[By Dewansh Raj]
The author is a student of National Law University, Odisha.
Introduction
The evolving landscape of cryptocurrency has left India’s legal landscape behind and places it at a critical juncture. Despite global advancements, India’s stance remains uncertain. With millions of Indians involved, regulatory clarities is crucial. The 2022 crypto crash and subsequent resurgence highlight the urgency for a structured approach. As debates on regulatory oversight intensify, the government’s delayed response raises concerns about investor confidence and the future of India’s crypto market.
Recent developments
In December last year Mr. Jayant Sinha, Chair of the standing committee on Finance stated that it would take another 18 months for any regulation relating to cryptocurrency. This could be a huge setback for the crypto market in India. With a new wave of cryptos, the investors and stakeholders would be forced to operate in the shadows and uncertainty.
The 2023 was a year when cryptocurrency slowly started to come back and in a one of a kind move, the Security and Exchange Commission (SEC) recently gave a go-ahead to the listing of spot bitcoin ETP, which is expected to bring a new wave of crypto products that saw a decline after the FTX crash. This step could mark a recurrence in cryptocurrency which was slowly fading away. The resurgence highlights the need for a mechanism to regulate cryptocurrency in India. The blog tries and analyse the current and future regulatory landscape of the crypto sphere.
The Crypto Comeback
The markets have recovered substantially following the 2022 implosion, and the market sentiments too reflect a positive outlook. The crash was so throbbing that it slashed nearly two-thirds of the value of all major cryptocurrencies by the time the FTX drama was over.
However, the growth showed that, even after the 2022 crash and the idea of cryptocurrency being questioned, the investors remain optimistic and confident. Its popularity in India is also evident from the fact that Indian investors contribute nearly 19 million investors, despite constant fear of its prohibition. Further, the fact that the majority of these investors lie in the age group of 18 to 35 reflects its popularity among the younger generation which could further be a point of concern, as these people usually don’t have a proper financial understanding and such a large on of these people investing in such a volatile investment can negatively impact the economy.
Who Should Regulate
Before delving into the current regulatory landscape and the future of these currencies, a fundamental question is, who should regulate cryptocurrency?
One would ordinarily believe that since cryptocurrencies are believed to be the substitute for currency, the Reserve Bank of India (RBI) should monitor them. The draft bill reiterated this idea and provides for the Central Board of the Reserve Bank of India to regulate cryptocurrencies.
But when it comes to cryptocurrencies which unlike traditional currencies don’t have government banking and can be much more volatile, could be trickier to handle. Hence, if cryptocurrencies continue to be legitimate then it might be best suited for the government to create a specialised agency that oversees the crypto market.
Another approach that the government can take is decentralising its regulation to various agencies. This approach finds support in the U.S. where several agencies oversee different aspects of cryptocurrency. While the reserve bank could handle regulations for exchange among consumers, SEBI and the investigating agencies could work towards its listing and preventing misuse for criminal activities.
Regulations till now
The world of cryptocurrency came to the spotlight during COVID-19 when the value of cryptocurrency grew leaps and bounds, every new currency that promised to transform the world was welcomed with open arms. But the response to these currencies was never unanimous.
India’s position on cryptocurrency has been ambiguous and lacks clarity, which creates uncertainty among the public and stakeholders. the government although doesn’t endorse the idea of an unregulated currency but on the flip side embraces blockchain technology. The Indian government even plans to introduce its very own government-backed cryptocurrency.
The Reserve Bank of India from inception has been thwarting virtual currencies from being recognised as legal tender. The Reserve Bank of India also tried to constantly dissuade investors from investing in cryptocurrencies. The breaking point came when the monetary authority in a notification dated dated 6th April 2018 directed all financial institutions to stop providing any services concerning cryptocurrencies. This move acted as an indirect ban on cryptocurrencies and was justified by labelling cryptocurrencies as dangerous for the economy.
