Journey From Banning to Regulating: Past, Present and Uncertain Future of Cryptocurrencies in India

Journey From Banning to Regulating: Past, Present and Uncertain Future of Cryptocurrencies in India

The Journey of Cryptocurrencies in India has been unpredictable. The key issue surrounding cryptocurrency is the inability to define its legal status.

RBI and Cryptocurrencies: Past

In 2018,  Reserve Bank of India (RBI) promulgated a circular which prohibited banks from extending financial services that involved cryptocurrency, though  RBI had raised concerns about the potential financial, legal and security risks associated with it since 2013. 

The Ministry of Finance constituted an Inter-Ministerial Committee which published the Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, 2019 raising several pertinent concerns including the need to secure consumers from fraud and risks, the protection of the financial system, and the need to prevent criminal activities. 

Thus, the Committee submitted the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which suggested a blanket ban on cryptocurrencies. Interestingly, the Draft Bill provided under Section 8(1) that whoever directly or indirectly mines, generates, holds, sells, deals in, transfers, disposes of or issues cryptocurrency, shall be punished with up to 10 years of imprisonment. The severity of the proposed imprisonment is in line with Para 2 of  Part A of the Schedule under the PMLA, giving us a clear indication as to how seriously the Government views these transactions.

However, a Supreme Court Bench comprising of  R.F. Nariman, Aniruddha Bose and V. Ramasubramanian, JJ. quashed  RBI circular in Internet and Mobile Assn. of India v. RBI, (hereinafter “IMAI”), on the ground of proportionality, and upheld the contention that the denial of access to cryptocurrency users would be tantamount to a denial of the right to carry on any trade or profession guaranteed under Article 19(1)(g) of the Constitution of India.

Thereafter, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was set to be introduced in the Lok Sabha, to prohibit all private cryptocurrencies operational in India. There is a strong likelihood that this step is being undertaken, because  RBI is instructed to launch its own digital currency. Yet, as on date, there is no definitive regulation governing cryptocurrencies, adding to the uncertainty and confusion about its legality in India.

The Government of India initially wanted to encourage blockchain technology whilst opposing the legitimisation of cryptocurrency because once the unit of transaction changes from rupees to any kind of cryptocurrencies, tax recovery or general regulatory control would become extremely difficult and may reach beyond the regulatory capacity of the Government.

Thus, the Government has attempted to welcome blockchain technology, but has vehemently opposed the use of private cryptocurrencies. Recently, it was reported that the Government plans to consult experts and seek “legal opinion at the highest level” before it comes to a final decision on whether to allow the trading and holding of cryptocurrencies within the domestic market.

Therefore, it is warranted to declutter the aspect of cryptocurrencies regarding the foregoing anticipation of money laundering attached to it, as to whether it can or rather should, be regulated through the PMLA, in view of its decentralised and peer-to-peer (P2P) network mechanism apropos its tenuous legality.

Budget 2022 and Cryptocurrencies: Present 

While presenting the Union Budget on February 1, 2022 finance minister Nirmala Sitharaman announced that income from digital asset transfer will invite tax at the rate of 30 per cent. She made clear that no deductions or exemptions, except the cost of acquisition, will be allowed. She also said that crypto gifts will be taxed at the same rate on the side of the receiver. This brought a big clarity to those trading in the emerging industry. Hitherto, they are unsure how their income from crypto trading would be taxed.

Cryptocurrency and money laundering

Some cryptocurrencies such as Monero, Zcash, DASH, Verge and Horizen provide their users with maximum privacy, making it almost impossible to trace the parties involved in the transactions. In other words, most cryptocurrencies allow criminals to hide the source of their wealth. Though Bitcoin records all transactions which are contained in a freely distributed database, criminals reportedly laundered US $2.8 billion through Bitcoin exchanges in 2019, up from US $1 billion in 2018, making it even more appealing to criminals. Thus, there is minimal or no law enforcement oversight protection, since there is no authority for regulating cryptocurrency, as opposed to the active role of the Government in the distribution of fiat currencies.

Does Taxing Cryptocurrencies means it’s legalised? Uncertain Future

It is essential to note that an income earned from both – legal or illegal activities can be taxed under Income Tax Act.  The government has not made crypto legal under the Finance Bill, but it made the gains from it as taxable. “The right way to look at it is that the government has the right to tax unaccounted money, the same way it has the right to tax gains from crypto – be it legal or illegal.

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