less verification on the math born in cryptography.[4]

Procedure for getting Cryptocurrencies:
Cryptocurrency is based on the term cryptography which means solving codes or to generate a key for any encrypted program. The generator hides these currencies behind the unsolved encrypted code which is unreadable to the person without having a proper encryption code or the key, and the whole procedure of finding a key is called mining which is one method of generating cryptocurrencies.

Putting reliance on the above explanation, it is clear that one way of getting a cryptocurrency is mining which is the trickiest one since it is very difficult to find a portal to engage in mining and also if one found the same, there is a huge probability that one could not solve the encryption code. It also took a large amount of time and electricity since one need to mines for days to find the key to the code.

Another easy way of getting a cryptocurrency is to buy it from the person having it. One can spend the real money and purchase it via different mediums and apps available on the internet. Lastly one can also accept the payment in a form of cryptocurrency or virtual currencies in exchange for any service given by them.

Comparison of Virtual currencies with Fiat money can be understood from the table appended below:
Serial No. Assessment Credentials Cryptocurrencies Fiat Money
1 Transparency Ledger of virtual currencies are transparent and can be easily accessible Ledger of fiat money, on the other hand, does not show the exact amount and cannot be accessible to the general public
2 Central system Virtual currencies are based on the decentralized referred to as the blockchain. Fiat money is regulated by the central system set up by the government of the company such as banks and other institutional bodies.
3 Nature Digital by nature Mostly physical in nature
4 Value Hold same value or binary system all over the world Holds different value based on the country's economy
5 Risk No risk of forfeiture or demonetization etc. by the government. Holds a risk of forfeiture or demonetization by the country's government.
6 Cost Cheaper to use Not as cheap as virtual currencies.
7 Basis Trust is based not to one but all the user in the system Trust is based on the institution regulating the currency of the country.

India Standpoint:

It is interesting to note that in India, buying, selling, or trading of cryptocurrency has never been disallowed. On April 5, 2018, RBI released a the statement called 'Statement on Development and Regulatory Policies',[5] which inter alia bans all its regulated entities from dealing with or providing any services to any individual or business entities dealing with or settling virtual currencies and also ask them to exit any such relationship if already been a part of.

Later on April 6, 2018, RBI by exercising the power conferred to it by the Reserve Bank of India Act, 1934[6] (Hereinafter referred to as RBI Act) along with the Payment and Settlement Act, 2007[7] (Hereinafter referred to as PSS Act), where RBI being the authority for the regulation and supervision of payment system issued a circular directing the entities not to deal in virtual currencies or provide any services for facilitating any person or entity dealing with the same. For clarity, services include registering, maintain accounts, trading, settling giving loans against virtual tokens, opening an account for exchanges dealing in virtual currencies or sale, and purchase of the same. Before this circular, many inter-ministerial meetings and circulars have been released from time to time that illegalizes the virtual currencies in India.

Aggrieved by the restriction imposed by the RBI, the Internet and Mobile Association of India (Hereinafter referred to as IMAI) in 2018, filed a petition questioning the legality of the circular issued by the RBI. Subsequently, another petition was filed by the shareholder and founder of the companies engaged in online crypto exchange platforms along with few individual traders. The case was been filed in the year 2018 under the name of the Internet and Mobile Association of India (IMAI) v. RBI.[8]

The main contention of the IMAI was that the power of RBI prohibiting the activity of trading in virtual currencies were outside the regulatory framework of the RBI Act or Banking Regulation Act, 1949, since it does not fall under the credit system or payment system under the PSS Act.

It was also contended that the complete ban on the business activity through subordinate legislation is a violation of Article 19 (1) (g) of the Constitution of India.[9]

RBI response to this was that this action of theirs is required to protect the interest of the general public, consumers, and regulated entities because the nature of the virtual currencies is highly volatile and it is also capable of being used for illegal activities due to their anonymity.

RBI further contended that the currency exchange does not have any formal or structured mechanism to handle consumer grievances. It can also hold the capability that erodes the monetary stability of the country's currency and credit system.

