Cryptocurrency – Legal or Illegal?

 

Cryptocurrency – Legal or Illegal?

C P Krishnan

CRYPTOCURRENCY has been a hot topic of discussion in our country for quite a few years.  Those who support cryptocurrency argue that the transactions of this virtual currency are done through blockchain technology and are therefore well protected.  They say that it is very easy to invest; one can start investing even with Rs 100 and is a safe investment. The first decentralised cryptocurrency was created by pseudonymous developer Satoshi Nakamoto in 2009. There are about 1.5 crore to 2 crore cryptocurrency investors in India, with total holdings of about Rs 40,000 crore, as per the industry estimates. But the actual figure of investing population in cryptocurrency and the actual holdings in our country are not authentically known to anyone.

There are no written rules to control cryptocurrency. Everything related to this is opaque and not subject to any audit of whatever nature. There are many forms of cryptocurrency and bitcoin is one of the most popular forms. Cryptocurrency is the currency of the internet and decentralised digital money prevalent worldwide. Unlike traditional currencies such as dollars, cryptocurrencies are issued and managed without any central authority whatsoever. There is no government, company, or bank in charge of cryptocurrency.

BITCOIN ENABLES ILLEGAL TRANSACTIONS AND PRONE TO FRAUD

On July 11, 2018, Joseph Stiglitz, winner of the Nobel Prize for economic studies and professor at Columbia University suggested that bitcoin would fail after governments begin to fight back against money laundering and other fraudulent practices that criminals perform with the aid of cryptocurrency. "You cannot have a means of payment that is based on secrecy when you are trying to create a transparent banking system," he said. "If you open up a hole like bitcoin, then all the nefarious activities will go through that hole, and no government can allow that." (Investopedia)

Many renowned economists all over the world have opined against this virtual currency and warned governments of dire consequences. They argue that this would facilitate hawala transactions, accumulation of black money and would enable illegal transactions, drug funding, human trafficking, terrorist activities, illegal weapon sales etc. Instances of fraud and hacking are also common with regard to cryptocurrency. For example, an Ernst & Young study found that around $400 million of the total $3.7 billion funds raised in cryptocurrency offerings have been stolen.

RBI PROHIBITED ON DEALING IN VIRTUAL CURRENCIES

Reserve Bank of India (RBI) prohibited dealing in cryptocurrency otherwise called virtual currency on April 6, 2018,  stating that “Reserve Bank has repeatedly through its public notices on December  24,  2013, February  01,  2017, and December  05,  2017,  cautioned users,  holders and traders of virtual  currencies(VCs),  including  Bitcoins,  regarding various risks associated in dealing with such virtual  currencies.  In view of the associated risks,  it  has  been  decided that,  with immediate effect, entities  regulated by  the  RBI shall  not  deal  in  VCs  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.”  This, in effect, banned the use of cryptocurrency in India.

In 2018, there was a draft bill to regulate virtual currencies. In 2019 another bill was drafted by the government of India to ban the VCs.

SUPREME COURT STRUCK DOWN RBI CIRCULAR

On March 4, 2020, the Supreme Court of India (SC) struck down the RBI circular dated April 6, 2018, on the grounds of proportionality. The inconsistent stand of the RBI and union government was severely criticised by the supreme court in its order. RBI, while prohibiting dealing on cryptocurrency, took the stand that it did not ban the same. The SC observed  “that RBI has not so far found, in the past five years or more, the activities of VC exchanges to have actually impacted adversely….. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalised banks/scheduled commercial banks/cooperative banks/NBFCs have suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them…”

In November 2021, the union government drafted another bill namely “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.”  The bill is intended to create a facilitative framework for the creation of the official digital currency to be issued by the RBI. The bill also sought to prohibit all private cryptocurrencies in India, however, it would allow for certain exceptions to promote the underlying technology of cryptocurrency and its uses.  But the bill was not introduced in the parliament during the winter session.

BUDGET ANNOUNCEMENT BY FM

On February 1,  2022, during the budget speech, the union finance minister has made two statements regarding cryptocurrency:

1. “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.”

2. "Introduction of central bank digital currency (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce digital rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23.”

CRYPTOCURRENCY LEGAL OR ILLEGAL

This gives rise to many questions, the basic one being whether cryptocurrency is legal or illegal. While RBI’s circular prohibiting dealing on cryptocurrency has been struck down by the supreme court, the government/RBI has not come out, to date, with any concrete proposal to deal with this. The government/RBI stand on virtual currencies has been the one with a lot of confusion and contradictions.

While the number of private cryptocurrency exchanges operating in India is growing, the union government has no official data on them. The government also does not have any information on the number of investors linked to these exchanges. In reply to a query on the number of cryptocurrency exchanges operational in India and the number of investors linked to them, union minister of finance, Nirmala Sitharaman in a written reply tabled in Rajya Sabha on July 27th, 2021 said: “This information is not collected by the government.”

In this background, the union government proposes a 30 per cent tax on income from the transfer of any virtual digital asset. Then will it not remain simply on paper when the government has no information regarding cryptocurrency exchanges and the number of investors in India? Again, will it not legitimise the virtual currency that the government intended to prohibit the same till the last winter session?

The union government further proposes to introduce a digital rupee to be issued by RBI using “blockchain technology and other technologies” that the private players use.  This vague statement of intent leaves open questions about the reliability of the digital rupee and whether it too could be used for all illegal activities and be prone to fraud - problems that plague the private crypto-currencies. Then how will “the government promoting digital rupee” be a safe currency?

CHINA BANNED CRYPTOCURRENCY

Last year China banned cryptocurrency. China did so in different phases. First, the country prohibited financial institutions from engaging in any crypto transactions in May. Then it banned all domestic crypto mining in June, and finally outlawed cryptocurrencies outright in September 2021. Alternately People's Bank of China issued virtual currency by the name of digital yuan.  In addition to China, eight other countries have absolute bans on these digital currencies. Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia have all chosen to unilaterally ban exchanges and services surrounding cryptocurrencies. 

RBI DEPUTY GOVERNOR CALLS FOR OUTRIGHT BAN

Reserve Bank of India deputy governor, T Rabi Shankar called for an outright ban on cryptocurrencies in the country.  "Cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi schemes, and maybe even worse," T Rabi Sankar said while addressing an event organised by Indian banks association on February 14, 2022. He further said, “We have seen that crypto-technology is underpinned by a philosophy to evade government controls. Cryptocurrencies have specifically been developed to bypass the regulated financial system.  They can wreck the currency system, the monetary authority, the banking system and in general government’s ability to control the economy. Total crimes using cryptocurrencies in 2021 was estimated to be $14 billion”, Rabi Shankar said citing Wall Street Journal dated January 6, 2022.

The union government is accountable to the people of India. The activities of the BJP government in dealing with virtual currencies have not raised any hope in the minds of the people. It is time for the government to take a firm stand to ban all the private virtual currencies, instead of levying tax and introducing digital rupee through RBI using a safer and time tested technology.