Date | Version December 29, 2022, | 1.0
Keywords ‘Cryptocurrency’, ‘Blockchain’, ‘Decentralization’, ‘Virtual Digital Assets’, ‘Dollarization’.
List of Legislation Referred
  1. The Constitution of India
  2. Securities Contract Regulation Act, 1956
  3. Foreign Exchange Management Act, 1999
  4. Income Tax Act, 1961
  5. Markets in Crypto Assets Regulation (MiCA) (European Council) (yet to be voted upon)
  6. Bipartisan Infrastructure Legislation, 2021 (The USA)
  7. Bank Secrecy Act, 1970 (The USA)
  8. White House Executive Orders
  9. Circulars issued by the Reserve Bank of India
Jurisdiction India

Abstract– Virtual currencies have proliferated the financial market at a global level since 2013. With the advancement of technology, particularly in the distributed ledger and other similar technology space, it is evident that the economy is moving towards an entirely digital universe. The futuristic technology of cryptocurrencies depends mainly on user sentiments and artificial digital asset value for its materialization. Despite the abundant potential, governments and central banks across the globe appear averse to easing up to this technological advancement. This article weighs the concerns of cryptocurrency against its potential and discusses the legislative framework with respect to cryptocurrencies in certain jurisdictions.


In a transaction involving the use of paper currency or fiat currency, the receiver needs to ensure that the paper currency is genuine and not counterfeit, and in the case of digital transactions, the authentication of bank account(s) is done by banks as the transaction would involve money moving from one bank account to another.

Some people fancied a world without these banks – conceptually, a good idea to avoid intermediation by banks. Reasons for avoiding the banks could be several, including lack of faith in banks, excessive charges by the banks or just the fact that these transactions are being tracked. A private transaction arrangement was made to bypass this interference by banks and other institutions.[1] The problem, however, was that such electronic money could be replicated easily, and the same currency could be spent again and again. Thus, causing the problem of double spending.[2] This problem was sought to be solved by introducing Bitcoin based on blockchain. A transaction occurring on this blockchain was broadcast on all computers on the network, arguably eliminating the possibility of double spending as that would involve changing every subsequent block on the blockchain.

A cryptocurrency is a form of decentralized virtual currency, and most popular cryptocurrencies (such as Bitcoin, Binance coin, Ethereum, Dogecoin and Litecoin) are based on blockchain technology that enables a user to transact without disclosing their identity and is secured by cryptography.[3] Cryptocurrency can revolutionize how we handle money, trade, undertake financial transactions, and, importantly, assess, evaluate, and mitigate the risks arising from the use of cryptocurrency. Blockchain technology is based on a distributed ledger system that stores and transmits data in ‘blocks’ connected with a chain. The cryptography algorithm is then employed to synchronize such data in a rigid and immutable manner. The possibility of misuse in cryptocurrencies is one of the reasons it has limited acceptance.

A cryptocurrency is not backed by assets and is traded via a digital platform, crypto-wallet, or any such digital mechanism. The value assigned to a cryptocurrency is dependent solely on user sentiments.[4]

The concept of cryptocurrency may be explained with the help of the following components:

  1. Based on Digital Network:
    A cryptocurrency is a digitized asset governed by rules enforced purely technologically and without relying on a central authority.
  2. Distributed ledger:
    Any central authority does not maintain cryptocurrency transactions; instead, each user device has access to the secure digital database.
    Distributed Ledger Technology (DLT) refers to the technological infrastructure and protocols that allows simultaneous access, validation, and record updates in an immutable manner across a network that’s spread across multiple entities or locations.
  3. Cryptography:
    Cryptography is a deep academic research field using many advanced mathematical techniques that are notoriously subtle and complicated.[5] To put it simply, ‘Cryptography’ is a technique deployed to provide data security to ensure that the data transferred between communication parties is confidential and not modified by an unauthorized party.
    Caesar cipher, monoalphabetic cipher, homophonic substitution cipher, Polyalphabetic Cipher, Playfair cipher, rail fence, One-time pad, hill cipher are some examples of cryptography techniques.

The rising use and popularity of cryptocurrencies may be attributed to the following:

  1. Ease of purchase of cryptocurrency, and
  2. The “network effect,” i.e., when technology gains value merely because more people are using it. A classic example of this is the case of Coinbase, the largest crypto platform in the United States, whose customers increased to over 100,000 in a day after the post-announcement of the Chicago Mercantile Exchange to launch Bitcoin futures.[6]

Tracing the Evolution of Cryptocurrency

It is a largely held misconception that blockchain technology was introduced by the circulation of a Bitcoin white paper by someone or some people who identified as ‘Satoshi Nakamoto’ in 2008. The technology finds its origin as far back as the 1980s.

