The global economy is inexorably transforming into digital environment. From investment, all is going paper based, to transfer of money. Cryptocurrency is the current and most innovative contribution to the world of digital payment. Bitcoin, a well-recognized cryptocurrency, has been gaining popularity across the globe. Bitcoin is a world’s first decentralized digital currency that can be purchase, vend and exchange, with no role of an intermediary or middlemen such as bank. All the electronic transaction, prior to the evaluation of bitcoin in 2008, involved the role of an intermediary. Satoshi Nakamoto, Bitcoin’s founder, initially recognized the need for an electronic system of payment based on cryptographic proof rather than trust.
The introduction of Bitcoin is quite revolutionary since it has eliminated the issue of double spending without involving any central authority[i]. When it comes to digital currency, there is a high possibility that it can be spent twice. The holder can easily produce a copy of digital coin and, consign it to some other person while maintaining the original one. Every transaction pertaining to the Bitcoin is recorded in a publicly shared ledger which is known as blockchain. To ensure that the same Bitcoins haven’t been used before, new transactions are compared to the blockchain[ii]. Cryptocurrencies, to authenticate the transaction and avert double-spending problem, use public-key cryptography. Public-key cryptography includes a public key as well as private key. The cryptocurrency account’s private key is primarily used to authorize the transaction. A private key is like a code or password that permits you to spend a cryptocurrency coin. Thus, it should be kept private. The public key, on the other hand, is used to validate a transaction after it has been submitted. It can be publicly disseminated in the form of an address to procure cryptocurrency. Cryptography is a means of transmitting confidential communication between two users using a mathematical technique to encrypt the message. Without encryption, the entire concept of cryptocurrencies is obsolete, because then unauthorized users would be able to decipher the transaction or data.
Cryptocurrency has the potential to reinvigorate both the Indian and global economies. Owing to the decentralized mode of transaction, sectors like Agriculture, Banking, Energy, etc. have been radically affected. The bitcoin industry has provided India with a significant possibility for economic development. Missing out on this new technological revolution would be a costly mistake for India. The potential economic rewards of the bitcoin industry are enormous, and other countries are already benefitting. In Asia, Thailand and the Philippines have floated the idea of drafting legislative rules to help their local cryptocurrency markets flourish, as well as developing standards to improve investor confidence and obtaining licenses for a number of crypto exchanges.
COVID-19 has had a detrimental impact on the Indian economy and the global market at large. Regardless, crypto has spawned job opportunities in India and overseas in a spectrum of areas and approximately 300 start-ups have resulted in the creation of thousands of jobs as well as hundreds of millions of dollars in revenue and taxes. India will inexorably draw tech talent as a result of the continuous progress. Thus, Cryptocurrency technology offers the potential to provide a huge boost to our economy’s strength. It has the ability to lay new economic and social foundations for us. However, while blockchain will have a massive influence, it will take years for it to permeate existing economic and social systems.
Legal Position of cryptocurrencies in India
The landmark case of Internet and Mobile Association of India v. Reserve Bank of India [(2020) 10 SCC 274] silhouettes India’s most recent legal position on cryptocurrency.
The Reserve Bank of India (RBI), on April 4, 2018, released a statement on “Developmental and Regulatory Policies” instructing the entities governed by RBI (1) not to engage in virtual currencies or impart any service to business organization or Individual that specifically trade with virtual currencies and (2) to end the relationship with such entities or individual that trade with virtual currencies. Further, the RBI released a Circular in exercise of authority granted by Section 35-A read in conjunction with Section 36(1)(a) and Section 56 of Banking Regulation Act, 1949 (BR Act 1949) ,and Section 45-JA and 45L of Reserve Bank of India Act, 1934, (RBI Act 1934) and Section 10(2) read with Section 18 of Payment and Settlement System Act, 2007(PSS Act 2007), guiding the entities which are governed by RBI not to engage in virtual currencies or offer any service to business organization or individual that specifically trade with virtual currencies and (2) to end the relationship with such entities or Individual that trade with virtual currencies.
Reasoning for contesting the circular issued by RBI
- Virtual currencies cannot be equated to legal tender and thus it does not fall within the purview of BR Act 1949 or RBI Act 1934.
- Virtual currencies are not subject to credit system of the country.
- The authority to modulate the financial system under section 45-JA and credit system of the country under Section 45-L of the RBI Act 1934 are not flexible so as to involve goods which specifically do not within the ambit of financial and credit system of the country.
- All the stakeholders like Department of Economics Affairs of India’s government, Central Board of Direct Taxes, etc. have rationally perceived the positive factors of cryptocurrencies as well as distributed ledger technology and thus preferred a regulatory framework. The RBI, however, has taken an irrational stance.
- The RBI has infringed the fundamental right to practice any profession or to carry on any occupation trade or business envisaged under Article 19(1)(g) of the Indian Constitution.
