The utility of crypto-currency had always been a juncture of dispute due to its mysterious and unsettled legal position. But, the recent judgment of Supreme Court has opened up new avenues for crypto-currencies in India and thus, in recent times, crypto-currencies have been reaping a lot of attention and are gradually becoming the talk of the town. There are several people throughout the nation who are buying and selling crypto-currencies or straightforwardly investing in them. At such a time a question may arise, that what this hype is all about. So this article will help you to discern the concept of Crypto-currency and block chain; the historic judgment of the SC; the impact of the SC’s ruling; and the current and prospected legal position of virtual currencies in India.
Key Words: Crypto-currencies, Block chain, Bit coin, Altcoins, Cryptograph
In an unpretentious sense, crypto-currency means a virtual or digital currency. It’s a digital medium of exchange that can be used to purchase and sell goods and services through a decentralized online version of cash. It uses the system of cryptography (encryption) to control, secure, and verify the transactions. According to the Financial Action Task Force (FATF), crypto-currency is a virtual currency having digital representation on a value that can be virtually traded and can function as a mode of exchange. One of the defining features of crypto-currency is that its value is not fixed. It can be purchased at a lower cost and be sold back at a higher value, which makes it a veracious asset for investment. However, the government is not favoring crypto-currency due to several concerns, such as its use on the dark web, it being a channel for black money, terrorism funding, etc. It is due to the anonymity, security, and affordability of crypto-currency, that criminals are increasingly using these virtual currencies. In spite of these odds, crypto-currencies have acquired esteem throughout the nation and are slowly gathering attention.
Block chain, an open and publicly distributed ledger, is a concept on which crypto-currencies function. It’s a public ledger on which all the crypto-currency transactions are recorded. Comparing it to the normal ledger book, each page in a ledger is a block consisting of multiple transactions, new blocks keep adding to the ledger. And a collection of these blocks is called a blockchain. Like a normal ledger, blocks are stored and arranged in chronological order. It is a publicly open decentralized ledger, which is accessible to all and immune from government intervention. It must be noted that block chain has a number of functions and one such function is the recording of the crypto-currencies transactions.
History of Crypto-currency
Theoretically, crypto-currencies have been with us for over a decade now, but in actuality, attempts have been made to decentralize it for a long period of time, even before the first digital alternative existed. There were many people, like Nick Szabo who were trying to create a cryptographically encrypted and decentralized currency since the late 90s. Still, that never really took place.
The biggest aspect that led to a boost in the use of crypto-currency was the Banking Crises of 2008, after which there was a need for cheap and safe methods of payment. And by late 2010 there were thousands of Crypto-currencies created called altcoins. And now many people in the world view crypto-currency as the most popular and legitimate payment method. Further, the ongoing COVID-19 crisis has proven to be the biggest opportunity for the crypto-currency market. There are some investors in India who have found bitcoin an attractive means to hedge the risk and make profits. Moreover, market experts say that they have remained untouched by the slowdown due to COVID-19.
Central Bank’s Circulars Regarding Crypto-currencies
The Reserve bank of India has never been in favor of crypto-currencies. It has consistently been issuing notices or circulars against the dealing and selling of virtual currencies in the country. The central bank had cautioned the users and the traders of crypto-currencies repeatedly through its circulars since 2013. It had previously issued three notices (Dated 24 Dec 2013; 1 Feb 2017; and 5 Dec 2017) regarding virtual currency in relation to the potential operational, financial, legal, and security-related risks to the people dealing and investing in crypto-currencies.
On 6th April 2018, the Reserve Bank of India released a circular which barred RBI regulated financial institutions from trading in crypto-currencies and from providing any services to a person or entity dealing in virtual currencies. However, this circular did not bar the holding or exchanging of crypto-currency. Yet, it had a very effective ban on trade and investment in virtual currency.
This notice was issued by the central bank in furtherance of the powers conferred to it by Section 35A and Section 56 of Banking Regulation Act, 1949, Section 45JA, 45L of the Reserve Bank of India Act, 1934.
Analyzing the Historic Judgment of Supreme Court
The impugned notice of the RBI was challenged before the Supreme Court by two writ petitions. The first petition was filed by a group of eleven crypto-currency exchanges (in the case of Rajdeep Singh & Ors v. Union of India). And the second petition was filed by an organization named IAMAI which providing OTT content (Internet and Mobile Association of India). This judgment, which extended to 180 pages, was authored by Justice V. Ramasubramanian.
- Whether the crypto-currencies falls in the scope of a currency: The SC, in this case, settled a very long dispute relating to the nature of crypto-currency. The court referred to various international jurisdictions and analyzed the definition of virtual currency and held that crypto-currencies can’t be considered as a legal tender of exchange. But yet, it mirrors all the characteristics of a currency.
