Author-Rusheetulya Subramanyam, ICFAI Law School
Abstract
Cryptocurrency has caught the public eye as a public utility with a change-making potential in finance and technology. It is characterized by the decentralization, the absence of borders, and the safety of transactions realized through the use of blockchain technology. However, this phenomenon has simultaneously created vast challenges for the existing global legal and regulatory frameworks. Within this general context, the present article focuses on the journey made by cryptocurrency, the disruption opportunity it has towards or through traditional financial systems, and the regulatory responses it is inciting across jurisdictions. Important issues such as consumer protection, AML, taxation, and digital asset classification are examined as presenting some of the mind-bending complexities that should be considered before the ideal policy is crafted. It also outlines the state of play in striking a balance between enabling innovation and ensuring security and presents a strong case for harmonized international regulation in tackling the risks and opportunities presented by this sector today.
Introduction
The currency and the other monetary factors have been floating around the global spectrum for numerous transactions. The development of the country is vaguely proportional to the magnitude of transactions made in the country. One of the easier ways of making transactions is digitally. It is impossible to transfer liquid funds internationally. The digital currency is further developed through the implementation of Cryptocurrency. Cryptocurrency is also called Crypto-currency or crypto. It is any form of currency that exists digitally or virtually and uses cryptic language to secure transactions. It is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Digital or virtual currencies that are based on cryptographic systems are cryptocurrencies. These cryptocurrencies are competent in executing secure online payments without needing third-party intermediaries. The word “crypto” refers to the various encryption schemes and other cryptographic techniques under which these entries are protected, including elliptical curve encryption, public-private key pairs, and hashing functions. Central to the appeal and functionality of Bitcoin and other cryptocurrencies is the blockchain technology. As its name implies, this is nothing but a ledger that can be considered a set of interconnected blocks of information on the internet. Each block contains transaction information for independent review by each validator on a network. Every new block that gets formed needs to be verified before its confirmation makes it extremely difficult to trick forged transaction histories. The contents of the online ledger must be agreed upon by a network of individual nodes or machines that maintain the ledger. Experts say that blockchain technology could help in various ways in different sectors, supply chains, or processes like online voting and crowdfunding. Financial Institutions like JPMorgan Chase & Co are now introducing blockchain technology to make their transactions less costly, and efficient, and accelerate payment processing.
Cryptocurrency Functioning
Blockchain is a public ledger where transactions are recorded and updated and held by holders. It is distributed among the various currency holders. Units of cryptocurrency are created through a process known as mining, using computer power to solve complicated mathematical problems that yield coins. Another way is to buy these currencies from brokers and store them in cryptographic wallets to spend as they desire. When you have cryptocurrency, you don’t own anything. What you own is a key that can move a record or a measure from one person to another without trust; there is otherwise no need for a third party whom you can trust. Despite being in existence since 2009, Bitcoin and new cryptocurrencies plus applications of this technology are emerging in finance, and much more future use is expected. Gradually, it may even be possible for all manner of transactions, including bonds, stocks, and other assets in financial terms, to be traded using the technology. The steps involved in buying of cryptocurrency are as follows: –
One can check out digital exchange platforms like Coindesk, ZebPay, or Coinbase to buy cryptocurrencies like Bitcoin. One can also use international credit cards to buy these currencies. Investors must submit essential documents namely Aadhar Card and PAN Card. Subsequently, the purchaser should complete the KYC process thoroughly. To buy Bitcoins, the individual must place an order for their purchase on a cryptocurrency exchange. Once the order is placed, investors can transfer the payable amount from their bank accounts to the crypto exchange. Electronic transfer mechanisms such as RTGS, NEFT, debit or credit cards, and other online methods of payment may also be employed for regular transactions. Proceeding beyond the acquisition process of Bitcoins, the next task that would be required of the investors would be the storage of these Bitcoins within crypto wallets that are made available through the exchange from where Bitcoins were purchased. There are two types of wallets where Bitcoins are stored. Cold wallets are one such types that store user’s private keys offline. They work in conjunction with compatible software on one’s computer. Additionally, as they do not store information digitally, cold wallets extend a higher level of scrutiny. Hot Wallets are another type of wallets that work with internet connectivity. They allow users to send and receive internet tokens, facilitating basic transactions. There are numerous types of Hot Wallets. Some of them are Desktop Wallets, Web Wallets, and Mobile Wallets.
Dependability scope of Cryptocurrency
Usually, it is blockchain technology that builds different cryptocurrencies. This is the way in which all the transactions are recorded in blocks and then time stamped against each of them, which is a little complex and technical but essentially results in a digital ledger that is huge to tamper with for hackers concerning cryptocurrency transactions. Also, transactions require a two-factor authentication process. For example, to begin a transaction, you may need to enter a username and password and then an authentication code sent via text to your personal cell phone. But even with those technologies, it does not mean anything that makes cryptocurrencies impossible even to hack. Some significant amounts of dollars that went into huge hacking into the organization’s capital formed the most important part of suffering among the startups in cryptocurrencies. Coincheck was hacked for around $534 million, while BitGrail lost almost $195 million due, making them two of the biggest hacks in the history of cryptocurrency in 2018. The value of a virtual currency differs from the value of all government-backed money: it totally relies on the idea of supply and demand. It leads to wild swings producing notable gains for investors or big losses. As such investments are much less protected by regulation than traditional financial products like stocks, bonds, and mutual funds.