- It’s a true conundrum that blockchain technology is suited for RBI but not cryptocurrency.
RBI’s Statement to the Disputed Grounds
- Virtual currencies do not qualify the specifications to be recognized as a currency such as means of exchange, unit of value, etc.
- Virtual currency, to manage any consumer disputes effectively, do not have well-structured framework.
- Owing to pseudo-anonymity, virtual currencies can be used for an illegitimate purpose.
- No person has an unrestricted fundamental right to conduct any business/trade on the system of RBI-governed entities.
- The disputed circular has been released in exercise of power under BR Act 1949, RBI Act 1934 and PSS Act 2007.
- The expanding use of digital currencies could undermine financial viability of Indian currency as well as credit system.
Issue before the Court
Whether the RBI’s statement on “Developmental and Regulatory Policies” as well as the circular are liable to be overturned?
Verdict of the Court
Once it has been established that some organizations/institutions have acknowledged digital currencies as an authentic form of payment regarding the purchase of goods/commodities and services then there is no way to circumvent the conclusion that consumers as well as dealers are engaged in an activity that comes within the jurisdiction of RBI. If an intangible property, under specific conditions, can function as a money, then RBI can certainly regulate it. The statutory duty, as a Central Bank, of RBI would necessarily require them to fix any issues that are deemed as posing a threat to country’s currency, payment, credit and financial system.
Section 45-JA and 45-L of RBI Act as well as Section 35-A of BR Act permits the RBI to issue appropriate directives if it is convinced that certain parameters prevail. The RBI, without initiating any drastic action, has been debating the matter for nearly a period of five years. As a result, RBI can scarcely be accused of not deploying its intellect. There is no doubt that RBI has the authority to release certain directives to its governed entities in the welfare of consumers or banking firms or general public. If RBI’s exercise of authority in order to realize the either of these goals inadvertently produces collateral harm to one of the many activities that are not covered by the legislative authority then the latter cannot be blamed on the colorable exercise of power or malice in law. The contested circular issued by RBI does not fit into either of these classes.
The Court, while determining the legality of a legislation limiting the conduct of a business or profession, must cogitate about (a) the immediate effect on constitutional rights, (b) the greater general interest sought to be protected in context of the goal sought to be realized, (c) the requirement of constraining individual’s autonomy and (d) intrinsic deleterious aspect of the prohibited act and (e) the potential of realizing the objective by enforcing a less severe restriction. The buying and selling of cryptocurrencies via virtual currencies swaps may be a hobby or as a business. People who purchase and offer cryptocurrencies, as a hobby, are not eligible to base their argument under Article 19(1)(g) of the India’s Constitution since it includes business /trade, vocation and profession only. Those engaging in the trade or business of selling and buying digital currencies, as well as those who operate virtual currency swaps, fall under the second and third categories of citizens. The second category cannot argue that the disputed RBI’s decision has resulted in the closure of their business. It is only the third category of citizen that have been adversely affected by the disputed RBI’s circular. The guidelines issued by the RBI must meet the proportionality test because the circular has eliminated the cryptocurrencies from the country’s industrial map and therefore impinged on Article 19(1)(g) of the India’s constitution.
Further, over the previous five years or more, the RBI has found no evidence that virtual currency exchange activity has had a devastating effect on the way regulated enterprises operate. The RBI has not stated that either of the entities regulated by it has endured any detrimental effect, explicitly or implicitly as a result of the virtual currency exchanges’ engagement with any of them. Accordingly, the Supreme Court has ruled that the RBI’s circular is likely to be overturned.
This landmark judgment is certainly a boon to crypto-based organizations. However, it is only a temporary respite. The Indian government has formerly attempted to enact the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which aims to outlaw cryptocurrency mining, retaining, selling, trading, issue, disposal, and usage across the country. Bitcoin is a fascinating breakthrough that has the proficiency to catalyzeconstructive and potentially transformative advances in commerce as well as transactions[iii].The application of public-key cryptography as well as peer-to-peer connectivity has eliminated the hassle of double-spending that had hitherto rendered decentralized virtual currencies impractical. It’s worth noting that cryptocurrencies, in India, are not unlawful but they are not adequately regulated. For the time being, there is no regulatory framework in place to control its operation. This suggests that a person can buy, vend and retain Bitcoin in the form of investment but there is no regulatory authority to oversee it and thus leaving a window for scams. For investors, this certainly raises the stakes to a great extent. It is a critical requirement of the hour that India should strive to take advantage of this technology’s ground-breaking capability in order to strengthen its position as a global IT giant. Accordingly, the Government, either as an asset or a means of exchange, should regulate the deployment of cryptocurrencies in India.
[i] Jerry Brito and Andria Castillo, BITCOIN: A Primer for Policymaker, 2nd ed. 2016, p.6
[iii] See Supra Note 2 at 73