Cryptocurrency Regulations in India

In the case of virtual currencies, India has not enacted any special legislation. However, with its increasing popularity, crypto has aligned with various government statutes like the Companies Act, 2013, necessitating the reporting of virtual digital assets (VDAs). It has also touched the broadened scope of the Prevention of Money Laundering Act, 2002, by including transactions related to these VDAs and different crypto exchanges. The income tax laws in India have also aligned themselves with the taxation of VDAs , thereby recognising the financial implications of the evolving virtual currency market. 

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With time, India has recognised cryptocurrencies on the legal front. The existing income tax laws and anti money laundering laws have increased their diameter to include the virtual currencies too. In this report by Coinpedia, we will cover the legal status of cryptocurrencies in India, the associated laws and the existing regulations.

Executive Summary

After the mere introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill, there have been talks of establishing a legal framework for the crypto operations in India. The bill holds a lot of necessary regulations related to cryptocurrencies. No wonder, cryptocurrencies have had a complex legal journey in India. 

The report contains the basics of the legal journey of crypto from “not a legal tender” to “highest adoption level in the world”. In 2023 itself, many remarkable events, like G-20, took place to revolutionize the way people see and adapt to cryptocurrencies in India and around the world. Let’s dive in to see how the recent build-up has impacted the entire crypto scenario in India!

Legal Status of Cryptocurrencies in India

There is no central body operating in India to regulate cryptocurrency. However, the legality of these currencies in India intensified as Nirmala Sitharaman (the finance minister) suggested taxing the digital assets. Let us step-by-step uncover the details about cryptocurrency and its regulatory status in India:

• Not a legal tender

Virtual currencies like Bitcoin, etc, are not recognized as legal tender in India. RBI has already clarified that cryptocurrencies do not have any official backing and are not regulated by any government body in India.

• RBI Circular (2018)

In 2018, the Reserve Bank of India regulated banks from providing services to individuals or businesses dealing in cryptocurrencies. This circular led to the disruption in the cryptosphere in India since it made it difficult for the people to convert their crypto into fiat currencies.

• Supreme Court on Cryptocurrency 

In 2020, the Supreme Court of India argued on the RBI circular stating it as disproportionate and unconstitutional. The landmark judgment gave some relief to the crypto industry and paved the way for the resumption of crypto trading and investments.

• No specific regulations for cryptocurrency

Cryptocurrencies are not illegal in India, however, there is no specific legislation or regulatory mechanism governing the usage of VDAs. thus creating challenges and uncertainty for businesses and investors.

• Cryptocurrency Regulation Bill Proposal:

In 2021, the Indian government introduced the Cryptocurrency Regulation Bill which aimed to ban all private cryptocurrencies and provide a framework for the creation of a CBDC issued by the RBI. The bill has not been passed yet and is still under discussion.

• Indian states on Cryptocurrency:

States in India like Telangana and Karnataka have explored blockchain technology and expressed interest in the same. 

RBI and Cryptocurrencies

The central bank, Reserve Bank of India, has taken some restrictive measures in terms of cryptocurrencies. 

• Circular of 2018

In 2018, RBI issued a circular that restricted banks from providing services to individuals or businesses dealing with cryptocurrencies. It encompassed concerns over investor protection, market integrity, and money laundering. Thus, it made it challenging to convert cryptocurrencies to fiat currency.

However, the circular was overturned by the Supreme Court in 2020. The Supreme Court mentioned that RBI’s decision to ban banks from providing services to cryptocurrency related businesses was lacking a reasonable basis. The judgment gave a boost to the crypto industry in India.

• Warning statements

The RBI has constantly expressed concerns over the risks linked to these virtual currencies. It has issued several public notices cautioning the public about the potential pitfalls of investing in cryptocurrencies. 

• CDBC in picture

RBI has always shown an interest in exploring the development and issuance of Central Bank Digital Currencies. It has conducted pilots and studies to determine the potential benefits of introducing a digital rupee. 

However, the stance of RBI on the use of blockchain technologies has been on a positive side only! In January 2024, RBI governor Shaktikanta Das, called the cryptocurrency “party” as a threat to the emerging market economies. Thus, maintaining the years old belief of RBI that cryptocurrencies pose a palpable danger to monetary stability and could be the reason behind the next major global financial crisis.

The Cryptocurrency and Regulation of Official Digital Currency Bill,2021

The bill was a proposed legislation introduced by the Indian government to regulate cryptocurrencies in India. The key aspects of the bill are:

• It proposes a ban on all private cryptocurrencies functioning in India. 
• It seeks to establish a framework for the issuance of an official digital currency to be known as Digital Rupee. It would be a CBDC regulated by RBI.
• It also aims to set up a regulatory body called the Digital Currency Board of India (DCBI) which would be responsible for overseeing the digital assets ecosystem. 
• It imposes penalties for offenses like holding, mining , buying or trading any private cryptocurrency.

A Timeline

• In Feb 2018, the finance minister, Arun Jaitley, said that the government did not consider cryptocurrencies as legal tender and would eliminate the use of crypto in financial illegitimate activities. He spoke in favour of blockchain technology.
• In April 2018, RBI issued a notification restricting banks to enable fund transfer for buying digital currencies. 
• In March 2020, a three-judge bench of the Supreme Court quashed RBI’s circular that banned banks from dealing with cryptocurrencies.
• In Feb 2021, a high-level committee under the Chairmanship of Secretary (Economic Affairs) suggested that all the private cryptocurrencies shall be prohibited in India.
• In November 2021, government had no proposal to recognise Bitcoin as a currency. 
• In 2021, India made headlines when it took a strong stance against private cryptocurrencies while laying the groundwork to launch its own Central Bank Digital Currency.
• In 2022, during the budget speech, Finance minister Nirmala Sitharaman introduced a tax of 30% on crypto profits and 1% tax has to be deducted at the source (TDS) on all the digital transactions. It provoked the movement towards DEXs and off-shore trading.
• In Jan 2023, RBI Governor said Bitcoin should be completely banned in India and shall be regarded as “gambling”.
• In 2023, following some major industry turmoil, India saw a shift to a global leadership role. It presided over the G20 summit, where finance ministers agreed on a regulator roadmap for the sector that included sticking to the international standards set by the Financial Action Task Force (FATF). 
• India welcomed a paper from the International Monetary Fund (IMF) and Financial Stability Board (FSB) on approaching crypto regulations!
• In October 2023, Finance ministers of G20 nations adopted the synthesis paper released by IMF-FSB the previous month.

India has taken a rather slow approach towards crypto adoption and regulation. It appears that India is set to explore 2024 as a year of some big crypto decisions. It is surely evaluating all the approaches before making any definitive legislation! In a recent interview, Jayant Sinha, chair of the Parliamentary Standing Committee, suggested that India was unlikely to accept a specialized crypto regulation bill before mid-2025.  

Final Thoughts

In the fast paced digital currency world, India chose to have slower strides. We expect some definite legal framework to operate in the country by 2025 as the region has shown the highest crypto adoption rate on grassroot levels in 2023. Thus, making it a fertile land for sowing the profits by cryptocurrencies.