CRYPTOCURRENCY

CRYPTOCURRENCY

Author- RIDDHIMA GROVER, STUDENT OF BHARTI VIDYAPEETH INSTITUTE OF MANAGEMENT AND RESEARCH(DEEMED TO BE UNIVERSITY)    

                
ABSTRACT

This research paper comprehensively analyses the current state and unborn prospects of cryptocurrency regulation in India. It begins with an overview of the history and growth of cryptocurrency in the country, followed by a detailed examination of the legal status of cryptocurrencies, including the Reserve Bank of India’s station and the impact of the 2018 RBI  indirect and the 2020 Supreme Court judgment. The paper also delves into the proposed Cryptocurrency Regulation Bill,  assaying its vittles, counteraccusations, and the proposed Central Bank Digital Currency( CBDC). The current regulations affecting cryptocurrencies, including their alignment with laws like the Companies Act, of 2013, the Prevention of plutocrat Laundering Act, of 2002, and the taxation of virtual digital means( VDAs) are also bandied. The paper concludes with an analysis of the pitfalls and challenges of trading in cryptocurrencies in India, and a discussion on how cryptocurrency regulation could impact colourful sectors of Indian frugality, like banking, finance, and technology. The paper posits that while cryptocurrency regulation has implicit benefits, similar to bettered fiscal structure and increased job openings, there are also significant challenges, including legal inscrutability and increased vulnerability to cyber pitfalls. The future of cryptocurrency regulation in India remains uncertain, but the paper suggests that a balanced and thoughtful approach could lead to significant profitable and societal benefits.

INTRODUCTION 

Cryptocurrency is digital or virtual money that is encrypted for security purposes. It is an autopilot which is not tied to a central bank and exits in digital form only. Here are some key points about cryptocurrency:

• Decentralization: Cryptocurrencies are usually decentralized, and a technology known as the blockchain is what they are based on and this is a distributed ledger enforced by a network of computers or nodes.
  
• Anonymity: The transfers with cryptocurrencies are very pseudonymous. While transaction details are contained on the blockchain, the identities of the parties involved may not be publicly declared.
• Variety: Today there are thousands of cryptocurrencies available, Bitcoin being the most popular among all of them. Among other popular cryptocurrencies are Ethereum and also Litecoin.
  
• Utility: Besides being a medium of exchange, some digital currencies possess various utilities. Such as, the smart contracts can be created on the Ethereum blockchain.
  
• Security: Cryptocurrencies apply cryptographic techniques to ensure the security of transactions as well as the production of new units. Involvement of such features which generally included holding and passing on the cryptocurrency information between wallets and into the public ledgers, make it more secure and safe.
  
• In 2018, the Supreme Court of India ordered a ban on the use of Cryptocurrency. Yet, this ban was lifted by the Supreme Court in March 2020 thus trading in cryptocurrency was legalised.
  
  At present, you can trade in cryptocurrency in India, but with all the preventive measures. The lifting of the ban has been positively accepted by NASSCOM who thinks the banning of tech is not the solution and that a framework has to be developed to regulate and monitor cryptocurrencies and tokens.
  
  The Indian cryptocurrency market is projected to grow at a CAGR of 17.76 % and is expected to reach US$343.5 million in 2024. The annual CAGR for the period 2024-2028 is forecasted to be 7.99% which gives an estimation of reaching US$467.2m by 2028. The number of users anticipated is 328.80m users in 2028.

HISTORY OF CRYPTOCURRENCY IN INDIA

• Early Adoption and Growth of Cryptocurrency in India
  

Cryptocurrency, for the first time in India, was introduced around 2009 in the form of Bitcoin. The first commercial transaction was in 2010 and the first cryptocurrency exchange came in 2013. Over the last few years, it has gained a very substantial fan base and has also explored extensive India. As per industry estimates, there are 15 to 20 million crypto investors in India with total holdings of around 4.1 lakh crore rupees ($5.37 billion). The rise in popularity of cryptocurrencies has been linked to a number of factors like India being the leading country in terms of growth in the adoption of the internet, a booming tech industry in India along tech-savvy millennials being the right target consumer segment for the cryptocurrencies. Chainalysis blockchain data platform research states that the crypto markets in India grew by 641% in 2020.

• Public and Government Response to the Rise of Cryptocurrency
  

The Indian government has done a very commendable job towards digital currency regulation in India. MCA has made it compulsory that the companies must disclose the crypto trading/investments during the financial year. This is going to be the initial move to cryptocurrency regulation in India [Modified device] The Centre has assured crypto stakeholders that there won’t be a blanket ban on digital currencies and that it’s still weighing all options on the subject. Finance Minister Nirmala Sitharaman has remarked the Centre is very open to experimentation with innovative technologies and not closing its mind to them. Nevertheless, it is still very vague on the legislation but the government is set to stop all the private digital currencies but with some exceptions. The Bill Cryptocurrency and Official Digital Currency Regulation, 2021 was presented to the Lok Sabha. The proposed bill would lay the foundation for a very benign environment for the creation of a digital currency to be issued by the RBI

Legal Status of Cryptocurrencies in India


Cryptocurrencies are not illegal in India. Despite the lack of a regulatory system to oversee the crypto-cycles in India, the country does not have such a regime at present. MCA has made it compulsory to disclose the crypto trading/investments during the financial year. This is being looked at as the very first step towards regulating cryptocurrencies in India.

