FIG Paper (No. 7) - Cryptocurrency in India

Introduction:

In recent years, investments in cryptocurrencies have witnessed exponential growth, with growing recognition by established financial institutions across the globe and cryptocurrencies morphing from a digital payment method to an asset class for investment.

In India, the regulators have been hesitant to regulate cryptocurrencies. The Reserve Bank of India (“RBI”) had issued press releases through the years, highlighting the risks associated with transacting in cryptocurrencies, which culminated in the RBI issuing a circular in April  2018 restricting all entities regulated by it from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling in virtual currencies. Entities who were already engaged with such companies were given a three months’ time to end their association. However, in March 2020, this circular was struck down by the Hon’ble Supreme Court of India on grounds of being disproportionate in nature (“IMAI Judgment”).

Legal position of cryptocurrencies in India:

Presently, the key issue surrounding regulation of cryptocurrencies is the inability to precisely identify their legal status, and thus, a quandary about choosing a statutory authority that can be tasked with regulating it. Courts in different jurisdictions have interpreted cryptocurrencies differently depending on the context of the text/ statute at hand.

Classification of cryptocurrency in India: 

  • As money/currency: Neither the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, the Payment and Settlement Systems Act, 2007 (“PSSA”) nor the Coinage Act, 2011 define the words ‘currency’ or ‘money.’ The Hon’ble Supreme Court in the IMAI Judgment, however, recognised that the RBI could notify cryptocurrencies to fall within “other similar instruments” under the definition of the term currency under the Foreign Exchange Management Act, 1999. Therefore, the users and traders of cryptocurrencies would be deemed to carry on an activity that falls within the purview of the RBI.
  • As a payment system: The Court also held that since cryptocurrencies do not hold any inherent monetary value due to its decentralized nature, it cannot be classified as a prepaid instrument under the PSSA, read with the Master Directions on ‘Issuance and Operation of Prepaid Payment Instruments’ dated October 11, 2017. However, the Court recognized the ability of the RBI to regulate cryptocurrencies under the PSSA since cryptocurrency transactions include ‘payment obligation’ and/or ‘payment instruction.
  • As a security: The definition of the term ‘securities’ under the Securities Contract Regulation Act, 1956 does not include cryptocurrencies, but it can be considered as a security under the term ‘other marketable security’ mentioned in the definition, which does have a wider connotation. It may be argued that cryptocurrencies can be considered as ‘security’ if generated, distributed and sold in a centralised manner. Separately, there have also been recent reports of cryptocurrency exchanges calling to regulate cryptocurrencies on the basis that they are similar to commodities.

Recent developments:

1. Cryptocurrency Bill:
  • The Government introduced the ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ (“Cryptocurrency 2019 Bill”), which was intended to ban cryptocurrencies in the country, followed by ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ (“Cryptocurrency 2021 Bill”).
  • The Cryptocurrency 2021 Bill is not present in the public domain. However, basis information available in the Lok Sabha bulletin, the purport of the Cryptocurrency 2021 Bill is to: (i) create a facilitative framework for creation of the official digital currency to be issued by the RBI; and (ii) prohibit all private cryptocurrencies in India.
  • While the Cryptocurrency 2021 Bill conspicuously omitted the words ‘banning of’ (which was a part of the Cryptocurrency 2019 Bill), it would be interesting to witness the approach finally adopted by the Central Government towards cryptocurrency, i.e., whether there would be a soft-touch approach of regulating the entities or an outright ban of private currencies.
2. Ministry of Corporate Affairs (“MCA”):

The MCA, vide its notification dated March 24, 2021 (with effect from April 1, 2021), prescribes companies to disclose the details of their investments/ trading activities in cryptocurrencies during a given financial year in their financial statements, thereby ensuring greater transparency in the activities of such companies.

3. Access to financial services/banks:

Notwithstanding the IMAI Judgment, there have been recent instances where multiple banks have begun limiting their exposure to cryptocurrencies and in certain instances, have stopped providing banking services to cryptocurrency exchanges and cryptocurrency transactions, thereby adding to further uncertainty with respect to transacting in cryptocurrencies.

Cryptocurrency: The Future!