In the late 1980s, Stuart Haber and Scott Stornetta worked together to develop a digital ledger that is so structured that tampering with one item on the chain would result in tampering with the entire chain. The scientists raised two-fold concerns as the average American household adopted personal computing. How do we trust the digital that is so easy to manipulate; two, could one trust the easily manipulated digital without a central regulating authority?

Nakamoto built on the concept of decentralization of Haber and Stornetta, adding to it the concept of mining. By solving mathematical puzzles tied to transactions in a block, one could win coins. This reward system prevented tampering. A single block on the chain could not be tampered with without tampering with and disrupting the entire chain, thereby making blockchain a secure and fraud-proof technology.

Even as Bitcoin was limited only to computer programming until the late 2000s, the technology saw rather brilliant tangents to its intended purpose. One such was when Laszlo Hanyecz, a computer programmer in Florida, offered 10,000 bitcoins in exchange for two pizzas being delivered to him.[7] The two pizzas that cost thirty dollars, in May 2010, to the man from England who had agreed to have them delivered to Hanyecz were worth 82 million dollars by May 2018.[8] May 22 is now famously celebrated as ‘Bitcoin Pizza Day’.[9] Like with many commodities, the value of Bitcoin is based on the theory of demand and supply.

It is essential to understand the journey of cryptocurrencies – from niche circles of computer programming to the common person to envision its use in the coming days. To effectively realize the potential of cryptocurrencies, it is important to be alive to the accompanying concerns and challenges.

Regulatory Concerns with Cryptocurrency

Since cryptocurrency operates in a regime that does not involve a financial intermediary, why are the government entities and the central bank aversive towards accepting cryptocurrency? Because in the absence of any regulatory body governing cryptocurrency, there is no structured redressal mechanism to address the challenges surrounding cryptocurrency transactions. For example, in case of erroneous payment using cryptocurrency,no regulatory body  may come to the rescue – in other words, there is no agency to implement a ‘stop payment’ or ‘reverse payment’ instruction. Regulatory concerns are articulated as under:

  1. No intrinsic value. A cryptocurrency has no intrinsic value, like gold, and its value is derived from trust and acceptance by the users. The argument in favour of cryptocurrency is that the number of any cryptocurrency would be limited by virtue of the way it is generated or ‘mined’. Of course, the kinds of ‘cryptocurrencies’ may not be limited.
  2. The legal status of cryptocurrency. The manner of defining cryptocurrency has been non-uniform across the globe as we know very little about the consequences of treating it as a security, commodity, currency, or even an asset. What we know is that it is a digital storage of funds that employs the technology of cryptography that controls the creation of new units and validates asset transfers. While countries like Japan and Switzerland have enacted legislations that promote cryptocurrency usage, the Indian State appears to be indecisive on whether to ban cryptocurrencies altogether or to incorporate them into the financial system.

The legal status of cryptocurrency in the Indian context is discussed below:

  • Cryptocurrency as securities:
    The definition of the term ‘securities’ under the Securities Contract Regulation Act, 1956 (‘SCRA’), does not include cryptocurrencies. Still, it can be considered a security under the term ‘other marketable security’ mentioned in the definition, which has a wider connotation. Cryptocurrencies can be considered as ‘security’ if generated, distributed and sold in a centralized manner.
    However, the mandatory requirement for such securities to be issued by a body corporate would defeat the essence of cryptocurrency, i.e., an unprecedented level of anonymity, and is, therefore, precluded from the ambit of securities under the SCRA.
  • Cryptocurrency as Virtual Currency:
    The regulatory authorities have yet to define the term ‘virtual currency’. However, the status of cryptocurrency may be determined by taking reference from the meaning of ‘currency’ as provided under Section 2(h) of the Foreign Exchange Management Act, 1999 (‘FEMA’).
    The FEMA defines ‘currency’ as all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or other similar instruments, as may be notified by the Reserve Bank of India (‘RBI’).
    Treating cryptocurrency at par with the traditional fiat currency, which is issued and backed by a central authority, the RBI and by statute are considered a ‘legal tender’ poses challenges. A ‘legal tender’ is a coin or a banknote legally tenderable to discharge debt or obligation. Coins issued by the Government of India and Bank notes[10] are issued by the RBI and guaranteed by the Central Government. Any such authority does not back cryptocurrencies – there is no issuer promising to pay an equivalent amount.
  • Cryptocurrency as a ‘good’:
    Treating cryptocurrencies as ‘goods’ eligible to be traded in the commodity derivatives market would be challenging. Section 2(bb) of the SCRA defines ‘good’ as ‘every kind of movable property other than actionable claims, money and securities’.
    Under the SCRA, a contract in respect of cryptocurrency, being a ‘good’, would be eligible as a ‘commodity derivative’ only if it is notified as such by the Central Government.