Reserve Bank of India’s Stance on Cryptocurrencies
The RBI still reiterates that cryptocurrencies have no fundamental value. RBI’s take is only on cryptocurrencies as a currency and not blockchain technology. In its recently released circular on cryptocurrencies, RBI has informed all the banks and regulated entities that they should not use the circular to caution their customers against trading in cryptocurrencies.

Cryptocurrency Regulation Bill

• Introduction to the Cryptocurrency Regulation Bill 

Cryptocurrency & Official Digital Currency Regulation Bill, 2021 was introduced in the Lok Sabha. The purpose of the Bill is to establish a friendly environment for the crypto currency which will be issued by the Reserve Bank of India (RBI). It provides them an opportunity to operate in India but the disallows private cryptocurrencies in the country.

• Detailed Analysis of the Bill’s Provisions and Implications 

The Bill defines cryptos along with NFTs as the virtually digital assets (VDAs). In ITR, cryptocurrency gains need to be reported under Schedule VDA. For cryptocurrency transactions in India that attract tax, these are buying goods or services with virtual/digital assets (VDAs), swapping VDAs, cryptocurrency-fiat currency trading, receiving airdrops, receiving cryptocurrencies as payment or as gift, receiving salaries in cryptocurrency and also earning from staking of cryptocurrencies. All the profit from trading of VDAs is levied at 30% and also 4% cess.

• Central Bank Digital Currency (CBDC)

 The Digital Rupee (e₹), eINR or E-Rupee is what the RBI proposes as a tokenized digital form of the Indian Rupee which the RBI will issue as a central bank digital currency (CBDC). The digital Rupee which was first envisaged in January 2017 was launched on December 1, 2022. The pilot would only include the sites included in the CUG by the participants. The e-R will be as a digital token which serves as a medium of exchange in the digital finance.

• Current Status of the Bill and Its Potential Future

The Cryptocurrency Bill was to be presented during the 2021 Winter Parliament Session but it didn’t happen. The Minister of State Finance, Shri Pankaj Chaudhary, who was answering on behalf of the Ministry of Finance stated, ” Crypto assets being borderless in nature, require global consensus to address regulatory arbitrage.” He later clarified that policy aspects and the cryptocurrency space are with the Ministry of Finance. Cryptocurrency regulation from the Government of India was on the agenda during the Winter Session of the Parliament. The bill is under a rework and the new bill (the “New Bill”) which recognises cryptocurrencies as a class of assets (crypto-assets) regulated by the Securities Exchange Board of India (“SEBI”).

Current Regulations and Future Prospects

Alignment with Existing Laws

• Companies Act, 2013: With the growing popularity of the cryptocurrencies, they have come into the compliance with many government pieces of legislation such as the Companies Act, 2013 and thus this necessitates the reporting of virtual digital assets (VDAs).

•  Prevention of Money Laundering Act, 2002: The Union Finance Ministry released a notice which brought the crypto trading, virtual digital assets (VDAs) and related financial services within the ambit of the Prevention of Money Laundering Act 2002. The PMLA implications mean the ED now has the authority to scrutinize any kind of crypto financial crime.

Taxation of Virtual Digital Assets (VDAs) in India

Effective from 1 April 2022, any income from transfer of VDAs is taxable at the rate of 30% (plus 4% cess) according to Section 115BBH. Deduction only in respect of cost of acquisition of Virtual Digital Assets from the value of consideration received will be allowed.

Risks and Challenges of Trading in Cryptocurrencies in India

• High Volatility: Cryptocurrencies are highly volatile, meaning there are sudden shifts in market sentiment that can result in significant and rapid price movements

• Lack of Regulations: The legal standpoint of cryptocurrencies in the country in 2021 had quite a roller-coaster ride which culminated in the question “should we regulate the cryptoAssets or not?” Although gossips and misinformation sent the market diving, the government ultimately decided to hold back the horses for now.

• Security Concerns: Major weaknesses of cryptocurrencies include security concerns, scams, and hacking issues.