- Whether RBI has the power to prohibit the use of crypto-currencies: The court on this issue stated that the RBI Act of 1934 empowers the central bank to regulate crypto-currencies as they have the capacity of being treated as a currency. Further, under Section 22 of the RBI Act, the central bank has the power to prohibit or regulate any activity which has a direct impact on the economic system of the country. And thus, accordingly, RBI has a wide power to issue such directions.
- Whether the impugned notice is violative to the fundamental rights: The court on this issue held that RBI had not done any adequate research before implementing such cohesive restrictions and thus such a policy is arbitrary and in violation of Article 14 of the Constitution. The court referred to the case of State of Maharashtra vs. Indian Hotels and Restaurants Association where it was held that the government entity must have some empirical data about the harm that is going to be suffered. Further, the court also held that the impugned notice is violating the fundamental rights to carry on trade and business guaranteed under Article 19(1)(g) of the Constitution.
The Court observed that RBI through these notices does not impose a complete ban on all the trade in virtual currencies, but only administered the banks that they are regulated by RBI to not furnish services to any insincere legal entity in dealing with VCs. Thus it can be deduced from the above that RBI is not prohibiting the use of virtual currencies stored with them in their digital wallets. Though these circulars had an immobilizing effect on the trade of virtual currencies, it could not be inferred as a complete ban. SC further mentioned that RBI being a regulatory agency has the power to issue such notices. These Circulars cannot be held wrong for embracing different approaches. RBI was motivated by the need of public welfare, and thus its power over these legal entities is well within its jurisdiction.
However, having answered the first two issues in an affirmative manner, SC dejected the third issue. By applying the Doctrine of Proportionality and observed that prohibiting storing of VCs will dearly affect them as they will not be able to survive long without access to the banking channels. And thus affecting the fundamental rights of the petitioners guaranteed under Article 19(1)(g). These restrictions need to pass the test of reasonableness to be valid. And therefore the court welcomed the concept of crypto-currency and the system of block-chain and hence the impugned notification of RBI was quashed.
And thus, as it stands today, buying, selling or simply trading in crypto-currency is legal in India.However it is pertinent to note here that, these virtual currencies are still not completely free from RBI’s control. This judgment just gives a temporary relief to the crypto-currency traders as the government is not in favor of these virtual currencies and therefore the VCs have a very dark future in India. The prospective legal position of VCs is discussed in the later section of this blog.
Analyzing the Impact of This Judgment on the Crypto-currency Exchanges
This historic judgment of the SC has given a short term relief to the crypto-currency exchanges in India. After this judgment, buying, selling, and trading in crypto-currencies is not illegal in India. However, it must be noted that this judgment will not bar RBI from issuing such notifications in the near future. The court had clearly stated that RBI has all the power to prohibit the use of any activity which has a negative impact on the financial system of the nation. And thus, the bank and other financial institutions will be cautioned against dealing with virtual currencies due to the unfavorable attitude of RBI and the government towards crypto-currency.
Prospected Legal Position of Crypto-currency
The recent judgment of SC has definitely given some relief to the crypto-currency traders. But it must be noted that this is only a temporary relief, because the government is not favoring these virtual currencies which are immune from its interventions. Let’s understand how the government is slowly moving towards a complete ban on these virtual currencies.
There are basically two bills relating to virtual currencies, proposed by the government (not passed) namely Regulation of Official Digital Currency Bill, 2019, and Crypto Token Bill, 2018.
- The Draft Banning of Crypto-currency and Regulation of Official Digital Currency Bill, 2019, on one hand, imposes criminal liability on the purchaser, issues, and disposer of crypto-currency. And on the other hand, it also introduces India’s own Digital Currency named Digital Rupee.
- The Crypto Token Bill, 2018 also on one hand bars a person from dealing in crypto token and on the other hand it allows the sale and purchase of virtual currencies through regulated brokers.
On analyzing both of these proposed bills, one can easily conclude that the intention of the legislature is ambiguous in the matter of crypto-currency. But yet, these bills clarify the intention of the government of banning all the activities which are immune from its control. And thus, in view of the author, crypto-currencies have a dark future in India.
As per the reports of the Economics Time (that seeks to set up a legal framework for banning crypto-currency in India), the government of India is planning to put a long-lasting ban on crypto-currency. The Finance Ministry on 12th June, 2020 has introduced a cabinet note for inter-ministerial consultation. If this note is accepted then a new bill may be introduced in the parliament that may put a complete ban on trading of crypto-currencies in India.
Author: Rohit Jain,
ALL INDIA LEGAL FORUM