With the ambiguity in determining the nature of cryptocurrency, regulators want to avoid the ‘cobra effect’, i.e., a situation where a solution to a problem makes the problem worse.[11]

  • Unprecedented level of anonymity and decentralization. The decentralized identity management system lends an unprecedented level of anonymity in relation to cryptocurrency transactions.
    • A word of caution: At first glance, it may seem that decentralized identity management leads to great anonymity and privacy. After all, one can create a random-looking identity without disclosing their real-world identity. But it’s more complicated. Over time, the identity that one creates makes a series of statements. People see these statements and thus know that whoever owns this identity has done a certain series of actions. They can start to connect the dots, using this series of actions to make inferences about their real-world identity.[12]
  • Difficulty in exercising control. The fundamental risk associated with cryptocurrencies that pose red flags for the RBI is that cryptocurrencies are built around the concept of avoiding control of the Government. Suppose cryptocurrencies do end up as an alternative to fiat currency. In that case, people might hold their deposits in more acceptable and stable currencies such as the US Dollar and Euro. This might result in the ‘Dollarization’ of the economy.[13] Given the unprecedented level of anonymity with respect to the transactions, it also opens the window to illegal transactions. Additionally, the combined effect of ‘Dollarization’ and the unprecedented level of anonymity of transactions may also render the monetary policy of the RBI almost redundant owing to the fact that it shall become difficult to regulate the money supply and interest rates to deal with inflationary concerns. As discussed above, the current legal system cannot treat cryptocurrencies as currency, securities, or commodities. Thereby making it difficult to bring it under the regulation of the financial sector.

Cryptocurrency Regulations in certain other jurisdictions

European Union

To see how cryptocurrencies have developed in Europe, we can have a look at the developments in the year 2013[14] when EBA (European Bank Authority) warned consumers about virtual currencies, this was issued to highlight the possible risks one may face when buying, holding or trading virtual currencies such as Bitcoin.

The warning included alarming points such as the users’ loss or theft of money, misuse of virtual currency for criminal purposes, and the volatility of such virtual currencies, among others.

On July 4 2014, the EBA published an opinion on virtual currencies. More than 70 risks involved in handling cryptocurrency were identified across several categories. One of the most concerning factors was the use of cryptocurrency in financial crimes. To address these issues, the EBA made certain recommendations, including:

  • National supervisory authorities should discourage credit institutions, payment institutions and e-money institutions from buying, holding or selling Virtual Currencies.
  • EU legislators consider declaring market participants at the direct interface between conventional and virtual currencies, such as virtual currency exchanges, to become ‘obliged entities’ under the EU Anti Money Laundering Directive and thus subject to its anti-money laundering and counter-terrorist financing requirements.

Talking about Europe, Germany continues to implement cryptocurrencies into its national regulation. First, it started with licensing cryptocurrencies custody service providers and defining cryptoassets as financial instruments. Private funds are allowed to keep 20% of their investments in cryptocurrencies.[15]

In another example, the United Kingdom affirmed in 2020 that cryptoassets are property. The UK has no cryptocurrency regulations and does not consider cryptocurrencies legal tender. [16] In March 2022, the Financial Conduct Authority (FCA) of the UK declared that all cryptocurrency ATMs in the country were illegal and would need to be shut down. At the time, Coin ATM Radar had listed 81 such ATMs in the country. None of the ATM operators had successfully registered with the FCA. The FCA cited a failure to comply with know your customer laws (KYC), which track and prevent money laundering and the high risk to customers due to a lack of regulation and protection.[17]

Anticipated developments in the European Union

  1. Markets in Crypto Assets Regulation (MiCA)
    The European Union (EU) has agreed upon the full legal text of its landmark legislation known as the Markets in Crypto Assets Regulation (MiCA). It has also agreed to have another law to reveal the identity of those making cryptocurrency payments.[18] The European Commission introduced in September 2020 a proposal for regulating cryptocurrency assets as part of its digital finance strategy.
    MiCA applies directly across the European Union (EU) without any need for national implementation laws. This approach is in keeping with consumer protection and ensuring effective and harmonized access to the innovative crypto asset markets across a single market.
    The Markets in Crypto-Assets Regulation have four essential objectives:

    • Ensuring legal certainty by establishing a sound legal framework for crypto assets in its scope that are not covered by existing financial services legislation;
    • Supporting innovation and fair competition in order to promote the development of crypto assets by instituting a safe and proportionate framework;
    • Protecting consumers, investors and market integrity in consideration of the risks associated with crypto assets; and
    • Ensuring financial stability, with the inclusion of safeguards to address potential risks to financial stability.[19]


