KnowLaw

Legality of Cryptocurrency in India – An Overview of Latest Developments

/

Vaishnavi Vats
Cryptocurrency

The emergence of COVID-19 had been a terrific surprise, for all the economies in the world. USA printed trillions of dollars, just to encounter the effect of COVID-19, which is equivalent to the GDP of India, that much money coming into the system, resulted, in the fiat currency, i.e., INR, US dollar, Euro that we hold in devaluing over time. The things that we could purchase with 100 Rupees in the future will not be the same as that we can purchase till now, hence leading to inflation. This devaluation of the currency will continue to happen as we progress in time. So what people are doing now a day is, people are using their money to invest in certain instruments like cryptocurrency. Why cryptocurrency? Because earlier people use to invest in gold, real estate, equity market, but today equity market is already at its peak, real estate does not entail that much return, so people are seeing bitcoin as a good store of value.

The young generation of the modern age is not interested in buying gold now, they buy bitcoin, which is a very good hedge against inflation. Many companies, today like, Tesla, Pay pal, have started putting their cash reserves in bitcoin, so if that appreciates, their cash doesn’t deplete over time. Today, Elon Musk (CEO of Tesla Motors) is talking about crypto, Kunal Shah (Founder of CRED) is talking about Crypto, Naval Ravikant (Indian-American investor and entrepreneur) is talking about crypto, and many other successful people are talking about it, these are the people who are looked up by thousands of individual, hence, making the cryptocurrency a popular celebrity, across the world.

The thing today is that everyone wants to talk about it but no one knows about it. This article aims to help people, who want to talk about it but are unaware of its concepts, it discusses the brief history of currency, and the status quo of cryptocurrency in India, concluding with the opinion of the author.

Historical Background of Cryptocurrency

Since the inception of mankind, the currency has played an integral part in its development. In the era of the caveman, we started using the barter system, where the money as we know it today was not involved, instead, the transactions were made by exchanging services and goods for services and goods in return, as the case may be. The bartering system is centuries old and was started around 6000 BC. However, the whole system of bartering collapsed, when people begin to notice the flaws in it, related to heterogeneity, indivisibility, perishability, etc.

Hence, around 600 BC, “King Alyattes of Lydia” minted the official currency, and was represented by gold and silver coins, and to avoid counterfeiting, these coins have pictures stamped on them. Then ‘gold plated florins’ were brought into existence, in 1250 A.D., which were common across the whole of Europe. During the Tang dynasty of China, around the 7th century, paper currency was developed for the very first time.  However, in the 11th century during the Song dynasty, the true paper currency appeared. This concept of paper money was introduced in Europe; around the 13th century by Marco Polo, and then slowly steadily the idea and concept of paper currency were started spreading across the world.

In India, marked coins were minted during 600 BC, by ancient India’s republic kingdom, these coins were called pana, karshapanas, Puranas, before these, the country followed the barter system. These coins get developed from century to century. And when the Britishers, started ruling in India, the country was introduced with paper currency. The Paper Currency Act was enacted in the year 1861, through which the government was allowed to issue notes in India, with a monopoly. After which the modern currency came into existence, as we know it today.

Coins, paper currency, credit cards, and digital wallets, are all included in the ‘modern currency.’ The wallets that we use today, like Google pay, phone pay, PayPal, amazon pay are all very popular among people all around the world. These transactions are controlled by the governments as well as by the banks, in the simple word these paper money, credit card, digital wallets all have their limits, set by a ‘centralized regulatory authority.’

Understanding Cryptocurrency

BITs

To understand the concept of cryptocurrency, let’s take a real-world example, when people in the real world interact with each other there are various ways of transferring value, they either give the value in the form of information or the form of money. Now, when this trade of value is done, people need middlemen, for example, if a person wants to hire a cab, they go to companies like uber, ola, if they want to buy a product online, they approach amazon, Flipkart, these are the companies which build this level of trust between two individuals directing transacting with each other, so that when two people need to communicate they need a central party.

Now, imagine the world where these middlemen are not required, and two people can directly transact or exchange value with each other without depending on a centralized party because there always exists a chance of the centralised party being corrupted. In the future, if there is a way one can transact or transfer this value on the internet, that is what blockchain provides. So, the blockchain is a technology that decentralizes, so one is no longer depending on a central authority, like the banks in the country, however, the scams and frauds with banks do not make it most reliable, people don’t have full transparency with the working of a bank, but in a decentralized manner people have full transparency, the entire ledger is public, and one can trust this system more.

Say, there is a Mr.X, who has his savings account with the Punjab National Bank, who went shopping at a say Zara store, and at the payment counter he is using his debit card to make the payments, there is a chance that payment doesn’t go through, maybe because, his account has been hacked, or the server of the bank is down, or Mr. X has exceeds the transfer limit of his account or due to some technical issues, the transaction is not happening, so due to the flaw in the bank, Mr. X’s spending power gets affected, here what blockchain would do is, it will remove that gap between Mr. X and Zara store, i.e., to do a transaction he will not require a bank, and transfer can happen directly between two individual in a matter of minutes.

