Written by Paran Singh
Fifth Year, BBA LLB. O.P Jindal Global University, Haryana
Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.
The Great Recession of 2008 reflected the fallacies in the laws and policies of various jurisdictions around the world. This harrowing period of time made the public realize the economy is dependent on the government regulations and policies. On the sidelines, a computer programmer or a group of computer programmers operating under the pseudonym ‘Satoshi Nakatomi’ invented Bitcoin, the very first known form of cryptocurrency. Cryptocurrency or ‘virtual currency’ (VC) as many call it, has been prevalent in the economy since the past decade. Warily, the increase in the number of cryptocurrencies and exchanges has brought about an upheaval in the banking, finance and the capital markets sector worldwide. Before we delve into the intricacies of cryptocurrency, it is imperative for us to define what is cryptocurrency? In layman terms, cryptocurrency is an intangible and digital form of non-legal tender which can be proxied by a legal tender. It is a decentralized, peer-to-peer network system powered by blockchain technology and cryptography; not backed or governed by a regulatory central authority. As a matter of fact, cryptocurrency is a subset of virtual currency. The concept of virtual currency debunks the antiquated concept of currency backed by legal tender known as the ‘fiat currency’ system of ‘commodity based currencies’. Now, it is imperative for us to understand the transactional procedure of trading or exchanging a cryptocurrency or Bitcoin. Firstly, the virtual presence of the bitcoin is unknown and therefore, its existence is validated by a signed piece of data from the sender, known as crypto-credentials that is broadcasted to the crypto- network. After its acceptance, it is made into a block to enter into a blockchain for the purpose of transferring the exchange to the designated digital address. Since the inception of Bitcoin in 2009, the market price of Bitcoin has skyrocketed through the years, making it one of the most expensive commodities to own and trade in. Currently, the price of one bitcoin is 9550$ or Rs. 7,16,000 and fluctuating constantly. But how did Bitcoin become so expensive?
With the advent of a decentralized payment system restricting any interference from central authorities, this so-called ‘democratic payment system has become immensely popular amongst the youth. Nevertheless, supply and demand forces have a direct effect on the surge prices of Bitcoin. The static number of available Bitcoins that can be mined is 21 million, to be exact. Therefore, elucidating the demand-supply principle, due to the increase in demand and shortage in supply the prices of Bitcoin have ascended.
Cryptocurrency a commodity, security or currency?
Cryptocurrency is a globally accessible currency and therefore, various national jurisdictions have framed unique laws and regulations around it. While some countries have taken a progressive stance on the regulation of cryptocurrency, others that are less progressive have failed to regulate it. In India, Securities are defined under the Securities Contract Regulation Act, 1956 (“SCRA”) and currently, cryptocurrency does not fall under the ambit of the non-exhaustive definition of ‘securities’. The reason for this could be that: any security derives its value from an underlying asset of the company, whereas the Bitcoin derives its value from its own demand and supply. Although, Initial Coin Offerings by crypto exchanges currency may fall under the realm of SCRA if the issuer of the cryptocurrency is identifiable and the cryptocurrency backed by the asset of the issuer. Other jurisdictions like the USA and Singapore have denied to entitle cryptocurrency as a tag of ‘securities’, fearing that it would lead to an unregistered publicly-offered security.
Bitcoin has been defined as a ‘commodity’ by various countries due its capacity for future payments and contracts. The idea behind doing so, is to generate working capital for Bitcoin Miners to generate more coins into the economy. In India, if Bitcoin is approved as a commodity, then it would fall under the governance and guidelines of Securities Exchange Board of India (SEBI). Commodities are bifurcated into two types, namely ‘spot’ and ‘derivative’ exchange. The former deals with ready delivery and the latter deals with derivative contracts. As Bitcoin exchange falls under the ambit of derivative exchange, it can be termed as a ‘commodity’ by the governing body. Having said that, currently no cryptocurrency has been recognized as a ‘commodity’ in India and various RTI petitions have been filed with regulatory bodies seeking guidance on the above issue.
Laws Surrounding Cryptocurrency in India
In 2013, the Reserve Bank of India (RBI) raised various concerns pertaining to the authenticity of the virtual currency, circulating various advisories on the banes of owning and exchanging virtual currency. In2018, the RBI prohibited all regulated entities from facilitating, dealing or providing service pertaining to virtual trading, selling, settling, clearing, providing loans as collateral etc. The cited reasons for this ban were:
Protection of consumers
Prevention of the violation of money laundering law
Curb the menace of terrorism financing
Safeguard the existing monetary/payment/credit system
Consequently, any activity remotely related to cryptocurrency was arbitrarily prohibited and regulated entities were banned from transacting or exchanging any cryptocurrency. The Circular by RBI was challenged in the case of Internet and Mobile Association of India vs. the Reserve Bank of India, contending that the RBI did not have any jurisdiction to pass such notification as cryptocurrency was not a legal tender. This judgment ousted the power of the RBI to regulate any matters related to cryptocurrency.. Moreover, it was contended that the RBI circular was in violation of Article 19(1)(g) as it failed to comply with the test of reasonableness vis-a-vis the blanket prohibition on VCs.