  2. Digital Euro
    The digital euro would be like euro banknotes, but digital. It would be an electronic form of money issued by the Eurosystem (the ECB and the national central banks of the euro area) and accessible to all citizens and firms.
    The ECB (European Central Bank) and the euro area national central banks launched the digital euro project investigation phase in October 2021. The investigation phase will last 24 months until October 2023 and aims to address key issues regarding design and distribution.
    At the end of the investigation phase, the Governing Council could start a realization phase to develop and test technical solutions and business arrangements for a digital euro. The body in charge of steering the digital euro project is the High-Level Task Force on Central Bank Digital Currency (HLTF-CBDC), composed of representatives from the ECB and the national central banks of the euro area.[21].

The bill will serve as the legal foundation for the European Central Bank’s ongoing technical work on the virtual version of a euro banknote or coin. One of the fears, especially of the banks, is that the savers could convert their deposits into the central bank-backed digital currency with the click of a button if there’s another financial crisis creating an online bank run.[22]

The United States

The approach of the US has been more liberal towards cryptocurrencies. Cryptocurrencies are legal in the United States and fall under the regulatory scope of the Bank Secrecy Act (BSA). This means cryptocurrency exchange service providers must register with FinCEN and implement an effective  Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) program.

On March 9, 2022, US President Joseph Biden signed an executive order,[23] directing the US federal government to come up with plans to regulate cryptocurrencies. Previously, the Biden administration had turned its attention to stable coins to address the danger of the tokens[24] growth in value.

For a background of the executive order, we need to mention the bipartisan infrastructure legislation, 2021[25], which lays out a national policy for digital assets across six areas:

  1. Consumer and investor protection,
  2. Financial stability,
  3. Illicit finance,
  4. US leadership in the global financial system and economic competitiveness,
  5. Financial inclusion, and
  6. Responsible innovation.

The new regulatory provisions are expected to provide tax authorities and financial regulators with additional tools to track the use of cryptocurrency. [26] Prior to the legislation, there was a need created for extensive recordkeeping requirements for cryptocurrency exchanges to account for gains and losses from digital asset transactions.

The US continues to progress in developing federal cryptocurrency legislation like Financial Crimes Enforcement Network (FinCEN). FinCEN does not consider cryptocurrencies to be legal tender but considers cryptocurrency exchanges to be money transmitters on the basis that cryptocurrency tokens are ‘other value that substitutes for currency.’[27]

The Internal Revenue Service (IRS) also does not consider cryptocurrency to be legal tender but defines it as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value and has issued tax guidance[28] accordingly.

The US Securities and Exchange Commission (SEC) has indicated that it considers cryptocurrencies to be securities and applies securities laws comprehensively to digital wallets and exchanges. However, The Commodities Futures Trading Commission (CFTC) has described Bitcoin as a ‘commodity’ and allows cryptocurrency derivatives to trade publicly.

FINCEN, in 2019, made clear that it expects cryptocurrency exchanges to comply with the ‘Travel Rule’ and gather and share information about the originators and beneficiaries of cryptocurrency transactions. It places virtual currency exchanges in the same regulatory category as traditional money transmitters.It applies all the same regulations, including those set out in the Bank Secrecy Act – which has established its version of the Travel Rule. In October 2020, FINCEN released a Notice of Proposed Rulemaking (NPRM) on adjustments to the Travel Rule, signalling the introduction of new compliance responsibilities for cryptocurrency exchanges. [29]


In late September 2021, the People’s Bank of China (PBOC) banned all cryptocurrency transactions. The PBOC cited the role of cryptocurrencies in facilitating financial crime as well as posing a growing risk to China’s financial system owing to their highly speculative nature.

Another possible reason behind the cryptocurrency ban is an attempt to combat capital flight from China.

Chainalysis Blockchain data platform, which is a company that provides guidance on engaging in Cryptocurrencies to government agencies, cryptocurrency businesses, and financial institutions, had analyzed that approximately more than $50 billion worth of cryptocurrency left East Asian accounts to areas outside the region between 2019 and 2020. As China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis staff believe that much of this net outflow of cryptocurrency was capital flight from China.

International Efforts

Regarding international cooperation among nation-states concerning cryptocurrencies, The Basel Committee on Banking Supervision came out with its report titled, ‘Prudential treatment on cryptoasset exposures’ (Basel Committee Report), setting out standards for cryptoassets to be implemented by January 1 2025.[30]

The report categorizes cryptoassets into two groups, i.e. Group 1 and Group 2. Each group is further divided into two sub-groups and is accompanied by the conditions to be met for categorizing a cryptoasset.