If one takes a look at the 2008 financial crisis, that was the mistake of the banks cause they have given bad loans and the whole world went into recession, and that was where bitcoin was born, a pseudonymous name called Satoshi Nakamoto, they came up with a way where how can one build a monetary system without the need to trust banks, and you’re sure that if one owns certain bitcoins which completely belongs to them it does not need assurance from the third party it is your own money that you have full control of.  

Cryptocurrencies refer to those currencies, which exist in digital form, and are used as a “medium of exchange,” it is similar to the currency that already exists, in non-digital form like rupees, dollars, etc. without physical presence, cryptocurrency runs on this concept of blockchain, which immunes them from being counterfeited, eliminates a central authority like banks, and is protected with the help of cryptography, i.e., encryption algorithms that are complex and strong. When we make a transfer with the help of cryptocurrency say bitcoin, that transaction is done by skipping all the layers of government, all the layers of bureaucracy, and directly to the other party, this could also be a reason why the government was a little afraid of cryptocurrency.

The positive thing about cryptocurrency is that it is secure, and transparent because even though the ledger of the transaction is available to the public, it only reveals the fact that so and so transactions took place at so and so time, without revealing the identity of the parties between whom that transaction happened. Another thing that makes people a little afraid of using cryptocurrency is that when a transaction is made with the help of cryptocurrency, from one person to another, from one country to another, there exist no proper regulations to keep the whole system intact. 

Current Situation

As of now, India does not have any kind of laws, to regulate cryptocurrencies. Due to the absence of any regulatory framework cryptocurrency can be exchanged in India. There is also no clarity on the charges of tax over the income earned from dealing in cryptocurrency, but as the chairman of CBDT (Central Board of Direct Taxation), has announced that any person who earns profit from bitcoin would have to pay a certain amount as a tax on them. 

The very first recognition that was given to the existence of cryptocurrency was between the years 2013 to 2017, through circulars, that were issued by the central bank of the country, these circulars were issued to warn all the holders, users, and traders of cryptocurrencies (including bitcoin), that there may exist potential legal, financial, operational, security, and customer protection-related risk while engaging in transactions with virtual currencies. In the year 2018, the central bank of India through a circular “banned banks and any regulated financial institutions from dealing with or settling virtual currencies, it prohibited the trade of cryptocurrencies on the domestic exchanges and gave existing exchanges to wind down, until July 6 of 2018.” 

However, when this ban was challenged before the apex court of the country, in the case Internet and Mobile Association of India v. Reserve Bank of India, the apex court struck down that circular and held that “transactions made with cryptocurrency at the same time, it also stated that cryptocurrency is accepted as payment for the purchase of goods and services. The court agreed with the right of RBI to protect the money of people of the country, and hence, the ban put on the cryptocurrency was within that right, but RBI, must have looked for ways to regulate the proper use of cryptocurrency in the country instead of putting a ban altogether.”

Even after the opposition of the Indian government on the matter of cryptocurrencies, and trading in them, it has shown a possibility of the introduction of a ‘central bank digital currency’ i.e., CBDC. In the report of ‘Trend and Progress of Banking in India 2020-2021’, released by the government in December 2021, it has been stated that “the Central Bank of the country is analyzing ways in which the CBDC could provide a safe and effective alternative to cash, while the deputy governor of the RBI, has stated that both ‘a wholesale CBDC’ and ‘a retail CBDC’ are in development.”

In November 2021, a meeting was held between the representatives of cryptocurrency exchanges and the Standing Committee on Finance, and it was decided that instead of banning the cryptocurrencies, a bill will be forthcoming, which must regulate its workings. As of now, no bill has been approved by the Parliament, and even though the work on the bill is very slow, Finance Minister Nirmala Sitharaman, on February 1st, 2022 while presenting the union budget, formally proposed that the RBI will be issuing the Central Bank Digital Currency. And the CBDC would be in digital form and legal tender.

Conclusion

It is said that a lot of the countries in medieval times, thought about expansions, they thought about new technology, they thought about going and taking over other countries, that is why the British ruled India, before them the French and the Portuguese ruled on India, also in South America, the ancient civilization was destroyed because of the Spanish and their technologies, whichever countries adopted new technology became the kings for the next hundred and two hundred years, that is what India needs to understand, it needs financial education, when it comes to investing in the stock market, mutual funds but this cryptocurrency is the modern age of financial investment, it needs to understand what other countries are doing.

People believe that by the year 2030, 25% of national currencies, will be occupied by cryptocurrencies, which implies that a large part of the world would be trusting cryptocurrency as a “mode of transaction.” Internet was new 30 years back people didn’t know, they could reach their loved ones, within a matter of minutes, or they can order things to their doorsteps, instead of going out. India was a little behind other countries when the internet came into the picture. However now is the chance to be on the same step as other countries by regulating cryptocurrency, by making people aware, of how it works, what it does, and what will be its implications if invested in it. 

References