On the other hand, RBI pleaded that being on the committee of members circulating advisories on the deficiencies of VCs would make them a relevant party, and a competent regulator of cryptocurrencies. They elucidated that the foremost responsibility of RBI was to protect the currency system from malpractices that would indirectly or directly result in the loss of public funds. After hearing the arguments, the Apex Court held that RBI did have regulatory authority over virtual currency as it is a parallel monetary system that challenges the very core of the central authority regulatory monetary system. Nevertheless, they also held that the circular prohibiting virtual currency was poor in law as it was violative of the constitutional rights listed under Article 19(1)(g) .
After this judgment, various companies have approached the RBI to seek relevant guidelines on operating and exchanging cryptocurrency, but due to the inadequate response of the government with respect to providing regulations, the said financial operating cryptocurrency in the Indian community is still unregulated which beleaguers the legitimate operators willing to comply with government regulations.
As we have observed, an immediate reinstatement of various exchanges like Zebpay, Bitpolo, Coin Switch into the crypto-exchanging market of India counts from sleuthing in legal laws of the other jurisdictions that can be adopted by the RBI. Currently, the crypto-exchanging websites provide a platform for the Indian public to trade in cryptocurrency from crypto to fiat currency or vice versa. The services provided by these websites are instant - buying/selling of cryptocurrency and exchanging of cryptocurrency and tokens amongst each other. For example, Bitcoin can be sold or bought by a customer by any one who exchanges as the counterparty, on the other hand the bitcoin can be exchanged with other tokens like Ethereum.
Hoping that RBI does not take any retributive action towards the cryptocurrency market, it is a rather crucial time to commence the formulation of laws to regulate the cryptocurrency market by taking insights from other jurisdictions around the world. Provided here, are some examples as to how the government can approach the implementation of these laws:
Unanimous Advisory Council: First and foremost,, the RBI can form a regulatory advisory council, similar to the GST council, to guide and advent laws and regulations.
Insights from foreign jurisdictions: Due to the nature of cryptocurrency, it has a property to be governed by various governmental bodies like SEBI, RBI, CBDT etc. In the USA, the federal government has introduced a bill named The Cryptocurrency Bill 2020 that divides the crypto-commodity, cryptocurrency and crypto-security to be governed by different regulatory authorities. A similar way can also be adopted by India, wherein the different types of cryptocurrencies fall under the realm of different authorities.This will eradicate the dilemma regarding the division of power. The initial regulatory mechanism can be inspired by New York’s BitLicense which allows companies to seek a license from the regulatory authority for:
(i) Virtual currency transmission
(ii) Storing, holding, or maintaining custody or control of virtual currency on behalf of others
(iii) Buying and selling virtual currency as a customer business
(iv) Performing exchange services as a customer business
(v) Controlling, administering, or issuing a virtual currency.
Recently, China adopted its own form of bitcoin known as crypto-Renminbi to prepare as an alternative to reserve currency against US Dollars. In a sovereign nation like India, having crypto-rupee would rival or eliminate the involvement of a parallel economy of cryptocurrency and central banks would have direct control over supply of money. Moreover, blockchain technology can be used to track and trace any illicit use of cryptocurrency by the public or companies preventing the use of cryptocurrency on the dark web.
The Sandbox Facility: The regulatory sandbox facility was initiated by the RBI in light of various Fintech firms collaborating with the banks. A sandbox facility is a live, controlled regulatory environment used by regulators, financial institutions and end consumers to collect evidence on the benefits of the invention, and mitigating risks, if any. Since its inception the Sandbox facility has proven to be a progressive approach by the RBI in inculcating technological innovation in the banking system of the country. The irony behind the authorization of Fintech firms is that the government allowed the use of applications operating under blockchain technology and smart contracts but prohibited the use of cryptocurrency. The crypto exchanging applications can be used in the Sandbox facility that can be reviewed by the government and the consumers.
Investment in Cryptocurrency: As noted, the price of Bitcoin has soared manifold (2,332,803% since 2010) in the market, making it one of the most valuable commodities at the moment. The conundrum faced by various governments is the storage of cryptocurrency as a ‘commodity’ like gold. In the scenario wherein India decides to procure bitcoins worth 15 million dollars, this would not only skyrocket the price of cryptocurrency, but it would also play a cardinal role in the price setting of bitcoin.