Group 1 cryptoassets include tokenized traditional assets (Group 1a) such as digital representations of bonds, loans, claims etc. Group 1b consists of cryptoassets with effective stabilization mechanisms that are redeemable for a predefined amount of reference assets and offer risk management similar to those of traditional assets. The report details a redemption test for such assets to be categorized into Group 1b. These Group 1 cryptoassets are “subject to capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework.”[31]

Group 2 cryptoassets are assets that fail to meet the classification conditions mentioned. These cryptoassets are generally unbacked and pose greater risks than Group 1 cryptoassets, therefore subject to the newly prescribed conservative capital treatment. For cryptoassets where a limited degree of hedging is permitted, they are said to be recognized as Group 2a cryptoassets. The remaining cryptoassets are categorized as Group 2b cryptoassets.

Among Group 1 and Group 2 cryptoassets, only those that fall under Group 1a are considered to be High-Quality Liquid Assets.[32] It needs to be noted that the report expressly mentions that central bank digital currencies shall not be described under the existing Basel Framework.[33] The report sets out limits such as bank exposure to group 2 assets and the capital and liquidity requirements for credit risk and market risks associated with these cryptoassets in accordance with the category they fall under. Being a member nation-state to this Committee, the RBI has also acknowledged these proposed measures.

Cryptocurrency Regulation in India

The RBI has highlighted its concerns with respect to cryptocurrencies and other digital assets on a regular basis, referring to them as virtual currencies. In 2013, RBI issued its first press release regarding these virtual currencies cautioning users against the risks involved in using such virtual currencies.[34] The issue was again highlighted in the RBI Financial Stability Report of December 2016, where RBI stated the concerns of data security and consumer protection and the manner in which such virtual currencies may affect the monetary policy, which may have far-reaching consequences.[35]

In February 2017, RBI issued another press release cautioning people against the use of such virtual currencies.[36] A report by Inter Disciplinary Committee followed this constituted by the Ministry of Finance in April 2017. The report recommended that virtual currencies shall not be accepted as legal tender.[37] While dismissing these virtual currencies altogether, the report also highlighted the utility of blockchain technology. In April 2018, referring to its earlier press releases, the RBI issued a Circular stating, “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.”[38]

The constitutionality of the April 2018 Circular was challenged before the Hon’ble Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India[39]. It was argued that the RBI had no power to impose such a ban on virtual currencies, and the same was against Art. 19(1)(g) of the Constitution of India. The RBI argued that virtual currencies did fall under the purview of RBI, and the ban was not against the fundamental rights enshrined in the Constitution. The RBI also highlighted issues pertaining to accountability and the potential of such virtual currencies being used for illegal activities.

The Hon’ble Supreme Court held the April 2018 Circular infringing upon the rights guaranteed under Art. 19(1)(g) was against the Doctrine of Proportionality. In the words of the Hon’ble Supreme Court: “It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an Article of merchandise is capable of functioning as is different from how it is recognized in law to be. It is as much true that VCs are not recognized as legal tender as it is true that they are capable of performing some or most of the functions of real currency.”

Following the decision of the Hon’ble Supreme Court in Mobile Association of India v. Reserve Bank of India,  the Ministry of Corporate Affairs issued a notification in March 2021 directing companies to disclose all their virtual currency transactions.[40] This was followed by a Circular from RBI in May 2021 that set aside its April 2018 Circular, and the RBI advised platforms trading in cryptocurrency to ensure compliance with provisions of FEMA, KYC and Anti-Money Laundering.[41]

Taxation of Virtual Digital Assets in India

On February 1, 2022, while presenting the 2022-23 Union Budget, the Finance Minister announced a 30 percent tax on all income generated from the transfer of any digital asset. This was the first instance where the term ‘Virtual Digital Assets’ was defined under the Income Tax Act, 1961 (‘Income Tax Act) to mean:

“(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called.

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette, specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of the virtual digital asset subject to such conditions as may be specified therein.”[42]

The Government has defined this term  broadly to include all sorts of digital assets ,not just cryptocurrencies in general. The move gives enough powers to the Government to govern any other Digital Assets apart from cryptocurrencies and non-fungible tokens that may come up in the near future as the crypto world evolves further.

