Blockchain And Cryptocurrency Regulation In India

Introduction

In India, Cryptocurrencies started to become a popular term around 2013, when small businesses started accepting Bitcoin for payments. Since then, Cryptocurrencies have emerged as the new means of investment in India. The first regulatory response in the context of Cryptocurrencies was issued by the RBI on December 24, 2013. The Press Note 1 released by RBI was in terms of neither sanctioning nor prohibiting Cryptocurrencies. All it was a caution to users, holders, and traders of ‘virtual currency’ and of potential risks associated with Cryptocurrencies. Ultimately, Cryptocurrencies were not banned or prohibited and India witnessed a steady rise in transactions in Cryptocurrencies.

In scope to Press Note 1, the RBI released similar warnings on February 1, 2017 (Press Note 2) and December 5, 2017 (Press Note 3) restating its cautions and this time clarifying that RBI has not provided any organization with license or sanction to transact with Cryptocurrency.

On February 1, 2018, the Indian Finance Minister in his budget speech stated that, as the Indian Government does not recognize Bitcoin as legal tender, it will take all measures to eliminate the use of Blockchain technology in financing illegitimate activities, or as part of the payment system.

After the circular issued by RBI on April 6, 2018, the dealing of Cryptocurrencies got substantially impeded in India. This circular issued by RBI banned all the entities regulated by it from facilitating any dealings in Cryptocurrencies.

Indian Supreme Court On Cryptocurrency

Two primary Petitions were filed seeking to address the legality of Cryptocurrency

1. Dalmia Petition: This Petition was filed against the Union of India, Ministry of Home Affairs, Ministry of Finance and RBI seeking the restraining of sale and purchase of Cryptocurrencies in India.
2. Bhowmick Petition: This Petition was against the Union of India, Ministry of Finance, Ministry of Law and Justice, Ministry of Electronics and Information Technology, SEBI, RBI, Income Tax Department, and Enforcement Directorate. It was filed for seeking issuance of directions as to regulate the flow of Bitcoin and to ensure that the same be made accountable to the national treasury.

After the above-mentioned petitions, many other industry participants filed a writ petition challenging the RBI’s circular and asked for clarity on regulation. Since the Supreme Court has admitted these petitions, the matters remain debatable.

Is Cryptocurrency Valid In India?

According to section 26 of the RBI Act, every banknote shall be legal tender at any place in India and shall be guaranteed by the Central Government. The Central Government decides the denomination value, form, and material of such banknotes and RBI consists of the sole right to issue banknotes in India. Similar to this, Section 6(1) of the Coinage Act allows the legal sanction to coins that are made of the material that is approved by the Central Government.  Hence, there is no sanction of Cryptocurrencies as legal tender in India.

Is Cryptocurrency A Valid Payment Method In India?

The India Payments and Settlement Act, 2017 (PSSA) regulates prepaid instruments and payment systems. Before the execution of PSSA, a report was issued on July 11, 2002, by a working group on electronic money set up by the RBI. This report defined electronic money as a monetary value electronic stored on a technical device used for making payments without necessarily involving bank accounts in the transactions.

Broadly, these products can be categorized as a) prepaid stored-value card ( electronic purse or e-wallet) b) pre-paid, a software-based product that uses computer networks (digital cash or network money).

PSSA does not explicitly define electronic money but regulates payment systems that enable payment between a payer and beneficiary involving clearing, payment or settlement service, or all of them but does not include a stock change. Such systems consist of Credit cards, Debit cards, smart cards, and money transfer operations.

Furthermore,  the RBI also issued the “Master Direction on Issuance and Operation of Pre-paid Payment Instruments” to regulate prepaid wallets on October 11, 2017. Prepaid wallets may be issued by a bank or non-bank entities to facilitate the purchase of goods and services against the value stored in these instruments.

According to the above understanding, the instrument in question must store some monetary value. Cryptocurrencies may not have any value stored on them or their value (if any) is contingent on market speculation so, their issuance is not likely to be constructed as a valid payment system, according to Indian regulation.

Are Cryptocurrency Cross-Border Trades Valid?

An Indian-resident individual may remit up to US $250,000 per year towards a permissible current or capital account transaction, or both under the RBI Liberalized Remittance Scheme dated January 1, 2016.

A permissible current account transaction includes inter alia remittance towards a) business travel or private visits;  b) medical treatment abroad; c) participation in international events/competitions; d) film shooting; e) emigration consultancy fees; f) fees for participation in global conferences.

A permissible capital account transaction includes inter alia remittance towards a) foreign currency loans; b) foreign securities investment; c) guarantees; d) loans and overdrafts; e) insurance policies; f) capital assets.

Cross-border transactions require periodic reporting and declarations to be made before undertaking the transaction

Conclusion

Regulatory uncertainty doesn’t seem to have obstructed industry participants from using creative alternatives to capitalize on the Indian Cryptocurrency market as cryptocurrency exchanges are exploring the option to act as an intermediary between entities trading in cryptocurrency. This clearly shows that businesses in India are keen to adopt blockchain and cryptocurrency, evidenced by various banks exploring the use of blockchain to facilitate cross-border payments.

It will be interesting to witness whether the Indian Government recognizes the need for such technology by providing for regulation or not.