In June 2019, the People’s Bank of China, in an attempt to clamp down the trading of cryptocurrencies, had blocked access to all domestic and foreign cryptocurrency exchanges and Initial Coin Offering websites. Recently, China has also taken further steps towards tightening restrictions on cryptocurrency, wherein Chinese regulators have banned financial institutions and payment companies from providing any service related to cryptocurrency in the country. In a joint statement issued by three associations including the People’s Bank on China, banks and payment systems have been directed not to engage in any services of cryptocurrency including trading, currency exchanges etc., along the lines of RBI’s 2018 circular.

Singapore has also been sceptical of people trading in cryptocurrencies but continues to allow it under a balanced regulatory and legal environment. A recent statement by the monetary authority of Singapore warned the public against retail trading in cryptocurrencies by highlighting the risks and volatile nature of cryptocurrency, given that it is not related to any economic fundamentals.

Another key concern with respect to cryptocurrency that has become a topic of debate is the energy consumption involved in mining it and the carbon footprint of the entire ecosystem. As per an analysis undertaken by the Cambridge Centre for Alternate Finance, Bitcoin’s electricity consumption is at approximately 110 Terawatt Hours per year, i.e. 0.55% of the global electricity production. While the mode of energy consumption is not yet clear, a significant portion of the energy involved in mining may be from non-renewable sources. The Chinese government’s intended crack down on bitcoin mining and trading will also have to be considered; since as per industry estimates, mining in China may account for as much as 70% of the global cryptocurrency supply. There are also reports of cryptocurrency miners setting up a Bitcoin Mining Council towards increasing transparency with regards to bitcoin mining energy usage.

With the growing uncertainty surrounding cryptocurrencies, it may be time for the RBI to launch its own ‘Central Bank Digital Currency’ (“CBDC”), similar to the digital RMB and digital rouble being considered by the People’s Bank of China, and the Central Bank of Russia, respectively.

Further, the RBI’s report on Currency and Finance dated February 26, 2021 elaborated on the need for and challenges concerning the issue of CBDCs in India. The said report also recognized the potential of CBDCs for financial inclusion, improving the aggregate demand in the market and enhancing the speed of monetary policy transmission. However, the report also highlighted how CBDCs pose a risk of disintermediation of the banking system, which would be a key factor.

Conclusion:

It will be interesting to see how cryptocurrencies will finally be regulated in India. With reports of the government contemplating the constitution of a fresh panel of experts to discuss and debate the regulation of cryptocurrency in India, regulatory certainty continues to remain on the horizon.

We continue to monitor the regulatory and market developments relating to cryptocurrency in India and we hope to issue a follow-on blog with further learnings and any updated notifications that the RBI may issue.


 

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Photo of Anu Tiwari Anu Tiwari

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu…

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu represents both Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information technology companies on transactional, enforcement and regulatory matters.

Anu has been a member of RBI’s Committee on Household Finance, SEBI’s Working Group on Mutual Fund Regulation, Fintech Committee of the Confederation of Indian Industries (CII) and a visiting faculty at the SP Jain School of Global Management.

Mr. Tiwari has been recognised by Chambers & Partners, IFLRMergerMarket and as Lawyer of the Year 2021, India, by Global Law Experts for his work in the M&A, Financial Regulatory and Blockchain/  Cryptocurrency space. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Ritu Sajnani Ritu Sajnani

Principal Associate Designate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Ritu advises financial services clients on matters before the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance and appellate tribunals. She has…

Principal Associate Designate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Ritu advises financial services clients on matters before the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance and appellate tribunals. She has represented several Indian and multinational fintech, banking, broker, exchange and asset management companies on transactional and regulatory matters. She can be reached at ritu.sajnani@cyrilshroff.com

Photo of Bharath Sridhar Bharath Sridhar

Senior associate in the general corporate and Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Bharath advises Indian and multinational financial services clients on transactional (including strategic investments, private equity, M&A), corporate commercial contracts, regulatory and enforcement matters. He can…

Senior associate in the general corporate and Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Bharath advises Indian and multinational financial services clients on transactional (including strategic investments, private equity, M&A), corporate commercial contracts, regulatory and enforcement matters. He can be reached at bharath.sridhar@cyrilshroff.com