1. THE INTRICACIES OF CRYPTOCURRENCY
By Sujata Kumari Munii
Cryptocurrency is a digital financial asset, for which ownership and transfer of ownership are
guaranteed by a cryptographic decentralised technology known as blockchain, rather than a
bank or other trusted third party. It uses encryption techniques to generate, exchange and
transfer units of currency. Such fund transfers are not verified by any bank or government
authority. These digital currencies are not considered to be legal tender even though they are
capable of being used as a medium of exchange akin to money. Due to its anonymity i.e., lack
of a traditional government or bank-backed system to regulate its use, cryptocurrencies create
opportunities for illegal activities like money laundering, terror funding and so on.
The bankruptcy of large investment banks during the subprime crisis (2008) led to the
loss of public confidence in the government currency. At this backdrop, the idea of virtual
currency emerged. In 2009, the first cryptocurrency i.e., Bitcoin was executed between the
Bitcoin founder(s) ‘Satoshi Nakamoto’ and cryptographer Hal Finney, which is one of the most
extensively used cryptocurrency. There are also other crypto currencies like Litecoin,
Ethereum, and Ripple.
The expansive growth of cryptocurrency is primarily attributable to the fact that over
the last few years it has become ubiquitous, prompting more national and regional authorities
to grapple with their regulation. Cryptocurrency is legal in Canada, Mexico, United States, etc.,
whereas it is illegal in Algeria, Macedonia, Nepal, etc. In India, there is no crypto Regulation
for allowing or prohibiting the buying or selling of cryptocurrencies. Even the terms like crypto
asset or cryptocurrency are not clearly and specifically defined under any law prevalent in
India. Hence, they fall outside the direct regulatory ambit of RBI or the Securities and
Exchange Board of India.
Since 2013, RBI has issued warnings on the potential risks of using it as a means of
legal payment due to its volatility risk and the fact that most of the crypto exchanges are
unregulated rendering unavailability of legal recourse to the citizens in the event of loss or
fraud. Considering the legal, regulatory, operational and other security related risks associated
with these currencies, the RBI in 2018, issued a circular directing banks and financial
institutions regulated by RBI (i) not to deal in virtual currencies nor to provide services for
2. facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the
relationship with such persons or entities, if they were already providing such services to them.
Subsequently, in 2019, the Inter-ministerial Committee had released a report recommending
an outright ban on cryptocurrencies along with criminal penalties.
The constitutional validity of the said RBI circular was challenged before the Supreme
Court. The Apex Court through its judgement in Internet and Mobile Association of India vs.
Reserve Bank of India [WP(C) No. 373/2018] struck down the circular, lifting RBI’s
restrictions on crypto exchanges stating that its regulatory action was ‘disproportionate’.
Hence, banks are no longer prohibited from facilitating virtual currency transactions subject to
existing due diligence norms. The Apex Court took the view that since there is no legislation
prohibiting the use of virtual currencies, the complete ban does curtail the right to trade, sell
and invest in crypto currencies which violates Article 19(1)(g) of the Constitution.
The misconception that the operation of virtual currencies is difficult to regulate needs
to be corrected and requires wider awareness. Technology prompting efficient and flexible
ways of working, communicating and transacting business is essential for survival in a global
economy. In addition to the risks attached, it offers innumerable advantages such as lower
transaction fees in comparison to credit cards and other payment gateways like paytm, paypal,
etc.; easy access to international trade by removing international trade barriers since it is easy
to accept payments in different currencies; offers faster way to transfer funds and provides
protection from inflation. These benefits show that a technology-driven shift to a new era
advances scientific, social and economic progress even though it has some inevitable and
inherent risks attached to it.
As cryptocurrency is in its nascent stage, the risks appear to outweigh the benefits.
Simply inducing penalties to counter the worldview can produce counterintuitive results.
Rather cryptocurrency-friendly regulations are required to be in place. The legislators and the
Central Bank need to consider the relative effects of their actions on the economy. The aversive
consequence of an absolute ban will pave the way for illicit trade as crypto-assets are available
to anyone using the internet without the need for any intermediary. Disruptive technological
innovation requires sophisticated solutions i.e., the consequent pain and hardship caused to
economy by such innovation can be eased by levying fees and taxes. The ban will result in loss
of tax revenue.
3. Similarly, the crypto exchanges not to be reflexively dismissed merely because they
trade in currency driven by technological evolution sans any authorisation by the RBI.
Conversely the Government can roll out an official government-owned virtual currency
managed by RBI or any other approved crypto exchange(s) and prescribe crypto exchange(s)
where the currency can be traded. Such introduction would warrant amendments in some of
the related statutes. It is the mundane duty of the appropriate government to avoid hampering
technological progress by shying away from framing robust regulation to guard the disruptive
effects of new technological innovation.
i The author is an Advocate practicingin the Supreme Court of India