Legislations revolving around Cryptocurrencies in India
Concerns surrounding consumer protection as well as issues regarding financial stability and possible misuse of cryptocurrencies for illicit activities have been cited by the Indian government. Intruding into the ambit of an extensive and promising subject, the “Cryptocurrency and Regulation of the Official Digital Currency Bill” was introduced in 2021 and aimed towards the promised movement of the government toward the regulation of the sector. Proposed in this bill was the introduction of an official digital currency by the Reserve Bank of India (hereinafter referred to as the RBI) and restrictions on private cryptocurrencies. Though the bill is yet to be passed, it marks how the government wants to play with balancing innovation with regulation. The Breakdown of all regulations concerning cryptocurrency in India is as follows:
Taxation of Cryptocurrency Gains-
- 30% Tax on Profits: The Indian government levied a 30% tax followed by 4% cess on income earned through the transfer of cryptocurrencies. Such gain refers to income arising from the sale or transfer of digital assets.
- 1% TDS: It deserves mentioned that the 1% TDS is applied to any transactions pertaining to cryptocurrencies. This will apply to individuals undertaking such transactions above a limit of Rs 10,000 per annum or Rs 50,000, as the case may be.
- Nothing is allowed for deductions. Taxpayers are not allowed to claim a deduction of expenses or losses incurred, except cost of acquisition incurred in-trading in cryptocurrencies.
Crypto Travel Rule Implementation
The Notification issued by the Indian Ministry of Finance on March 7, 2023, brought Virtual Digital Assets (VDAs), including cryptocurrency, all activities related to which are trading, transfer, storage, management, and related financial services, into the fold of the Prevention of Money Laundering Act. This makes India the first country which has begun implementing the Travel Rule, as a part of its wider implementation initiative towards strengthening anti-money laundering (AML) activities with counter financing of terrorism (CFT) measures, for the Financial Action Task Force (FATF) global standards.
He or she will thus provide indicative directions in his or her official remit to reporting entities that would now be coming under those Guidelines to exercise sound reporting principles as regards VDA services. These guidelines mandate that Service Providers providing services relating to VDA(SPs) must include accurate originator and beneficiary information in wire transfers, as per Section 12(1)(a) of the PMLA. SPs are also required to monitor transfers for missing information and conduct screening. One such guideline states that originating SPs should obtain and hold required and accurate originator information and required beneficiary information on such VDA transfers, give that information above to the beneficiary SP or financial institution (if any) immediately and securely, and make it available upon request to appropriate authorities. The relevant information that has to be collected by the beneficiary SP on such VDA transfers includes the applicable required originator information and accurately needed beneficiary information and must be available when requested by appropriate authorities. The same is true whether or not the value of that VDA transfer is in fiat currency or another VDA.
AML and KYC Requirements
- PMLA is the principal legislation which sets out the framework for fighting money laundering in India. Crypto exchanges in India, like any other businesses, are expected to comply with the AML requirements, including very strict Know Your Customer (KYC) norms to verify the identity of users. The federal government had issued a gazette notice on March 7, 2023, requiring intermediaries having dealings in virtual digital assets (VDA) and crypto exchanges to carry out know your customer (KYC) procedures on their customers and platform users.
- In addition to investigating suspicious activity, exchanges must also record the transactions’ particulars. Every Reporting Entity under section 12 of the PMLA should maintain records of all transactions and documents evidencing the identity of clients to furnish them before the central government, including furnishing information and reporting suspicious transactions to the Financial Intelligence Unit, Government of India (“FIU-IND”). Further, under rule 5(2) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, such Reporting Entity should have an internal mechanism for keeping this information
Crypto Mining
Although there isn’t any nationwide ban on cryptocurrency mining, domestic rules and regulations in numerous states restrict and discourage them.
The future
Seemingly, the present prospects of cryptocurrency adoption do seem to be unbound in India. The Indian market, on the one hand, significantly Favors millions of people who have activated their accounts and traded digital assets. This increased attraction may signify a future role for cryptocurrencies in the Indian financial ecosystem. However, the future pace and extent of adoption hinge on regulation. The government could certainly stimulate wider adoption by introducing an objective and balanced regulatory framework that promotes innovation while safeguarding the public interest. The Reserve Bank of India would highly encourage potential future perspectives in digital assets with the announcement of its own virtual currency. The current implementation of the travel law on crypto in India is also a step towards creating solid cryptocurrency legislation in India and across an entire nation with the wide adoption of cryptocurrency. Therefore, if one looks at these factors, the eastward progressive tilt would mean that there are possibilities for adopting cryptocurrencies in India, but not without challenges in the current legal and regulatory landscape.
Frequently Asked Questions:
- What are some of the popular cryptocurrencies in India?
Some of the Popular Cryptocurrencies in India include but are not limited to; Bitcoin, Ethereum, Binance Coin, Tether, Ripple etc.
- Is GST applicable on Cryptocurrency Transactions?
While there is no explicit GST framework for cryptocurrencies, GST may apply to services provided by cryptocurrency exchanges or platforms. Exchanges charge GST on transaction fees or commissions, typically at 18%.
- What happens in cases of non-disclosure of Cryptocurrency Income?
Failing to report cryptocurrency income may lead to:
Penalties: Up to 200% of the tax amount due.
Prosecution: If the concealment is deemed willful, imprisonment of 3 to 7 years may be imposed.
Interest: Interest on unpaid taxes under Section 234A, 234B, and 234C of the Income Tax Act.
- What is the interplay between DTAA and Crypto income?
India ensures no double taxation under its Double Tax Avoidance Agreements (DTAAs). However, clarity may vary for international crypto holdings, depending on the treaty with the respective country.