Introduction:

Cryptocurrencies are a new kind of digital money that doesn’t rely on banks or governments. They use a special system where everyone on the network helps keep things secure and running. Transactions are recorded on a public ledger called a blockchain, which ensures the integrity and transparency of the transactions and it has taken the financial world by storm.

However, its innovative nature presents a complex web of legal issues that governments and regulatory bodies are still grappling with. This article delves into the key legal challenges surrounding cryptocurrency, analyzing its implications for various aspects of financial regulation.

India’s Cryptocurrency Journey: A Shift in Stance

In late 2017, the Indian government formed a committee to study virtual currencies. This committee, in July 2019, recommended a complete ban on private cryptocurrencies.

The Reserve Bank of India (RBI) took a proactive stance even before the committee’s report. In April 2018, it restricted banks and financial institutions from dealing with cryptocurrencies. This move aimed to limit the growth of the crypto industry in India, as banks play a crucial role in exchanging money and facilitating business operations.

However, a significant shift occurred in March 2020. The Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India (2020) overturned the RBI’s ban. The court’s decision focused on two key aspects:

• The Right to Do Business: The court viewed the ban as an infringement on the right to carry on a trade or business guaranteed by the Indian Constitution.
• Proportionality: The court felt the RBI’s action was excessive. It argued that the RBI hadn’t shown any direct harm caused by cryptocurrency trading to justify such a strict ban.

In conclusion, the Supreme Court’s verdict in 2020 allowed cryptocurrency trading to resume in India, marking a significant change from the RBI’s initial stance.

Advantages of Cryptocurrency: 

The benefits of using cryptocurrency are undeniable. However, in the long term, these advantages can become insignificant and futile. Some of the advantages include ease of use, elimination of intermediaries, fast transactions, and global accessibility. Nevertheless, virtual currencies can be used to deceive unsuspecting individuals. There is a common misconception that only the buyer needs to exercise caution and awareness. It is the buyer’s duty to thoroughly examine any intended purchases. No one should compromise their security, as this is the primary target area for cryptocurrency attacks.

Legality of cryptocurrency in India:

As of 2024, the following are the points that a crypto user should be aware of –

1. An individual can trade, hold and invest in cryptocurrencies, but they cannot be used to make official purchases, which implies that they cannot be used as legal tender.
2. As per the Finance Bill of 2022, cryptocurrency has been defined under ‘Virtual Digital Assets’.
3. Income from transfer of virtual digital assets such as crypto and NFTs will be taxed at 30%.

Legal Issues Surrounding Cryptocurrency:

1. Classification: Security, Commodity, or Currency?

The fundamental hurdle lies in the classification of cryptocurrency. Is it a security, a commodity like gold, or a medium of exchange like traditional currency? This classification significantly impacts regulations.

Securities Laws: If deemed a security, cryptocurrency could fall under securities laws, requiring issuers to register with regulatory bodies and comply with disclosure requirements. This approach ensures investor protection but might stifle innovation.

Commodity Laws: Classification as a commodity could subject cryptocurrency to regulations governing derivatives and trading platforms. This might provide some regulatory framework but might not adequately address investor protection concerns.

Currency Concerns: As a currency, cryptocurrency lacks the backing of a central bank, raising concerns about price volatility and money laundering.

The lack of a uniform global classification creates uncertainty for businesses and hinders the development of a comprehensive regulatory framework.

2. Consumer Protection and Anti-Money Laundering (AML) Challenges

The anonymity associated with cryptocurrency transactions poses challenges for consumer protection and AML efforts.

Investor Vulnerability: The absence of central oversight exposes investors to fraud and scams. Rug pulls, where developers abandon projects after raising funds, and pump-and-dump schemes, where prices are artificially inflated before a sudden sell-off, are significant concerns.

Money Laundering Risks: The pseudonymous nature of cryptocurrency transactions makes them attractive for criminals seeking to launder illicit funds. Regulatory bodies are working on implementing Know Your Customer (KYC) and AML rules for cryptocurrency exchanges, but complete anonymity on some platforms remains a concern.

3. Taxation of Cryptocurrency Transactions

The treatment of cryptocurrency for tax purposes varies significantly across jurisdictions. Some countries tax cryptocurrency gains as capital gains, while others treat them as income. The lack of clear guidance creates uncertainty for investors and hinders tax collection efforts.

4. Regulatory Landscape: A Patchwork of Approaches

Governments worldwide are taking various approaches to regulating cryptocurrency. Some, like China, have adopted a restrictive stance, banning cryptocurrency transactions altogether. Others, like the United States, have implemented a patchwork of regulations across different agencies. This fragmented approach creates uncertainty for businesses operating internationally.

5. Decentralized Applications (DApps) and Smart Contracts

The rise of DApps, applications built on top of blockchains, and smart contracts, self-executing contracts stored on the blockchain, raises new legal questions.

Liability Issues: Who is liable for the malfunction of a DApp or smart contract? Determining liability in a decentralized environment presents a challenge.

Securities Regulation of DApps: If a DApp offers investment opportunities, it might fall under securities regulations. Defining the parameters of such regulations for DApps remains unclear.