The Supreme Court later lifted the ban on the grounds that the move infringed the right to trade under Article 19(1)(g). The court in its judgement stated that RBI failed to consider other less intrusive measures, thereby pointing towards the abruptness and severity of the step. Even after the upliftment of the ban, it seems that RBI hasn’t changed its stance.
Initially, the government too hinted towards a blanket ban, with a report suggesting a complete ban on virtual currency being discussed in an Inter-ministerial committee in 2019. Nevertheless, this step never saw the daylight and with the Supreme Court judgement, the murmur around also started to die down.
When a bill titled Cryptocurrency and Regulation of Official Digital Currency Bill 2021 was listed for the 2021 winter session, the buzz around cryptocurrency was reignited but the bill too was never introduced and has been deferred indefinitely citing the complexities involved.
The government later announced in the Union Budget of 2022 a 30% tax on all transactions involving virtual currency. The measure could serve as a temporary means to dissuade the citizens from engaging in cryptocurrency and in process benefit the exchequer. Since the budget, the government remained silent. The silence has left the crypto community on the edge, eagerly waiting to see what the government decides.
Why is it important to clear the doubt over cryptocurrencies
The need to regulate cryptocurrency is one whose need has been felt from the very beginning. The excuse is that a very small number of people are invested and the complexities involved don’t hold good. Even after the FTX crash, a sizable population continues to trust cryptocurrencies, and nearly half of them are first-time crypto investors.
These people with a lack of market understanding could be prone to frauds and even cyber-attacks and hence it becomes the duty of the government to protect their rights. Another important stakeholder that the government needs to consider is that of the businesses dealing with these currencies. These businesses that provided a platform for trading cryptocurrency were mostly startups and the lack of regulation could affect India’s ease of doing business score. The clarity in regulations will help the startups and their investors to make more informed decision.
What’s up for the future
Although the future of cryptocurrency remains to be seen considering the steps that were taken by the Reserve Bank of India and the Indian government in the past few years the ban seems long overdue and the predictable step. The step of banning the currency will bring a radical change in the Indian investing ecosystem and will affect a large number of investors.
It is also essential to mention here that the cryptocurrency bill doesn’t provide any sought of provision for the investors to liquidate their holdings and the same could be a point of contention if the bill is introduced in the future. The bill apart from banning all types of cryptocurrencies also makes it an offence with imprisonment of up to 10 years.
Another important question that arises is whether the government’s decision to ban cryptocurrency would face a similar legal challenge and faith as that of RBI’s ban. But the same is unlikely to happen as the reasoning behind the same was the lack of evidence to show actual loss to the banking sector, however quantifiable data is available in the form of the crypto crash in 2022 affecting nearly 3 lakh Indians with some even losing more than 50% of their investment. The government can also take the stance of general good prevailing over the personal good with the complete ban protecting the economy from any type of negative effects that crypto might have in the future.
Conclusion and Analysis
The future of the crypto market looks to be in its final stage in India, but the delay by the government in bringing up the regulation has extended the life of these currencies. However, it remains to be seen when the government finally decides to take a definite step. The government if and when decides the faith of cryptocurrencies, needs to take into consideration the existing investors and their investments.
Such a far reaching step by the government must be taken after due consultation. This was a key point highlighted by Mr. Sinha which is prolonging the time taken for a regulation. Although the government is correct in taking its due time, the government should establish a temporary self regulating body involving all the businesses involved in cryptocurrency to ensure that the rights of citizens are protected till the time concrete regulation is introduced.
If the government decides to impose a ban then the government can create a temporary body that might act as an exchange for the existing investors and help them liquidate their investments. This would be beneficial for the public as they will get a chance to get a chance to liquidate their investments, and at the same time, the government might be able to generate good revenue from the tax levied on these transactions.
Whatever step is taken by the government should be taken after consulting all the stakeholders and considering the current state of the markets. Any step taken haphazardly would negatively impact the investors’ confidence, especially when the government is hoping to introduce its own Central Bank Digital currency.