Based on the foregoing, a taxation framework for Virtual Digital Assets was put into place. Sec. 115BBH was also added to the Income Tax Act, which provides for a thirty percent tax, excluding the applicable surcharge and cess on income from the transfer of these Virtual Digital Assets.[43] Following this, from July 1 2022, a tax deduction at source equal to one percent has been deducted for every cryptocurrency transaction.[44] This step by the Government has been seen by the experts as “significantly adverse for the nascent cryptocurrency industry in India.”[45] The effect of these actions can be seen in the significant drop in daily transaction volumes by over 70 percent.[46]

On November 29, 2022, RBI announced the launch of the first pilot for retail digital Rupee that shall be issued in the same denominations of paper currency from December 1, 2022. The transactions shall take place through digital wallets offered by the participating banks. The Concept Note of RBI introducing CBDC explains that the e₹ will provide an additional option to the currently available forms of money. Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by the Reserve Bank, a form of fiat currency, that is, the Indian National Rupee. It is substantially not different from banknotes, but being digital, it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money.

  • Reserve Bank’s approach is governed by two primary considerations: to create a digital Rupee that is as close as possible to a paper currency; and
  • to manage the process of introducing the digital Rupee in a seamless manner.

RBI is exploring the option of implementing account-based CBDC in the Wholesale segment and token-based CBDC in the Retail segment vide a graded approach. This step by the RBI still  needs to address the fundamental issue of cryptocurrencies being used to evade regulation by banks.

Crypto: The Road Ahead

  • Cryptocurrency has the potential to revolutionize the existing financial system. A peer-to-peer system can help us overcome the limitations of the traditional banking system. A large portion of the population in third-world countries has no access to bank accounts.[47] Cryptocurrency allows an individual to exchange currency without a third trusted party like central banks regulating such transactions.
  • Under the traditional banking system at present, an international transaction may take days, or even weeks to take place. There may be other scenarios where the speed of the transaction is of the essence. Cryptocurrencies enjoy a massive advantage over traditional payment mechanisms by offering their users a quick peer-to-peer transactional speed vis-à-vis the conventional systems. The checks and balances employed by banks in such transactions do not apply to cryptocurrencies, making these transactions instantaneous with little or no transaction costs being charged for them. These reduced transaction costs will also promote efficiency while also increasing the volume of transactions.
  • Irrespective of the level of regulation or even in case of prohibition, cryptocurrency can be deployed to purchase cyber-assets (for example, the online reputation of a person).It may reach a point where cyber-assets dominate the non-cyber assets or traded against non-cyber assets – and given the speed with which cryptocurrency-based transactions are consummated, it may be possible to make or break a deal in a moment. Recent developments like Gucci selling the digital version of its bag for a price higher than the cost of the bag in the physical world[48]attests to the enthusiasm of users towards the fast-developing digital world, albeit largely unregulated.
  • Nation-states across the globe have been transitioning towards a cleaner, sustainable, and greener future. While the current manner of mining cryptocurrencies involves the consumption of a lot of power in addition to these systems being stored in a cool place. The same concerns were raised with the introduction of the internet, which ended up revolutionizing the entire system of data and information exchange. Under the traditional financial system, significant energy is consumed by the increase in ATMs across cities and banks expanding their branches. Additionally, the maintenance and upgrading of data centres for banking transactions also involve a lot of power consumption.[49] Cryptocurrencies have the potential to substantially reduce the dependence on these structures, if not eliminate them completely. The same would align with the commitment to greener and cleaner sources of energy.
  • Cryptocurrencies also have the potential to make the crowdfunding process more efficient. Rather than having a few investors who would make large investments, cryptocurrencies will allow entrepreneurs to have access to a bigger pool of investors, giving them better financial coverage.[50] This access also reduces and mitigates the risks associated with such projects by allowing more investors to make smaller investments. Just the inclusion of unbanked individuals into a global financial system would open a myriad of opportunities. The option of an initial coin offering can also help startups to secure capital. Therefore, cryptocurrencies may even accelerate the economic and social development processes across the global economy.
  • Limiting cryptocurrency as a financial tool would be underestimating this technology’s potential. With a promise of transparency and fairness on the one hand, and finding roots in the deeply capitalist financial system, cryptocurrency has been rightfully called the Janus-faced technology.[51]
  • The distributed public ledger can help businesses track payments and access data in real-time, ensuring transparency and security of the transactions. Given the fact that cryptocurrency transactions are recorded instantly across the network of computers, these transactions are publicly accessible and traceable as well. Therefore, we might end up doing away with the entire concept of escrow accounts that are currently in place to protect the interests of parties.
  • As things stand, people are investing in cryptocurrencies as a speculative asset rather than a medium of exchange. The Deputy Governor compared the current patterns in cryptocurrency investments to a ponzi scheme, “Even Ponzi schemes invest in income-earning assets. A bitcoin is akin to a zero-coupon perpetual; it’s like you paid money to buy a bond which pays no interest and which will never pay back the principle.”[52] This reluctance on the part of the RBI and other Central Banks across the world to provide legitimacy to cryptocurrencies has led to volatility being experienced by investors, causing further trouble in treating it as a medium of exchange. Such volatility in the market may negatively affect the monetary and financial stability of the economy.