The Road Ahead: Balancing Innovation and Regulation

The legal issues surrounding cryptocurrency necessitate a collaborative approach from governments, regulators, and the cryptocurrency industry.

Global Regulatory Standards: Developing a global framework for classifying and regulating cryptocurrency could foster innovation while mitigating risks.

Investor Education: Educating investors about the inherent risks associated with cryptocurrency is crucial for protecting them from fraud and scams.

Technological Solutions: Technological advancements like blockchain analysis tools can help combat money laundering and enhance transparency in cryptocurrency transactions.

The future of cryptocurrency regulation is likely to be a process of continuous adaptation. As the technology evolves, so too must the legal framework to ensure a safe and stable environment for all stakeholders.

Way Forward:

Evidently, there have been apprehensions around cryptocurrency followed by the nations coming to terms with it in some way or the other. Some notable measures as well as their advantages are discussed below.

Stablecoins are cryptocurrencies designed to have a stable value, typically pegged to fiat currencies like the US dollar or the Euro. This stability makes them attractive for various uses compared to other cryptocurrencies with wild price swings.

The rapid growth of the stablecoin market (over $130 billion) has drawn the attention of regulators around the world. Notable examples of legislations surrounding stablecoins might be the Markets in Crypto Assets (MiCA)of the European union which aims to bring comprehensive regulations for stablecoins, including licensing and reserve asset management.

Central Bank Digital Currency (CBDC): It is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements. This would not only ensure financial digitisation but would provide an upper hand to our sovereign government to circumvent the SWIFT(Society for Worldwide Interbank Financial Telecommunications) financial system in times of global financial turmoil, thus allowing enhanced autonomy in pursuing a favourable foreign policy for the nation.

De-Dollarisation: As witnessed during the trade in crude oil with Russia following the rupee ruble agreement, an alternate source of currency(like cryptocurrency) would go a long way in enabling a nation in diversifying and having more autonomy in it’s trade. Morover, it would lift the leverage of a single currency(like dollar, euro) in a nation foreign reserves.

These are examples of some of the domino effects that Cryptocurrency may create in an economy. That would require some stringent measures like:

• Involvement and synergy regarding  regulatory bodies such as SEBI and RBI.

• A comprehensive legal system that defines how crypto-related disputes will be settled and establishes clear rules for the crypto industry
• The Cryptocurrency Bill 2021 is still pending in parliament; it should be passed as it would make the legal framework enforceable.
• Widespread use will depend on having the right tech in place across the country.
• Boosting digital literacy helps everyone benefit from the online world safely and securely.

Additionally, India should also participate in the existing collaborative measures to combat the misuse of cryptocurrency and solidify its position on a global scale. These measures include:

• The Financial Action Task Force (FATF) has set up rules for cryptocurrencies to fight money laundering.
• The leading economies (G7) are working together to create similar regulations for crypto assets.
• Interpol has formed a special unit to focus on crimes involving cryptocurrencies.

Conclusion:

The current situation around cryptocurrency in India is unclear. There are no clear rules for cryptocurrency exchanges, blockchain tech, or how investors and workers in the industry should operate. This lack of clarity is a problem because cryptocurrency seems likely to be around for a while. In fact, the government’s own Draft National Strategy on Blockchain highlights its potential benefits. Instead of an outright ban, the government should focus on creating clear regulations. This would help build trust with investors and the public, which is important for India’s development. Finance Minister Nirmala Sitharaman previously indicated that a complete ban isn’t on the table, and some experimentation will be allowed. However, until the government lays out clear rules, it’s best to wait and avoid any risky activities in this uncertain space.

FAQ:

Q1. What is Cryptocurrency?

Ans.: A cryptocurrency is a form of virtual or digital asset distributed across a huge number of computers based on a network. It is typically a decentralized digital fund designed to be over the net. It is not governed or regulated by any central authority or government.

Q1. Are Crypto currencies banned in India?

Ans.: No, cryptocurrencies are not banned in India at present. They have never ever been banned in India.

Q2. Legal Framework to be introduced by Govt. to regulate Cryptocurrency Trading?

Ans.: The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.

Q3. How does Cryptocurrencies work?

Ans.: Cryptocurrencies work on blockchain technology – a decentralized ledger of transactions. This isn’t maintained or stored in one place or with any central authority. Instead, it is spread across a network of computers, also known as peer-to-peer networks.

Q4. Is blockchain technology legal in India?

Ans.: Yes, Blockchain technology is as legal as artificial intelligence (AI), machine learning (ML) or any other form of emerging technology.

Q5. Is Cryptocurrency taxable in India?

Ans.: Yes, Section 115BBH of the Income Tax Act,1961 taxes profits from cryptocurrency trading at a rate of 30% (plus 4% cess). 

Section 194S (ITA) levies a 1% Tax Deducted at Source (TDS) on the transfer of crypto assets starting on July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year. 

Q7. Is cryptocurrency regulation bad?

Ans.: No, cryptocurrency regulation can actually be a good thing as it will reduce the risk factors for investors and can be a healthy development sign for technological advancement in areas of cyber security including the use of blockchain.

Author: Piyush Kumar, a Student of Faculty of Law, Delhi Unuversity