• Legal and Practical Ambiguities: There are significant differences in the legal premise of digital currencies among the various regulatory agencies, which might determine the Crypto future in India

2018 RBI Circular and Its Impact

In Apr 2018, RBI brought a circular which barred banks from giving services to those dealing with cryptocurrencies individually or businesses. It ranged from investor protection issues to market integrity concerns and money laundering. This complicates the conversion of cryptocurrencies to fiat currency. With respect to the circular basically, cryptocurrencies are not allowed to be used by financial institutions and other organizations involving financial concerns. Such action by RBI undermined the Indian bitcoin industry which led to the shutdown of various exchanges and stalled innovations.

2020 Supreme Court Judgment on the RBI Circular
RBI’s circular was the subject of a legal challenge which led to a historic ruling by the Indian Supreme Court in March 2020. The Supreme Court decided that a total trading ban was disproportionate. The Court opined that such administrative orders should be founded on rationality and not ambiguous. Accordingly, the order of the RBI circular was quashed as the Court held that it breached the doctrine of proportionality principle and also did not comply with Article 19 (1) (g). This, though, was a pivot moment since the entire legal status of the cryptocurrency industry in India was now clear and the group had a new ray of hope.

Impact of Cryptocurrency Regulation on the Indian Economy

Impact on the Indian Economy Regulation of cryptocurrencies in India could have both positive and negative impacts on the economy

Potential Benefits

• Financial Infrastructure Improvement: A forward-looking crypto policy can improve the overall financial infrastructure.
• National Security Safeguarding: It can help safeguard national security.
• Prevention of Financial Frauds: It can deter financial frauds.
• Monetary Policy Strengthening: It can strengthen the monetary policy.
• International Capital Attraction: It can attract international capital.
• Job Opportunities Creation: It can create more job opportunities.
• Tech Talent Retention: It can retain tech talent to accelerate technological development.
• Global Powerhouse Driving: It can drive the nation towards becoming a global powerhouse.

Potential Drawbacks

• Challenges in Control and Oversight: Controlling and overseeing transactions may be challenging                 because they are decentralized.
• Dispute Resolution Difficulties: The absence of a central authority can make settling disagreements or transaction-related problems difficult.
• Cyber Threats: The widespread use of digital currencies will certainly increase the vulnerability of online transactions to cyber threats.
• Legal Challenges: The regulation of cryptocurrencies poses major legal challenges such as various contractual issues within crypto-related transactions, and ambiguity in determining jurisdiction in case of disputes resulting from those contracts and transactions.
• Illegal Activities: The illegal activities that stem from the exploitation of various loopholes in the functioning and mechanisms of cryptocurrency.
• Privacy Issues: Resulting privacy issues due to data theft and anonymity of transactions.
• Lack of Concrete Laws: The lack of concrete laws needed to address the above issues and the steps that need to be taken.

Impact on Various Sectors

• Banking Sector: The RBI may rely on the blockchain infrastructure to create a regulatory presence in the cryptospace. However, the rural sector economy, which is still using old methods but without essential banking services, may experience friction.
• Finance Sector: Cryptocurrency isn’t simply employed for bad things, though. In fact,Its popularity has declined in the black market due to price fluctuations and other factors. Hence, it remains popular. Compared to credit or other traditional methods, money can be transferred faster and at a lower cost with certain coins. 
• Technology Sector: Globally, cryptocurrency has become a ground-breaking financial tool that is upending established monetary institutions and financial markets. The emergence of cryptocurrencies has been closely monitored in India, a country known for its volatile regulatory dynamics, which is currently developing statutory regulations to regulate the emerging market.  problems and opportunities they provide.

CONCLUSSION

Although not illegal in India, cryptocurrency deals aren’t classified as legal tender. During the  fiscal time, companies are  needed to  expose crypto trading/ investments by the Ministry of Corporate Affairs( MCA) This is being considered as the first step towards regulating cryptocurrencies in India. The future of cryptocurrency regulation in India is still uncertain. Private cryptocurrencies are being targeted for prohibition in India through the government’s medication of a bill, with some exceptions. Despite this, the bill is being revised, and the revised bill will  probably incorporate cryptocurrencies as an asset class. Digital currency  pullout has not been ruled out by the government. Regulation of cryptocurrencies in India may have both positive and negative  goods on the frugality. On the positive side, it can ameliorate  public security, discourage  fiscal frauds, strengthen  financial policy, attract foreign investment,  produce  further jobs, retain tech  gift and drive the nation towards  getting a world leader.( M). It has the implicit to  produce obstacles in regulation and supervision,  produce complications in resolving conflicts, increase  vulnerability to online hacks or attacks,  induce legal difficulties as well as  grease illegal conditioning, lead to  sequestration  enterprises( and eventually warrant concrete laws) This may have broad counteraccusations  for other  diligence,  similar as banking, finance, and technology. The emergence of digital currencies will  really increase the  vulnerability of online deals to cyber attacks. The rise of cryptocurrencies has been  nearly covered in India, a country known for its tight regulation, which is  presently creating legal mechanisms to deal with the specific problems and implicit  openings that arise.