El Salvador illustrates the point – in September 2021, El Salvador became the first nation to treat Bitcoin as a legal tender which meant that the payee had to accept them.[53] The Government ended up spending over 100 million USD on Bitcoins, buying them at an average price of around 40,000 USD. A year since then, Bitcoin has been traded at around 20,000 USD. Therefore, after spending over 100 million USD on buying bitcoins, the investment is worth less than 50 million USD. The President of the State urged the citizens to hold onto their Bitcoin investments,  which led to further devastating losses.[54] This cryptocurrency experiment was  unsuccessful and only created further speculations for countries like India that might consider adopting cryptocurrencies as legal tender.


  • Since cryptocurrency transcends national boundaries, international consensus is required when developing policies to govern and regulate it. The regulation of cryptoassets on the International scale was highlighted again in the RBI Financial Stability Report of December 2022. The RBI highlighted this issue owing to the fact that cryptocurrencies have increasingly become interconnected with the traditional financial system and the recent volatility in the cryptocurrency market is a problem that needs to be addressed immediately.[55]
  • The Financial Stability Board recommended the promotion of International consistency in the regulation of cryptocurrencies based on the principle of ‘same activity, same risk, same regulation’. [56] Making a mention of the classification of crypto assets into two groups under the Basel Committee Report, the report went on to emphasize the need to strengthen financial stability and the preparations for the issues that will be taken up during India’s G-20 Presidency. The group of 20 countries (G20) is aiming to adopt a globally coordinated approach toward developing uniform regulations[57].
  • The future of cryptocurrencies is heavily dependent on the political and social impact they can have on society. Presently, the world is still determining how this technological advancement may affect our day-to-day lives. There is potential for both individuals and countries, to benefit from this. To reach the next phase in its evolution, cryptocurrencies need to gain the acceptance of all parties, including merchants, tech developers, consumers, investors and financial institutions. This would be difficult to achieve without having a regulation policy in place.
  • Crypto offers freedom of ownership to its users. While cryptocurrencies offer the option of quick transactions without any intermediaries and also ensure that data cannot be manipulated, it is extremely difficult to determine the value of these cryptocurrencies as such value is assigned by users across the globe and not a central bank regulating financial transactions. The very freedom from the regulators is likely to be a bane, given the endless possibilities of crypto-facilitated transactions. Cryptos have to be regulated and cannot really be prohibited or ignored.
  • Currently, there is a struggle between those individuals or bodies promoting currencies and the central banks seeking to regulate these cryptocurrencies. The central banks have to accept the fact that cryptocurrencies are here to stay. At the same time those arguing for avoiding the banking system need to understand that the involvement of the central banks would provide cryptocurrencies authenticity, resulting in them becoming less volatile. Therefore, a light-touch regulatory approach may be used by the central banks to legitimize the use of cryptocurrencies. The same would be beneficial to all the stakeholders.
  • It’s true that the unprecedented creative liberty that the technology provides to users raises unique challenges exclusive only to it, far beyond the realms of laws and regulations of the physical. However, refuting the advantages of new technology would be naive insomuch as new technology is essentially inevitable.

