The Proposed Prohibition of Cryptocurrency in India
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In January 2021, India’s cryptocurrency investors and enthusiasts were shocked when the Lok Sabha Bulletin indicated that the Indian Parliament is considering the introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (the “Crypto Bill”). The Crypto Bill intends to ban “private” cryptocurrencies in India with certain exceptions to promote the underlying technology of cryptocurrency and provide a framework for creating an official digital currency, the central bank digital currency to be issued by the Reserve Bank of India (“RBI”). RBI had previously issued a circular on April 6, 2018 directing the entities regulated by the RBI not to deal in crypto/virtual currencies or provide any services for facilitating any person or entity dealing with or settling virtual currencies, and many banks suspended the current account operations of cryptocurrency platforms which effectively disabled crypto trading. The RBI circular was subsequently set aside by the Supreme Court of India in March 2020 by concluding that the RBI has been conferred with wide powers in the economy of the country, but the measures taken by the RBI for issuance of the circular were not proportionate and therefore violative of Article 19(1)(g) of the Constitution of India (refer our article at https://lexcounsel.in/wp-content/uploads/2020/04/Newsletter-March-14-2020-.pdf).
Earlier in 2019, the Inter-Ministerial Committee (“Committee”) constituted with the mandate of studying various issues related to virtual currencies including its legal framework, issued its report, and recommended the banning of private cryptocurrencies in India. Along with the report, the Committee had also submitted a draft bill titled ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’ (refer our article at https://lexcounsel.in/wp-content/uploads/2019/08/August-2-2019.pdf).
The Government is now planning to fast-track the proposed ban and pass the Crypto Bill. If the proposed Crypto Bill becomes law, India will officially ban private cryptocurrencies rather than regulating them like corporate stocks.
The expression “private” cryptocurrencies used in the Lok Sabha Bulletin has garnered criticism and debate due to the ambiguous nature of the expression as also the underlying impacts associated with it. As the draft of the Crypto Bill is not presently available in public domain, it is being contended that the government’s definition of “private” could imply that any digital currency that is not sovereign could be seen as a “private” currency. This definition of “private” could also outlaw the two most popular cryptocurrencies: Bitcoin and Ethereum. While the Government has been mulling over the fate of cryptocurrencies for many years and has brought out several advisories through the RBI cautioning investors against risks of crypto/virtual currencies (though stopping short of declaring them as illegal), this decision to prohibit “private” cryptocurrencies is being seen by some experts as being rushed/hasty without any consultation with the stakeholders and putting India back by a decade. Further adding to the ambiguity, the Bulletin further stated even though the bill is anti-private cryptocurrencies, it will allow certain exceptions to promote the underlying technology of cryptocurrency and its uses.
The implications of the proposed ban are making current and potential cryptocurrency investors and exchanges jittery and impacting investor confidence. The lack of legal status of crypto/virtual currencies under Indian laws has caused much confusion in the past and has kept many serious investors and financial institutions away from cryptocurrency and it is expected that the introduction of the Crypto Bill will bring finality to its legal status. Instead of complete prohibition on cryptocurrencies it is being suggested that the Government could have instead regulated the trading of cryptocurrencies by brining supporting regulations including strict KYC norms, reporting and taxability but this suggestion now appears to be a bit late in the day considering the recent announcement.