India is witnessing a rapid increase in the number of crypto exchanges as well as cryptocurrency transactions. As per publicly available data, the average daily cryptocurrency trading volumes across the top Indian exchanges have grown nearly 500% from March 2020 to December 2020. Globally, countries such as Switzerland, Singapore and the US have been pro-active in undertaking cryptocurrency transactions, and simultaneously creating a robust regulatory framework for the same. In fact, investors from these countries have also been investing in Indian cryptocurrency exchanges.
Historically, Indian regulators were reluctant to regulate ‘virtual currencies’ such as cryptocurrencies. Even today, there is an ambiguity about the legal validity of cryptocurrency and the regulatory mechanism relating to it due to lack of clarity on whether it is a currency or a security or an asset. There have been few legislative and judicial instances of ‘regulation’ of cryptocurrency transactions. However, a clear picture has still not emerged.
Recently, the Ministry of Corporate Affairs vide Notification dated March 24, 2021 (‘MCA Notification’) has amended Schedule III of the Companies Act, 2013 (‘the Act’) prescribing the form of financial statements, effective from April 01, 2021. Surprisingly, the said MCA Notification has made it mandatory for all companies to disclose the details of cryptocurrency/ virtual currency in their balance sheets.
Prologue to the MCA Notification
Cryptocurrencies, prior to the MCA Notification, have seen their fair share of regulatory uncertainty. The Reserve Bank of India vide Circular dated April 6, 2018 (‘RBI Circular’) had restricted all entities regulated by the RBI from dealing in or providing services for facilitating ‘any person or entity dealing with or settling’ virtual currencies. The RBI had earlier cautioned users, holders and traders of virtual currencies, regarding various financial, operational, legal and security risks associated in dealing with such virtual currencies. This RBI Circular was challenged before the Supreme Court (‘SC’). On March 04, 2020, the SC struck down the RBI Circular on the ground of violation of the doctrine of proportionality. Moreover, it was also held that the RBI did not have any empirical evidence to suggest that the activity of exchanging virtual currency was having any adverse impact on the functioning of the entities regulated by the RBI.
In its Report dated February 28, 2019 (‘Report’), the Ministry of Finance had studied the positions adopted by multiple jurisdictions for regulation of virtual currencies. The Report concluded that there was no underlying intrinsic value attributable to private cryptocurrencies and therefore, excluding any virtual currency that may be issued by the Government, all private cryptocurrencies should be prohibited in India. Basis the findings of the Report, a draft of the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019’ (‘Cryptocurrency Bill’) was placed in the public domain. The Cryptocurrency Bill proposed to prohibit the use of cryptocurrencies, and also impose criminal liability (of fine or imprisonment up to 10 years, or both) on anyone who mines, generates, holds, sells, transfers, disposes, issues or deal in cryptocurrencies. During the recently held Budget Session of Parliament, the Central Government had proposed to introduce the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ which would lay down the regulatory framework for the launch of an ‘official digital currency’, while prohibiting all private cryptocurrencies subject to certain exceptions. However, for the reasons unclear to the authors, the Bill was not taken up for consideration during the last Parliamentary session. In the meanwhile, internationally, some of the renowned MNCs are moving towards acceptance of cryptocurrency encouraged by a recent record listing of a crypto exchange on NASDAQ.
Analysing the MCA Notification
Section 129 of the Act provides that the financial statements shall give a true and fair view of the state of affairs of the company, shall comply with the accounting standards, and shall be in the form as may be provided for different class or classes of companies under Schedule III of the Act. The MCA Notification has amended Schedule III of the Act with effect from April 01, 2021. This includes an amendment to Paragraph 5 of Part II of Schedule III of the Act, which provides a list of additional items that a company, irrespective of being listed or unlisted, has to disclose by way of notes regarding aggregate expenditure and income in their statement of profit and loss. The MCA Notification has inserted item (xi) in Paragraph 5 of Part II of Schedule III of the Act, to provide that companies shall disclose the details of cryptocurrency or virtual currency. Where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the company should disclose the following:
- profit or loss on transactions involving cryptocurrency or virtual currency;
- amount of currency held as at the reporting date; and
- deposits or advances from any person for the purpose of trading or investing in cryptocurrency or virtual currency.
The MCA Notification comes at a time, when on the one hand, the trading in cryptocurrency is multiplying at an exponential rate in India, and on the other hand, there is nervousness amongst the traders and investors with regard to potential banning of private cryptocurrencies/ virtual currencies.
The MCA Notification has provided some degree of respite to the investors and traders in cryptocurrency. They may perceive as a step towards eventual acceptance of virtual currency by the Government/ RBI.
There are FEMA and taxation-related concerns regarding cryptocurrency. In a written reply to a question in the Rajya Sabha, The Minister of State for Finance observed that “Irrespective of the nature of business, the total income for taxation shall include all income from whatever source derived…the gains arising from the transfer of cryptocurrencies/assets is liable to tax under a head of income.”
There have been concerns in the minds of policy makers that cryptocurrencies may become easy tools for money laundering and terrorist financing. Particularly in the case of cross-border cryptocurrency transactions. It is expected that the proposed legislation will provide adequate safeguards to prevent any such misuse of cryptocurrency/ virtual currencies.
In 2017, the MCA had instructed the Serious Fraud Investigation Office (‘SFIO’), established under Section 211 of the Act, and the Registrar of Companies, to gather details about companies that deal in cryptocurrencies. This was done to keep a check on companies using cryptocurrencies to lure the public for collecting funds and prejudicially affecting the investors and depositors.
International Position on Disclosures
In the United States, the office of Internal Revenue Service requires companies to make disclosures for each virtual currency transaction, including details on the type of virtual currency, the date of acquiring and selling the virtual currency, and the amount of gain/ loss on such sale of virtual currency. The finance regulator of Switzerland also requires disclosure of digital currencies, including cryptocurrencies, as assets in the annual returns of companies dealing in such transactions. Singapore, considered to be the most crypto-friendly country, has recognised cryptocurrencies and virtual currencies in their existing set of regulatory frameworks to manage virtual currencies.
On March 19, 2021, the Financial Action Task Force (‘FATF’), an inter-governmental body tasked with setting international standards aimed at preventing money laundering and terrorist financing, issued a draft guidance for virtual assets, which was an updated draft to its guidance issued in 2019. The draft guidance provides a mechanism for supervision and monitoring of virtual assets service providers, customer due-diligence provisions and sanction measures against money laundering and terrorist financing.
The MCA Notification seems to suggest that India is testing waters by trying to gauge the scale of cryptocurrency/ virtual currency held by Indian companies for devising suitable regulatory response. Any aggressive view on this issue may result in a situation where companies dealing with cryptocurrencies and virtual currencies may shift their bases to a more ‘regulatory-friendly’ jurisdiction, resulting in the loss of revenue for the Government. The Government seems to be taking a more calibrated approach along with the disclosure requirements under the MCA Notification to reduce the nervousness of investors. However, to read such disclosure in the financial statement as a precursor to recognise its legitimacy by the Govt of India or the RBI could be misleading. Nonetheless, the disclosures requirements under the MCA Notification will bring in a level of transparency, which will help the Government/the RBI in devising suitable regulatory framework for cryptocurrencies.
 Circular No. RBI/2017-18/154 dated April 06, 2018 titled ‘Prohibition on dealing in Virtual Currencies’ issued by the Reserve Bank of India.
 Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274.
 ‘Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies’ dated February 28, 2019 issued by the Department of Economic Affairs, Ministry of Finance.