Regulation of Cryptocurrency: Challenges and Issues

What is Cryptocurrency and Blockchain Technology?

Cryptocurrency in its essence refers to the digital currency that can be stored in a digital wallet in the form of computerized data and can be transferred at will.

Unlike fiat currency (i.e. Indian Rupee, US Dollars, etc.), cryptocurrency is decentralized, referring that no individual government can control or manipulate the flow of this currency since it are not backed or regulated by any country, state, or government. It has no intrinsic value and as pointed out before has no such physical form, besides it only exists in networks. As the name suggests, Cryptocurrency works on the principle of Cryptographs i.e., mathematical principles and computational practices that ensure security while transacting by transforming data into unintelligible chunks of information which only parties with proper access can read and process, thus paving way for a future of foolproof trading.

Blockchain technology on the other hand is what allows the existence of cryptocurrencies. Defined as the “distributed or decentralized ledger technology”, it provides each participant that is connected to the Cryptocurrency network (bitcoin for example), an identical copy of validated transactions between the members without the need for a central clearing authority. Blockchain technology has already been recognized as capable of revolutionizing the business world as we know it with its potential applications in the automobile industry, the healthcare industry, and even in the field of voting.

Invented in 2009, Bitcoins, the most popular form of cryptocurrency was the brainchild of Satoshi Nakamoto, the supposed pseudonym of the person or persons who created and deployed bitcoins and also developed the first blockchain database. Primarily used for transactions in the dark web for sites such as Silk Road in its infancy and initial stages in 2009. Since then the value of a single bitcoin has skyrocketed from the initial USD 0.08 to the present whopping USD 31,000. Although with renewed security systems in place, the governments of the world are ultra wary of the technology owing to the anonymity it provides as well as the limit of identification and verification of participants that can effectively facilitate a safe haven for the transaction of money between criminals, especially terrorists and money launderers.

A primary example of this was when in 2015 a German media company termed “Deutsche Welle” reported that a bitcoin wallet suspected to be belonging to ISIS received a staggering $23 Million in a single month.

From a more localized perspective, it was found that between 2017 and 2019, Indian investors have lost more than $500 Million in Cryptocurrency scams. Another such incident that happened more recently was in December when the Enforcement Directorate arrested a Gujarati Cryptocurrency trader, with links to an online Chinese betting scam case that is estimated to have a turnover of about Rs 1,100 Crore. With rampant misuse of the virtual currency, different countries have taken different stands on the regulation of the same with some countries like Japan and Germany taking a more lenient approach and other countries like China and Bolivia banning it completely. However, some countries like Russia and Colombia have also taken an alternative path or a lack thereof with no clear regulations in place regarding the trade of cryptocurrencies leaving the citizens of the respective nations hanging.

What is India’s Stand?

The years 2012-2017 saw the almost exponential rise in the value of the bitcoin with a number of private players and companies scrambling to get a take on the deal. Riding on this bandwagon, a number of cryptocurrency exchanges like Unocoin and Zebpay also set foot into the Indian market during this period. Owing to the increasing value of cryptocurrency around the time, it was evidently seen that there was an influx of users in the country. I

n light of the potential dangers to the Indian customer, the RBI issued a Press Release, back in 2013 cautioning the public against dealing in cryptocurrencies. However, the real influx of users was only after November 8th,2016 after the government authorized the demonetization of 500-Rupee and 1000-Rupee notes and the governments’ emphasis on online transactions and the public’s desire for an alternative coupled with the potential benefits cryptocurrency offered ultimately led a large portion of citizens into adopting bitcoin transactions with zeal. This in turn forced the RBI to issue another Press Release in 2017, which recapitulated the concerns that were raised earlier in 2013.

After repeated warnings, the RBI in 2018 issued a formal circular which prevented Commercial and Co-operative banks to not only deal in virtual currencies themselves but also directed them not to provide services to any entity involved with virtual currencies. This basically crippled the entire cryptocurrency sector in India since they relied on banks for the conversion of bitcoins into money and vice versa; which was the most essential part of their business. This forced people to sell their stocked-up assets and induced a huge load of bitcoins into the market essentially overloading it. This two-pronged attack from both sides provided to be too much for the industry to handle and faced severe losses.

All of this ultimately led to a writ petition titled “Internet and Mobile Association of India v. Reserve Bank of India” being filed at the Apex Court on May 2018 which challenged the circular.

Arguments Heard and Decision of the Court

The circular that was issued by the RBI was challenged on two central grounds-

1. The RBI’s power did not extend into the regulation of Cryptocurrencies

2. Disproportionate infringement of rights of the petitioners

1. The Regulatory Power of the RBI

The petitioners contended that cryptocurrencies were not equivalent to legal tender but rather they more closely resembled a good or commodity and were therefore not under the regulatory power of the RBI. Since virtual currencies failed to clear two of the four characteristics comprising medium of exchange, the unit of account, store of value, and whether it is socially accepted as money.

It still was constituted to be the hallmarks of money. However, due to not being widely accepted and not being recognized as a final discharge of debt, it for most of the part resorted to being invalid and was consequently rendered not a legal tender.

The Court, therefore, acknowledged that cryptocurrencies were indeed not legal tender but since it functioned as money “under certain circumstances”, it was under the jurisdiction of the RBI as the supreme regulator of the countries’ finance system to decide the course of action to be taken involving cryptocurrency in various cases.

2.The Proportionality of the Circular

This claim was based on the argument that the fundamental right to trade [Art. 19(1)] of the petitioners was violated by the actions of the RBI and had effectively put them out of business. The petitioners argued that the restrictions placed on the Right to trade, though subject to restrictions, had to be proportionate to the concerns and if still less intrusive measures existed, then only they should be adopted.

The court accepted the claims of the petitioners and held that it was disproportionate since firstly, none of the RBI’s regulated entities had ‘suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them’. Secondly, the Court held that there were alternative and less intrusive measures like better, reformed, or stringent regulations which the RBI could have taken rather than prohibition.

The final decision of the Court held that the circular was indeed unconstitutional and that financial regulatory bodies are not to make policy decisions such as these without relying upon concrete data to back it up.

The Way Forward

With the positive decision of the Supreme Court, it has penultimately re-opened a door that was thought to be closed in the chapter of cryptocurrency in India. However, the legality of cryptocurrency in India is still a questionable affair.

Although it would surely not be for long since a draft titled Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has been submitted to the Government which essentially bans holding, selling, and use of cryptocurrency in India. This uncertainty has left a number of the companies who dealt with virtual currencies, completely in the dark, making them unsure whether or not to restart operations in the country.

Unless a proper regulatory system can be instituted, something that has been touted to be an almost herculean task, the vast potential of what cryptocurrency could provide would remain untapped, along with profits estimated in the millions. But if the Government still does take up the challenge, it would result in unprecedented growth for the country as a whole; maybe even restructuring the position of India in the world leaderboards.


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