This post has been written by Supriya Bhatpahari , a student of Hidayatullah National Law University, Raipur.
The world today is taking a technological turn, with the onset of breakthroughs in almost all fields. The financial sector is also not alien to these changes; therefore, it was not entirely unexpected that virtual currencies would exist one day. The terms virtual currency or crypto currency, often used interchangeably, do not refer to a digital manifestation of your existing money, rather, they are used to denote a currency which only exists digitally and is issued by private developers, the prime examples being Bitcoins, Ripple and Ether.
The legal status of crypto currencies in India however, is a little complicated.
Reserve Bank of India on the 6th of April 2018 notified by means of a circular that all entities associated with RBI must not engage in any activity related to the purchase or sale of virtual currencies. This in effect banned crypto currency and all other related activities in India. A writ petition was filed by the Internet and Mobile Association of India in the apex court against the circular. On 4th of March 2020, the Supreme Court quashed the Reserve Bank of India circular that declared the trading of such virtual currencies illegal, stating that since virtual currencies do not enjoy a status that is at par with conventional money, the RBI may only intervene in such matters if it impacts the monetary or economic system of the country adversely. This de jure means that crypto currencies are not illegal, however, they are still not recognized as legal tender. Why are virtual currencies not recognized as legal tender even after being legalized and termed as currencies? One might want to consider various factors such as the infancy of the whole system that houses both virtual and crypto currencies, lack of trust on part of the administration and ambiguity on part of the general population pertaining to the understanding of such currencies.
Timeline of events
Understanding virtual currencies
The timeline starts from June 2013, when the Financial Action Task Force published New Payment Products and Services Guidance, a set of guidelines which were issued for risk-based online transactions. But this report did not establish comprehensively as to what a virtual currency was and what were its benefits and lacunas. So, a short-term project was initiated by the FATF to generate a risk matrix for such virtual currencies. At the very same time RBI also took cognizance of the proliferation these currencies, and in its Financial Stability Report expressed that since these currencies are owned by private individuals and are unregulated, they pose considerable regulatory and operational risks. On 27th of December 2013, the Enforcement Directorate conducted raids on two bitcoin trading firms in Ahmedabad, the second virtual currency-related raid globally, after the U.S.A., in October the same year. It then became clear that in the absence of a regulatory framework and a comprehensive understanding for such currencies their misuse was bound to outweigh their advantages. So, in June 2014, FATF came up with yet another report, one which focused on virtual currencies and their potential risks and advantages.
This report defined virtual currency as a ‘digital representation of value that can be traded digitally and functioning as
(1) A medium of exchange; and/or
(2) A unit of account; and/or
(3) A store of value, but not having a legal tender status.’
The same report by FATF also defined crypto currency as ‘a math-based, decentralized convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.’
On the basis of another report, in June 2015, FATF advised nations to conduct their own assessments with regard to these virtual currencies and develop a risk profile for a specific type of currencies that pose a threat to their regulatory jurisdiction.
Difficulty in a comprehensive understanding
Around the same time, two narratives emerged pertaining to virtual currencies. The first, being that virtual currencies are the future of digital transactions and the second, being the polar opposite, that they will be a tool for criminals, terrorists and other similar outfits, that will attempt to evade the existing legal framework pertaining to anti-money laundering and countering the financing of terrorism (AML, CFT). The deep web and the dark web, both of which are abodes of online criminal activities, accept most payments via Bitcoins or other cryptocurrencies, as anonymity is a primary concern for both, the customer and the service provider due to the illegal nature of many services and products. It was common knowledge that the USPs for almost all cryptocurrencies was anonymity and lack of a regulatory framework which allowed them to transfer the said funds from anywhere globally, with little or no transactional costs. The anonymous nature of these currencies would make it more difficult than ever for authorities to track down suspicious or illegal activities. Adding onto an already long list of problems would be the issues for taxation. When virtual currencies are not recognized as legal tender, will the people who trade in the same and earn capital be liable to pay income tax for it? Most governments around the world struggled to comprehend whether these virtual currencies were advantageous to their trade or were they riddled with technologies that would make it impossible to track certain illicit transactions. This fact is what led a lot of countries like Algeria, Pakistan and Vietnam to place a blanket ban on any and all activities related to crypto currencies.
Why does India need crypto currencies?
Recently Yes Bank and PMC Bank both drowned financially, leaving the people who had deposited their hard-earned money, stranded and unable to liquidate their assets. Now it is important to note that while the value of a crypto currency fluctuates very rapidly, at no point can such currencies be placed under a moratorium, like these banks by the whims and fancies of bureaucrats. There can be no restrictions on their liquidation, whatsoever. Moreover, even if their values dip drastically momentarily, in the long run these currencies will turn out to be a profitable investment, as is exhibited best by Bit coin.
Another advantage of such currencies would be minimal transaction costs, hence eliminating the need for middlemen in financial transactions. This would also help in drastically reducing the deep-rooted and rampant problem of corruption in the country by eliminating the various levels of administration that funds have to pass through, by directly transferring the said funds with the help of the Blockchain technology, with minimal transaction costs.