The rapid increase of cryptocurrency in the India market has made it imperative for the government to take actions and implement laws to regulate cryptocurrency, rather than debunking the technology altogether. Some experts do believe that the cryptocurrency market is an economic bubble, just like housing prices in 2008 and ‘dotcom’ in 2000, but the properties shown by the cryptocurrency market prove to be the contrary. As per Ethereum founder and creator, the government shall embrace the “distributed ledger’ technology use independent computers (referred to as nodes) to record, share and synchronize transactions in their respective electronic ledgers (instead of keeping data centralized as in a traditional ledger).” This technology can be used in terms of regulating cryptocurrency and using it for lending, financing and various other financial services to hasten the advent of a new realm of fintech technology, and hence create more job opportunities. If we analyze closely, any technological invention has brought numerous job opportunities and an increase in the GDP of the country, and this time I believe, India shall be at the forefront of the implementation of the rise of cryptocurrency.
 Vaibhav Parikh, Jaideep Reddy & Arvind Ravindranath,2018, Virtual Currency Regulation Review, Law Business Research Ltd., 144-156, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf  Legal Tender is anything recognized by law to as a means to settle financial obligations, contract fulfillment, tax payments or legal fines. https://www.investopedia.com/terms/l/legal-tender.asp  Paras Vishwakarma, Mr. Zohaib Khan & Dr. Taruna Jain, 2018, Cryptocurrency Security Issues and Upcoming Challenges to Legal Framework in India,International Research Journal of Engineering and Technology, 5(1) https://www.irjet.net/archives/V5/i1/IRJET-V5I143.pdf  Paras Vishwakarma, Mr. Zohaib Khan & Dr. Taruna Jain, 2018, Cryptocurrency Security Issues and Upcoming Challenges to Legal Framework in India,International Research Journal of Engineering and Technology, 5(1) https://www.irjet.net/archives/V5/i1/IRJET-V5I143.pdf  https://www.bitcoin.com/  Vaibhav Parikh, Jaideep Reddy & Arvind Ravindranath, (2018), Virtual Currency Regulation Review, Law Business Research Ltd., 144-156, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf  Nikam, R.J. (2018). Model Draft Regulation on Cryptocurrency in India. Hasanuddin Law Review, 4(2): 146-161  Scott D. Hughes, Cryptocurrency Regulations And Enforcement In The U.S (2017)., Western State Law Review. http://www.scotthugheslaw.com/documents/CRYPTOCURRENCY-REGULATIONS-AND-ENFORCEMENT-IN-THE-US-2.pdf  Vaibhav Parikh, Jaideep Reddy & Arvind Ravindranath, (2018), Virtual Currency Regulation Review, Law Business Research Ltd., 144-156, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf  Reserve Bank of India, (2018), Prohibition on dealing in Virtual Currencies (VCs), RBI Notifications, 104 /08.13.102/2017-18. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0  Internet and Mobile Association of India vs. the Reserve Bank of India, 2020 SCC 275  ibid  ibid  Ethereum is a form of digital currency, just like Bitcoin.  Ramani "Ram" Ramachandran, (March 5, 2020), Cryptocurrencies have got a new life in India. Policymakers can grab it and flourish, or regret, Yahoo Finance, https://finance.yahoo.com/news/cryptocurrencies-got-life-india-policymakers-052147742.html  ibid  ibid  Reserve Bank of India, (2019),Draft Enabling Framework of Regulatory Sandbox, RBI Notifications. https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=920  Ramani "Ram" Ramachandran, (March 5, 2020), Cryptocurrencies have got a new life in India. Policymakers can grab it and flourish, or regret, Yahoo Finance. https://finance.yahoo.com/news/cryptocurrencies-got-life-india-policymakers-052147742.html  Robert Shiller,(2019), Bitcoin Price Bubble Could Last 100 Years, Says Yale Economist, Investopedia. https://www.investopedia.com/news/yale-economist-believes-bitcoin-bubble-could-last-100-years/  https://www.worldbank.org/en/topic/financialsector/brief/blockchain-dlt Bibliography
Paras Vishwakarma, Mr. Zohaib Khan & Dr. Taruna Jain, Cryptocurrency Security Issues and Upcoming Challenges to Legal Framework in India, 05 IRJET, https://www.irjet.net/archives/V5/i1/IRJET-V5I143.pdf
Vaibhav Parikh, Jaideep Reddy & Arvind Ravindranath, Virtual Currency Regulation Review, Law Business Research Ltd., 144-156, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf
Nikam, R.J. (2018). Model Draft Regulation on Cryptocurrency in India. Hasanuddin Law Review, 4(2): 146-161
Scott D. Hughes, Cryptocurrency Regulations And Enforcement In The U.S (2017)., Western State Law Review, http://www.scotthugheslaw.com/documents/CRYPTOCURRENCY-REGULATIONS-AND-ENFORCEMENT-IN-THE-US-2.pdf
Internet and Mobile Association of India vs. the Reserve Bank of India, 2020 SCC 275