India and the Crypto Industry: Timeline of Events

This post traces the series of events that have occurred in India with respect to its regulation of the virtual currency ecosystem, in a chronological order.

India has had a very complex and vague relation with the crypto world that has led to a big void in the legal and regulatory environment which is now being felt and acknowledged by various stakeholders. However, it shall be noted that this is a situation that prevails in most countries owing to the very infrastructure of cryptocurrencies, thereby creating several difficulties in the process of formulating any law. Many question arise to the mind, when one tries to examine the legal nature of cryptocurrency. Some of the most notable ones are its definition, usage, tax application,

Simply put, cryptocurrency is a digital or virtual currency that is secured by cryptography. One of the unique features of this is that it occurs on a peer-to-peer basis thereby eliminating the need of an authorized central agency to oversee the transactions.

The first instance when the government officially voiced its unfavorable stand towards virtual currencies was by a circular, (VC Circular) dated April 6, 2018, issued by the Reserve Bank of India (RBI), which prohibited the use of payment channels by banking institutions regulated by RBI for the sale and purchase of virtual currencies. It further gave an three month window period for institution engaged in the business to put an end to all such activities. In effect, it restricted traders from purchasing virtual currency via electronic payments and at the same time, prevented the conversion of virtual currencies into physical cash recognized as legal tender.

It shall be mentioned, however, that even prior to the issue of the aforementioned circular, the Central Bank had hinted its adverse stand on dealings involving virtual currencies by issuing three warning circulars (December 24, 2013, February 01, 2017 and December 05, 2017) wherein it cautioned the public of the potential risks associated with it.

Soon, an Inter-Ministerial Committee was constituted to submit o report on the working of virtual currencies and its recommendation in this regard. Initially, the committee proposed the Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018. This bill did not seek to impose a blanket ban on virtual currencies but sought to regulate and required the recognized exchanges to maintain a register of all holdings and transactions that take place. However, after the RBI governor voiced his disagreement over it, this bill got replaced by the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 that categorically banned all activities done via private virtual currency that was submitted along with the report in the year 2019.

It is It is also interesting to note that the 2019 report had sufficiently emphasized on the usefulness of the underlying technology used i.e. the Decentralized Ledger Technology by stating that its benefits could be reaped in both the financial and non financial sectors, a point expressed by other experts time and again. Also, a strategy paper published by NITI Aayog has recognized the potential of blockchain technology.

All the Parliamentary questions that were continuously posed to the Ministry of Finance ceased and the perplexity amongst public seemed to have disappeared by the passing of the circular in 2018. However, the legitimacy of this circular was questioned in the case of Internet and Mobile Association of India v. Reserve Bank of India was filed in the year and the circular was challenged on constitutional grounds. Finally, the Supreme Court passed the verdict against the VC circular calling it void ab initio. This acted as a breather to the crypto industry and effectively put an end to any proceeding that may have constituted under the circular. One major line of reasoning used by the apex court, amongst othere, was that the circular went against the principles of reasonableness and proportionality and curbed the fundamental right of the affected citizens to carry out businesses.

Further, a strategy paper titled, National Strategy on Blockchain was also created by the Ministry of Electronics and Information Technology (MeitY), Government of India to provide a framework for growth of applications based on this technology.

Discussions and debates reached a peak in the last quarter of 2021, when it was expected that the Crypto currency bill would be tabled at the parliament during its winter session.

The absence of an exclusive legislation is indicative of the non-serious stance of the government on regulating the virtual currency ecosystem. It has also actively attempted to evade from providing any clarificatory statements in the past as evidenced from its refusal to entertain an RTI application on grounds of not being qualified as 'information' under the RTI Act.

India's position in the global economy cannot be underestimated, and the surge in the virtual currency transactions can make India a dominant force. It is a matter of necessity that the government This will also show in India in good light and prevent ambiguous actions.