[1] Keynote address delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, Reserve Bank of India, February 14, 2022.
[2] Ibid.
[3] Mike Orcutt, “A Cryptocurrency Without a Blockchain Has Been Built to Outperform Bitcoin”, MIT Technology Review, December 14, 2017. Last accessed on December 30, 2022, 13.48 hrs (IST)
[4] Utkarsh Mehrotra, “Cryptocurrency: A Regulatory Conundrum”, SCC Online Blog, November 3, 2021.
[5] Arvind Narayanan, Joseph Bonneau,, Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction, page  6 (Princeton University Press, 2016)
[6] Brandon Kochkodin, “One of the Biggest Bitcoin Exchanges Just Added 100,000 Users in a Single Day”, Bloomberg, November 2, 2017.
[7] Evan Jones, “A Brief History of Cryptocurrency”, CryptoVantage, September 21, 2022.
[8] Amy Whitaker, “Art and Blockchain: A Primer, History, and Taxonomy of Blockchain Use Cases in the Arts” 8(2) ARTIVATE: A JOURNAL OF ENTREPRENEURSHIP IN THE ARTS 28 (2019).
[9] Supra note 7.
[10] The Reserve Bank of India Act, 1934 (Act, No. 02 of 1934) s. 2(aiv).
[11] Lawrence G. Baxter, “Adaptive Financial Regulation and Regtech: A Concept Article on Realistic Protection for Victims of Bank Failures” 66 DUKE L.J. 594 (2016).
[12] Arvind Narayanan, Joseph Bonneau,, Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction, page  20 (Princeton University Press, 2016)
[13] Supra note 1.
[14] European Banking Authority, “Warning to consumers on virtual currencies” (December 12 2013).
[15] Stephan Kahl, “Germany to Allow Institutional Funds to Hold up to 20% in Crypto”, Bloomberg, July 30, 2021.
[16]“Cryptocurrency Regulation UK- Is Crypto Legal?”, Comply Advantage, July 6, 2018 (updated June 10, 2022).
[17] Ibid.
[18]Jack Schickler, “EU Seals Text of Landmark Crypto Law MiCA, Fund Transfer Rules”, CoinDesk, October 5, 2022.
[19] Haroun Boucheta and Arnuad Joseph, “MiCA-Market in Crypto-Assets regulation memo”, BNP Paribas, July 7, 2022.
[20] European Banking Authority, “Progress on the investigation phase of digital euro”.
[21]  Ibid.
[22] Bjarke Smith-Meyer, “Digital euro bill due early 2023”, Politico, February 9, 2022.
[23] The White House, “Executive Order on Ensuring Responsible Development of Digital Assets” (March 9, 2022)
[24] Jake Frankenfield “What Are Crypto Tokens, and How Do They Work?”, Investopedia, May 20, 2022.
[25] The White House, “Building a Better America”.
[26] Douglas Nakajima, “Cryptocurrency: Regulations in the USA on the way”, Ecovis, March 28, 2022.
[27] Financial Crimes Enforcement Network, Department of the Treasury, “Application of FinCEN’s Regulations to Persons Administering, Exchanging or Using Virtual Currencies (March 18, 2013).
[28] Internal Revenue Service, “Virtual Currency Guidance” (March 25, 2014).
[29] “Cryptocurrency Regulations Around the World”, Comply Advantage, July 5, 2018 (updated August 25, 2022).
[30] Basel Committee on Banking Supervision, “Prudential treatment of cryptoasset exposures” 1, (December 2022).
[31] Basel Committee on Banking Supervision, “Prudential treatment of cryptoasset exposures” 1, (December 2022).
[32] Basel Committee on Banking Supervision, “Prudential treatment of cryptoasset exposures” 24, (December 2022).
[33] Basel Committee on Banking Supervision, “Prudential treatment of cryptoasset exposures” 5 (December 2022).
[34] Reserve Bank of India, “RBI cautions users of Virtual Currencies against Risks” (December 24, 2013).
[35] Reserve Bank of India, “Financial Stability Report Issue No. 14” (Dec 2016).
[36] Reserve Bank of India, “RBI cautions users of Virtual Currencies” (February 1, 2017).
[37] Department of Economic Affairs, Ministry of Finance, “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies” (February 28, 2019).
[38] Reserve Bank of India, “Prohibition on dealing in Virtual Currencies (VCs)” (April 6, 2018).
[39] 2020 SCC online SC 275
[40] Ministry of Corporate Affairs, GSR 207(E) (March 24, 2021).
[41]  Reserve Bank of India, “Customer Due Diligence for transactions in Virtual Currencies (VC)” (May 31, 2021).
[42] Sec. 2(47A), Income Tax Act, 1961.
[43] Sec. 115BBH, Income Tax Act, 1961.
[44] Sec. 194S, Income Tax Act, 1961.
[45] Shouvik Das, “High tax on crypto may kill the industry in India: Binance CEO”, Mint, November 3, 2022.
[46] Ibid.
[47] Peter D. DeVries “An Analysis of Cryptocurrency, Bitcoin, and the Future 1(2) International Journal of Business Management and Commerce 1 (2016).
[48] Gemma A. Williams, “Will Gucci’s Digital Bag Disrupt Luxury?” Jing Daily, May 31, 2021.
[49] ”How Can Cryptocurrency Reshape the Global Economy?” International Finance March 21, 2022.
[50] Robert Finlay, “5 Ways Cryptocurrency Will Change the World of Commercial Real Estate”, Yahoo Finance December 12, 2021.
[51] Nathan Jones & Sam Skinner, Artists Re: Thinking The Blockchain, (Torque Editions & Furtherfield, 2017).
[52] Supra note 1.
[53] Sara Acosta, “One Year on, El Salvador’s Bitcoin Experiment has proven a spectacular failure”, The Conversation September 11, 2022.
[54] Ibid.
[55] Reserve Bank of India, “Financial Stability Report Issue No. 26” (Dec 2022).
[56] Ibid.
[57] The Hindu Bureau, “India to seek harmony in crypto regulation in G-20 finance talks”, The Hindu December 11, 2022.

Principal Associate at Alaya Legal
Associate at Alaya Legal


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