Cryptocurrency is a type of digital or virtual money designed to work as a medium of exchange over the internet and whose network is distributed across many computers. It is organized and monitored by a peer-to-peer network called a blockchain, which also serves as a secure transaction ledger, e.g., buying, selling, and transferring.

Cryptocurrencies are decentralized digital assets, which means they are not issued by governments or other financial institutions like physical money. They can be launched, mined, and/or distributed by any private person.

The first and foremost known endeavour to create a cryptocurrency was eCash in 1980 by David Chaum who established a company called DigiCash that would ultimately make eCash. But no cryptocurrency was able to influence the masses till the release of Bitcoin in 2009.

Some cryptocurrencies that are presently in circulation are Bitcoin, Litecoin, YEM, Ether, and Monero.

Cryptocurrency Mining

Mining is a process that is used by several cryptocurrencies including bitcoin to generate new coins and verify new transactions. This process involves the use of extensive, decentralized networks of computers all around the globe that verify and safeguard blockchains, which are virtual ledgers that record crypto transactions.

Mining is performed using sophisticated hardware that solves an exceptionally strenuous computational math problem. The very first computer which finds the solution to the complex problem receives the next block of bitcoins and the same process starts again.

Each computer on the network competes with others to be the first to speculate a 64-digit hexadecimal number which is known as a "hash." The faster a computer can divulge guesses, the more likely the miner is to earn the reward. Bitcoin miners get bitcoin as a reward for accomplishing "blocks" of verified transactions, which are added to the blockchain.

Regulation of Cryptocurrency in India

Cryptocurrency regulations vary by jurisdictions around the world. Currently, cryptocurrencies are not regulated in India. There are no regulations to ban people from dealing in or mining cryptocurrency. Presently, as public cryptos are mined using the miners' own resources, there are no laws in operation for regulating this process.

Is Cryptocurrency legal or illegal in India?

Whether crypto is legal or legitimate in India has come up repeatedly. Neither the government nor the central bank, the Reserve Bank of India (RBI), has recognized cryptocurrencies.

The Reserve Bank of India (RBI) issued a circular dated 6th April 2018 (1), notifying that citizens will not be allowed to deal in cryptocurrencies as they pose several serious concerns regarding consumer protection, money laundering, market integrity, and many others. But in 2020, in the case of Internet and Mobile Association of India v. Reserve Bank of India (2), Supreme Court struck down the aforementioned circular. The Supreme Court seemed to have favoured virtual currencies by allowing its dealings.

The supreme court observed that cryptocurrency should be regulated by the RBI. The Supreme Court held that since RBI is a financial institution whose aim is to protect public money, it was within RBI's right to ban cryptocurrency. But at the same time SC also said that in place of banning these virtual currencies altogether, the RBI could have looked for alternatives that may have been advantageous to the virtual currency users by implementing apposite rules.

After the Internet and Mobile Association of India Judgment (Supra), the government was planning to introduce "The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021" (the "Bill") to the Lok Sabha. According to the Lok Sabha bulletin dated November 23, 2021 (3), the Bill seeks 'to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India.

The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.' But owing to several complexities, the bill has not been introduced in any house of Parliament.

But India is trying to regulate the cryptocurrency market to make it less volatile and risky for the citizens. MCA amended Schedule III of the Companies Act 2013 which states that from Financial Year 2021-22 all the companies will be required to disclose their investments in cryptocurrencies, and also state any profit or loss involved in the transaction. The holder of virtual currencies will also be required to state the number of holdings, details of deposits, and advances from any person for trading.

While cryptocurrencies are not legal tender in India, the Government of India has noted time and again that they are also not illegal. Hence, cryptocurrency is currently a gray area in India.

Taxation Policy on Cryptocurrency in India

The Union Finance Minister Nirmala Sitharaman through Finance Bill, 2022 has proposed to levy a flat tax of 30 percent on the transfer of virtual assets including NFTs and cryptocurrencies. For this purpose, a new Section 115BBH to the Income-tax Act,1961 will be inserted.

Further, while ascertaining the income from the transfer of virtual assets, there is no provision for any deduction in respect of expenditure except the cost of acquisition. In addition to this, as per proposed provisions of Section 115BBH, the loss from the transfer of virtual assets will not be allowed to be set off against the income generated from the transfer of another virtual asset.

This newly proposed virtual asset tax will be applicable from the Assessment Year 2023-24. That means all the income arising from crypto or NFT transactions in Financial Year 2022-23 will be taxed at the rate of 30 percent.

Reference:

• https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF
• https://main.sci.gov.in/supremecourt/2018/19230/19230_2018_4_1501_21151_Judgement_04-Mar-2020.pdf
• http://loksabhadocs.nic.in/bull2mk/2021/23.11.21.pdf