Supreme Court's decision- The Supreme Court observed that the cryptocurrencies are to be considered as a digital representation of value that is capable of functioning as a medium of exchange, unit of account, or store of value. It was noted that the cryptocurrencies are capable of performing all functions of real money though not legal tender.

Additionally, the court noted that the RBI has the requite power to regulate the currency system of the country and the argument of the IMAI and other stakeholders are not acceptable. However, reflecting upon the contention of the petitioners it was held to be not reasonable to completely ban the right to access the banking system which is an integral part to the right to carry on any trade or profession and thus any legislation whose impact impairs the right granted in the same lieu would therefore be considered as a violation of Article 19(1)(g) of the Constitution of India. Thus, it was emphasized that the measures adopted by the RBI must pass the test of proportionality.

As the RBI has been conferred with very wide powers in the economy of the country, which powers are in the form of preventive as well as curative, the Supreme Court concluded that the measures taken by the RBI for the issuance of the RBI Circular were not proportionate. And accordingly, the said circular was set aside by the Apex court on the ground of proportionality.
Importance of this Judgement- India being one of the largest markets and most populous country of the world, cannot act as a sleeping giant; it has to change and adopt new methods and means to compete with the growing tech hubs of the world. This will facilitate the trade relations of the country with the developed nations. The lifting of the ban will help in generating a new technology which will be a motivation for the young youths of the country to engage in new start-ups in the same field.

Categorization of Cryptocurrency- Post COVID-19, There has been a massive boost in the valuation of the Cryptocurrency 'Bitcoin', it has emerged as a hedge against the uncertainty of the COVID-19. With many other restrictions that are imposed by the government of different countries to stop the spread of the virus, the trade and fiat money exchange has been affected majorly. This results in a huge change in the interests of the investors.

Since Cryptocurrency is a virtual currency and it also harmless when it comes to spreading of the virus, a huge number of investors also called as 'crypto investors' shown their interest in investing via Bitcoins. This impacted India's economy badly, as many countries which are accepting Bitcoins were benefitted with the transactions in virtual currency at these difficult times of pandemic.

The skeptical view of Indian government comes as a setback for them since India does not have a sound legal framework regulating the transactions of Cryptocurrency. Any investor who is interested in investing huge money needed a surety that there is the proper mechanism for the dispute redressal. The Indian government firstly fail to recognize Bitcoins as a currency, now when the ban has been lifted, there is still many question and issues that are needed to be addressed. [10]

The major dilemma of the Indian government is that the use of virtual currency can lead many chaotic issues such as money laundering and terror financing, but this is required to understand that the issues are there with all the countries and they have enacted proper methodology and framework to curb such activities. It is time to frame the proper set of law and regulate the cryptocurrency instead of fearing from it and banning it. Since the transaction is legalized but the same has not been given a status of legal tender, this become problematic when it comes to its operation.

The lifting of the ban by the Supreme Court will not going to solve the problem, there is a need to have a proper framework to make this work. The not so welcoming defiance of the government is making it difficult to come on an equal footing with the other developing countries who are not only allowing the transactions in virtual currency but also encouraging the same.
Recently, The Central Economic Intelligence Bureau (Hereinafter referred to as CEIB) suggested a proposal to the Central Government to impose an 18% Goods and Service Tax (Hereinafter referred as GST) on any cryptocurrency transaction, the same is proposed in lieu to boost the economy, the proposal estimated that with the imposition of 18% GST, the government can generate 40,000 crores of revenue annually.

The same is very effective and necessary after the loss in the economy because of the pandemic. The CEIB further proposes to categories the Cryptocurrency under 'intangible assets', the proposal suggest that with the implementation of the suggested conditions there can be a huge benefit in terms of revenue.

