Cryptocurrency can be understood as digital assets created to function as a mode exchange which uses strong cryptography to secure financial transactions. According to Fernando Angulo, Head of Communications at SEMrush, Cryptocurrency search growing fast across India. During one of his interviews he mentioned that 'The investment on cryptocurrency was the first place so they are searching, where to invest, what is the best cryptocurrency, how to get cryptocurrency to transform into rupees or how to get physical money about that?'.1 The April 2018 RBI circular banning the cryptocurrency in the Indian market created quite a stir in the market.
However, the recent judgement of the Hon'ble Supreme Court in the case of Internet and Mobile Association of India v Reserve Bank of India gave a new lease of life to cryptocurrency in India. The SC in its judgement quashing the ban imposed on cryptocurrency by the Reserve Bank of India held that 'the impugned Circular dated April 6, 2018 is liable to be set aside on the ground of proportionality.'
The evolution of this judgment can be traced back to a series of events mentioned below:
Dwaipayan Bhowmick v. Union of India & Ors.2
For the first time in July 2017, a petition was filed in the Supreme Court seeking a regulatory framework for cryptocurrency. A Public Interest Litigation was filed under Article 32 of the Constitution against Union of India, Ministry of Finance and the Reserve Bank of India over the use and business of Bitcoins, Litecoins, Ethereum, etc. The Supreme Court on July 14, 2017, directed the RBI and the other concerned ministries to clarify their stance and enact a bill on the same before disposing off the PIL.
Inter-Ministerial Committee on Cryptocurrency.
Further, it was in November 2017 that the issue of legality was taken up seriously by the Indian Government when it constituted a specific committee to look into the matter of cryptocurrency. The Inter-Ministerial Committee (hereinafter referred to as 'IMC') was formed on November 2, 2017 to examine the future of cryptocurrencies by the Ministry of Finance. The objectives of the committee were3 :
- To take stock of the present status of Virtual Currencies both in India and globally
- To examine the existing global regulatory and legal structures governing virtual currencies
- To suggest measures for dealing with such Virtual Currencies including issues relating to consumer protection, money laundering, etc.;
- To examine any other matter related to Virtual Currencies which may be relevant.
On April 6, 2018, RBI issued a notification prohibiting banks, lenders and other financial institutions from 'dealing with virtual currencies.4 (hereinafter referred to as 'notification')
The notification stated that "in view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs (virtual currencies) or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/ receipt of money in accounts relating to purchase/ sale of VCs."5
The RBI further notified that "regulated entities which already provide such services shall exit the relationship within three months from the date of this circular."
Report of the Inter-Ministerial Committee to propose specific actions to be taken in relation to Virtual Currencies6
in February 2019, the IMC gave another shocker to the cryptocurrency industry in India when it submitted the report Ministry of Finance suggested banning of private cryptocurrencies and criminalising any activity related to virtual currencies.
The specific recommendations were:
- "The committee recommends that all private cryptocurrencies, except any cryptocurrency which may be issued by the government, be banned in India."
- "There is no underlying intrinsic value of private cryptocurrencies. These private cryptocurrencies lack all the attributes of a currency. There is no fixed nominal value of these private cryptocurrencies i.e. neither act as any store of value nor are they a medium of exchange. Since their inceptions, cryptocurrencies have demonstrated extreme fluctuations in their prices. Therefore, the Committee is of clear view that the 56 private cryptocurrencies should not be allowed. These cryptocurrencies cannot serve the purpose of a currency. The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence, private cryptocurrencies cannot replace fiat currencies."
- The committee also proposed a bill 'to prohibit the use of Cryptocurrency, regulate the Official Digital Currencies and for matters connected therewith or incidental thereto'.
- The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 was proposed by the IMC in the report. Section 6 of the Draft Bill states that:
- "(1) No person shall directly or indirectly use Cryptocurrency in any manner, including, as,-
- (a) A medium of exchange; and/or
- (b) A store of value; and/or
- (c) A unit of account.
- (2) Cryptocurrency shall not be used as legal tender or currency at any place in India."
Chapter 6 of the Draft Bill deals with offences and Part V of the Bill provides for the Penalties for non-compliance
IAMAI v. RBI: The Cryptocurrency Revitalizer
- Pursuant to the notification issued by the RBI, Internet and Mobile Association of India (hereinafter referred to as the 'Petitioners'), an industry body that represents online and mobile value-added service providers filed a writ petition in the Hon'ble Supreme Court of India hereinafter referred to as the 'Supreme Court') against the RBI (hereinafter referred to as the 'Respondents') demanding a stay on the notification issued by the RBI.
- The Petition prayed for the following measures:
- Regulation of the flow of Bitcoin and other crypto currencies to ensure accountability to exchequer;
- Constitution of a committee for framing appropriate rules and mechanisms for the regulation of the flow of Bitcoin and other cryptocurrencies.
- Constitution of a committee of experts to examine the prohibition or regulation of Bitcoins and other crypto currencies.
- Citing the RBI's circular as 'not proportional', the Hon'ble Court held that 'he concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them'.
- The Court also took into consideration the finding of the IMC's report which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.
- However, the Supreme Court also pointed out that despite having due time to consider the situation and various committee reports submitted to that effect (some even contradictory to one another), neither the government nor the RBI have been able to satisfy the now impugned measure taken with regard to cryptocurrency.
- After analyzing the definition of Virtual currency's by various regulators & government of various countries, noted that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value.
The Future of Cryptocurrency in India
It would be interesting to see the how the next chapter in the cryptocurrency saga would unfold now that the ban on cryptocurrency is lifted by the Apex Court in the country. Though the cryptocurrency players in India are celebrating the judgement, the fact that RBI has a legal right to file a review petition cannot be ruled out completely.
2. Writ Petition (Civ.) No. 1076/2017
4. Reserve Bank of India, Prohibition on Dealing in Virtual Currencies (VCs) (Apr. 6, 2018) (RBI/2017-18/154), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0
6. Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies (February 28, 2019) https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf
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