|Date | Version||March 06, 2021 | 1.0|
|Keywords||‘Cryptocurrency’, ‘Bitcoin’, ‘RBI’|
|List of Legislation Referred||i. RBI Notification ‘Prohibition on dealing in Virtual Currencies (VCs)’
ii. Internet and Mobile Association of India v. Reserve Bank of India [(2020)10SCC274]
1.1. What is cryptocurrency?
Cryptocurrency is a medium of exchange, created and stored electronically in the blockchain, using encryption techniques to control the creation of monetary units and to verify the transfer of funds. Bitcoin is the best-known example.
Cryptocurrency has no intrinsic value or a physical form and exists only in network. Moreover, its supply is not determined by a central bank and the network is completely decentralized.
Cryptocurrency work on the blockchain technology which is a decentralized ledger of all transactions across a peer-to-peer network.
1.2. Benefits of cryptocurrency
Early adopters have long argued that cryptocurrencies have the potential to enable social and economic growth throughout the world, including in developing countries, by offering easier access to capital and financial services. Cryptocurrencies, particularly Bitcoin, has received wide acknowledgment across the world as an efficient form of digital currency instead of old-school fiat money.
Presently, cryptocurrenciesare being used more like store of value Cryptocurrencies due to the following advantages:
A. Protection from inflation- Almost every cryptocurrency, at the time of its launch, is released with a fixed amount and the source code specifies the amount of any coin; like, there are only 21 million Bitcoins released in the world. So, as the demand increases, its value will increase which will keep up with the market and, in the long run, prevent inflation.
B. Self-governed and managed- The cryptocurrency transactions are decentralized and stored by developers/miners on their hardware. These ‘miners’ get the transaction fee as a reward for doing so andhenceare incentivized to keep transaction records accurate and up-to-date, keeping the integrity of the cryptocurrency and the records decentralized.
C. Secure and private- Privacy and security have always been a major concern for cryptocurrencies. The blockchain ledger is based on different mathematical puzzles, which are hard to decode. Cryptocurrencies, for better security and privacy, use pseudonyms that are unconnected to any user, account or stored data that could be linked to a profile.
D. Currency exchanges can be done easily- Cryptocurrency can be bought using many currencies like the US dollar, European euro, British pound, Indian rupee or Japanese yen. With the help of different cryptocurrency wallets and exchanges, one currency can be converted into the other by trading in cryptocurrency, across different wallets, and with minimal transaction fees.
E. Cost-effective mode of transaction- One of the major uses of cryptocurrencies is to send money across borders. With the help of cryptocurrency, the transaction fees paid by a user is reduced to a negligible or zero amount. It does so by eliminating the need for third parties, like VISA or PayPal, to verify a transaction. This removes the need to pay any extra transaction fees.
This technology has left people with certain apprehensions, few of many are that Bitcoins are still only accepted by a very small group of online merchants due to the high volatility in price. This makes it unfeasible to completely rely on Bitcoins as a currency. There is also a possibility that governments might force merchants to not use Bitcoins to ensure that users’ transactions can be tracked.
Wallets containing the bitcoins can be lost and there if a hard drive crashes, or a virus corrupts data, and the wallet file is corrupted, Bitcoins have essentially been “lost” with no recourse to recover it.
2. Legal Framework
2.1. 2018 Ban
Although, the central government of India has been skeptical of privately issued cryptocurrencies, the government has not yet enacted a regulatory framework for cryptocurrencies. The Reserve Bank of India (‘RBI’) also advised caution on their use and issued three notifications that ‘cautioned users, holders and traders on the risk of these currencies and clarified that it has not given any licence or authorisation to any entity or company to operate such schemes or deals’.
Later, on April 6, 2018, the RBI issued a notification prohibiting banks, lenders and other regulated financial institutions from “dealing with virtual currencies,” which stipulated that ‘in view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in virtual currencies (‘VCs’) or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs’.
2.2. Supreme Court Judgement
In the case of Internet and Mobile Association of India v. Reserve Bank of India , The Supreme Court overturned the RBI ban and stated that ‘While we have recognized the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.’
The Supreme Court further stated that ‘since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g) of the Indian Constitution’.
3. Looking ahead
3.1. Ever since the ban, RBI has continuously voiced its concerns over the impact of cryptocurrencies on the financial stability of the economy and has conveyed the same to the government.
3.2. The central government has proposed to introduce ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ in March 2021. This Bill proposes ‘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’.