It is pertinent to understand here that imposition of 18% Tax and allowing the trading of cryptocurrency is not going to solve any problem but this may increase it. It is required for the government to facilitate such transactions instead imposing such a high tax rate which will ultimately force the people to trade it illegally and this will further result in tax evasion. There is a need to set proper legislation and a regulatory body that could regulate such transactions and also provide dispute resolution. The tax imposed on any such transactions should be reasonable and practical.[11]

Conclusion and Suggestions:
It is very evident that the nature of the cryptocurrencies are very volatile and it cannot be accepted by the country within the current framework, there is a need to adopt some measures to regulate it and can be used in a consumer-friendly way. Having said that:
The first suggestion is to enforce an indirect regulatory approach that relies on economic instruments. It is often viewed as regulation of being exchanges where the cryptocurrencies are exchanged for fiat money where the other exchanged commodities would belong under the realm of government's regulation. This will restrict the scope of the cryptocurrency in a way that it comes under the ambit of other existent regulation.

Secondly, the regulators need to categorize cryptocurrency with caution since it will define its legal nature. For example, in the USA it has not been recognized as legal tender but as 'commodity'. Similarly, the government of Japan amended their Payment Services Act which states that the cryptocurrency is limited to property values that are stored electronically on electronic devices; currency and currency-denominated assets are excluded.

Thirdly setting up the minimum qualification criteria for the companies involving in the cryptocurrencies which will include redressal to consumer grievance, maintaining certain records to avoid illegal use and development of high-tech software to provide good service.

At this juncture, it is very necessary to cite Dr Subramanian Swamy's tweet that If it is unstoppable then develops software to regulate it, a blanket ban is useless".[12] It is therefore to time to tame the dragon and make the best use of the opportunity.

End-Notes:
  1. Nishi Agrawal (B.A.LL. B Corp. Hons.) and Aman Pathak (B. Com LL. B Corp. Hon).
  2. Rui Zhang, Rui Xue, and Ling Liu. 2019. Security and Privacy on Blockchain. ACM Comput. Surv., Article 1, January 2019, Accessed through https://doi.org/10.1145/3316481.
  3. The What, How, and Why of Financial Intermediaries, In Contemporary Financial Intermediation (Fourth Edition), 2019, Accessed through https://www.sciencedirect.com/topics/economics-econometrics-and-finance/fiat-money.
  4. Bernard Marr, A Short History of Bitcoin and Crypto Currency Everyone Should Read, Forbes, dates 06.12.2017, Accessed through https://www.forbes.com/sites/bernardmarr/2017/12/06/a-short-history-of-bitcoin-and-crypto-currency-everyone-should-read/?sh=6464323d3f27.
  5. Reserve Bank of India, Statement on Development and Regulatory Policies dated 05.12.2018 Accessed through https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR13004FC9305488364E1781D3D45BF2EA68ED.PDF
  6. Section 3 (1), ) A bank to be called the Reserve Bank of India shall be constituted for the purposes of taking over the management of the currency from the 2 [Central Government] and of carrying on the business of banking in accordance with the provisions of this Act, Reserve Bank of India, 1934 Accessed through https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.PDF
  7. Section 3 (1), 1) The Reserve Bank shall be the designated authority for the regulation and supervision of payment systems under this Act, The Payment and Settlement System, 2007 Accessed through https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/86706.pdf
  8. Internet and Mobile Association of India (IMAI) v. RBI, Supreme Court of India, dated 04.03.2020, MANU/SC/0264/2020.
  9. Anuradha Bhasin and Ors. v. Union of India and Ors., Supreme Court of India, dated 10.01.2020, MANU/SC/0022/2020.
  10. Vaishali Basu Sharma, Will 2021 Be the Year When India Finally Clarifies Laws Around Cryptocurrencies, The WIRE, dated 23.12.2020 Accessed through https://thewire.in/tech/will-2021-be-the-year-when-india-finally-clarifies-laws-around-cryptocurrencies.
  11. Pradeep Thakur, Govt. weighs imposing 18% GST on Bitcoin Trade, Times of India, dated 29.12.2020, Accessed through https://timesofindia.indiatimes.com/business/india-business/govt-weighs-imposing-18-gst-on-bitcoin trade/articles how/80 001885.cms
  12. Subramanian Swamy, If it is unstoppable then develops software to regulate it, a blanket ban is useless, dated 04.03.2020 accessed through https://twitter.com/swamy39/status/1235142325820469249?lang=en.
Written By:
  1. Nishi Agrawal and
  2. Aman Pathak

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