Future of Cryptocurrency and Implications of a National ban(India)
By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law,
Hyderabad.
(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal
advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your
business needs).
An overview of the proposed legislation in India
In July, a Committee set up by the Ministry of Finance to study issues related to virtual currencies,
submitted its report. The Committee recommended that all private cryptocurrencies should be
banned in India. Correspondingly, the Committee proposed a draft Bill banning cryptocurrency
in the country. In this blog, we explain cryptocurrencies and how they are used, recommendations
of the Committee with respect to cryptocurrencies and the regulatory framework for
cryptocurrencies in India and other countries.
What are virtual currencies and what is their use?
Virtual currency is a digitally tradable form of value, which can be used as a medium of exchange,
or a stored value which can be utilised later. It does not have the status of a legal tender. A legal
tender is guaranteed by the central government and all parties are legally bound to accept it as a
mode of payment.
Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by
cryptographic encryption techniques. Bitcoin, Ethereum, Ripple are a few notable examples of
cryptocurrencies. Decentralisation implies that there is no central authority where records of
transactions are maintained. Instead, anyone can create a transaction.
Key Regulatory Concerns
- Investor protections: Investor protection has been a top priority for Indian regulators.
Crypto assets are seen as high-risk, speculative assets. Investor education, guidelines
against mis-selling and other safeguards are needed. - Crypto assets are now better understood as digital assets, instead of as digital currencies.
- Regulating them like commodities and clarifying their tax treatment is a win-win. The
government’s tax revenues can go up. - It can also increase the number of tax filers (only 64 million in FY20) and the number of
taxpayers (14 million). - Sidestepping current regulations: Some crypto assets may allow individuals to bypass
securities issuance laws. That’s a potential risk to economic stability. - If crypto holders have to declare their holdings above a particular level in their tax forms,
such concerns can be mitigated. - Illicit transfers: Anonymous transfers of crypto assets may weaken anti-money laundering
laws or combating the financing of terrorism rules. That’s a potential national security
issue.
What are the present regulations in India with respect to Cryptocurrencies?
In the last few years, the Reserve Bank of India (RBI) has notified the potential financial,
operational, legal and security risks related to cryptocurrencies on multiple occasions (December
2013, February 2017 and December 2017). In December 2017, the Ministry of Finance issued a
statement which clarified that virtual currencies are not legal tender and do not have any regulatory
permission or protection in India. Further, the investors and participants dealing with them are
doing so entirely at their risk and should best avoid participating. In the 2018-19 budget speech,
the Finance Minister announced that the government does not consider cryptocurrencies as legal
tender and will take all measures to eliminate their use in financing illegitimate activities or as a
part of payment system. In April 2018, RBI notified that entities regulated by it should not deal
in virtual currencies or provide services for facilitating any person or entity in dealing with or
settling virtual currencies.
How does the draft Bill proposed by the Committee change these regulations?
Currently, only the entities regulated by the central bank are prohibited from dealing in, or
providing services for dealing in virtual currencies. The draft Bill prohibits any form of mining
(creating cryptocurrency), issuing, buying, holding, selling or dealing in cryptocurrency in the
country. Further, it provides that cryptocurrency should not be used as legal tender or currency in
India. The Bill allows for the use of technology or processes underlying cryptocurrency for the
purpose of experiment, research or teaching.
The Bill also provides for offences and punishments for the contravention of its provisions. For
instance, it states that mining, holding, selling, issuing or using cryptocurrency is punishable with
a fine, or imprisonment up to 10 years, or both. For individuals who might be in possession of
cryptocurrencies, the Bill provides for a transition period of 90 days from the commencement of
the Act, during which a person may dispose of any cryptocurrency in their possession, as per the
notified rules.
Cryptocurrencies as Property in the United States of America
One of the most critical legal considerations for any cryptocurrency investor has to do with the
way that central authorities view cryptocurrency holdings. In the U.S., the IRS has defined
cryptocurrencies as property rather than currencies. This means that individual investors are
beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses and
profits on their annual tax returns, regardless of where they purchased digital coins.
This aspect of the Cryptocurrency space adds layers of confusion and complexity for U.S.
taxpayers, but the difficulty does not end there. Indeed, it remains unclear whether digital currency
investors who have purchased their holdings on foreign exchanges must face additional reporting
measures come tax time. According to a report by CNBC, “anyone with more than $10,000 abroad
usually needs to fill out the Report of Foreign Bank and Financial Accounts (FBAR)… with the
Treasury Department each year. Another law—the Foreign Account Tax Compliance Act, or
FATCA—requires certain U.S. taxpayers to describe their overseas accounts on Form 8938, when
they file their taxes with the IRS.
The Way Forward
• Regulation is the Solution: Regulation is needed to prevent serious problems, to ensure that
cryptocurrencies are not misused, and to protect unsuspecting investors from excessive
market volatility and possible scams. The regulation needs to be clear, transparent, coherent
and animated by a vision of what it seeks to achieve.
• Clarity on Crypto-currency definition: A legal and regulatory framework must first define
crypto-currencies as securities or other financial instruments under the relevant national
laws and identify the regulatory authority in charge.
• Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the government
shall rather regulate the trading of cryptocurrencies by including stringent KYC norms,
reporting and taxability.
• Ensuring Transparency: Record keeping, inspections, independent audits, investor
grievance redressal and dispute resolution may also be considered to address concerns
around transparency, information availability and consumer protection.
• Igniting the Entrepreneurial Wave: Cryptocurrencies and Blockchain technology can
reignite the entrepreneurial wave in India’s startup ecosystem and create job opportunities
across different levels, from blockchain developers to designers, project managers,
business analysts, promoters and marketers.
Conclusion
In summary, a smart regulatory approach should consider both the potential upside and downside.
It fosters financial innovation, safeguards investors and unshackles the Indian crypto ecosystem.
However, one quick look on the description may give us the initial impression that all may not be
well:
“To create a facilitative framework for creation of the official digital currency to be issued by the
Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India,
however, it allows for certain exceptions to promote the underlying technology of cryptocurrency
and its uses.”
In this momentous occasion, we could ask which side would the Government of India swing
We are well experienced in handling legal issues pertinent to tax filings and wealth
management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding
of your legal issues or if you wish to set up a free consultation.