Hi, This is Qadir A.K, Crypto lover and Research Columnist.
“The only source of knowledge is experience and you need the experience to gain wisdom”
It relates to my series as I have gained and shared my experience of exploring the regions and today I have landed up to explore India!!!
Cryptocurrency Regulation in India 2020
Cryptocurrency entered India in 2013 and raised a big heat among people from all social classes who invested and traded with great enthusiasm. The authority at that time was not very particular about bringing any regulations rather issued warnings. Let us explore the relationship between India and cryptocurrency in this article.
Government’s Stand on Cryptocurrencies
The Indian government is not so friendly with cryptocurrencies from the start but wants to encourage blockchain-related technologies in various government services. The Reserve Bank of India (RBI) wanted to ban the activities related to cryptocurrencies. The decentralized nature of cryptos and the constant fluctuation in the trading volumes had bought the RBI’s radar over them.
What might have made RBI ban the cryptocurrency activities in India?
- The primary reason might be that no individual or agency or organization is responsible for its value. It is pure speculation.
- There is no control over the crypto transaction or activities as it is decentralized.
- There is no third party involvement like banks to regulate the transactions.
- Fear of losing the value of Fiat currency and banking system.
- Protect the interest of people so that they do not lose their money.
RBI had banned the banks to encourage the activities related to cryptocurrencies in 2018, the Supreme court lifted the Cryptocurrency Ban in March 2020. But still, RBI wants the supreme court to rethink on the judgement as they still do not have faith in them. So, what all happened before, how was the case fought in the supreme court? Let us find out!!
The Ups and Downs of Cryptocurrencies in India
Cryptocurrencies landed in India and started its functioning in 2012 on a small scale and became very familiar among the people within a year. A few businessmen started accepting Bitcoin as payments. For eg, a Pizzeria in Mumbai became the first restaurant to accept Bitcoin as payment in 2013.
Did You Know? About 2500 people exchange Bitcoin daily with the trading volume of nearly $20 billion a year.
As a result of May, exchanges also were established. Like,
- BTCXIndia was founded by Mupparaju Siva Kameswara Rao in May 2013
- UnoCoin was founded in July 2013 by Abhinandan Kaseti, Sathwik Vishwanath, Harish B V and Sunny Ray.
- In 2014, a global exchange platform Belfrics was launched based at Bangalore and Kuala Lumpur by Praveen Kumar.
- One of the most dominant exchanges in India was founded in 2015, Zebpay
- BuyUCoin was launched in June 2016 by Shivam Thakral, Devesh Agrawal and Atulya Bhatt. It was India’s first multi-cryptocurrency wallet.
- Many exchanges were founded in 2017 like Coindelta, CoinSwitch, Koinex, Coinome, Redipay and WazirX. WazirX was founded by Nishkal Shetty on 01 Dec 2017 which was the most trusted and cheapest exchange for trade.
On 27-12-2013, a newspaper reported the first-ever raid by the Enforcement Directorate of 2 Bitcoin trading firms in Ahmedabad. Online scams like the Silk Road website which was used to trade illegal goods like drugs led to serious thought on the authenticity of the cryptocurrencies by the RBI.
Regulatory Actions by Government
18-03-2020:– The government of India revealed to the lower house, ‘Lok Sabha’ about the inspection carried out by the Ministry of Corporate Affairs on specifically cryptocurrency companies, Zeb It Services Ltd and Unocoin Technologies Ltd.
05-03- 2020:- After a series of arguments between IMAI and RBI, the Supreme court delivered its verdict in favour of the IMAI uplifting ban imposed by RBI on cryptocurrency. The whole world of crypto hailed the judgment all over the globe.
29-01-2020:- The Indian Institute for Smart Government (NISG) has published a draft ‘National Strategy on Blockchain’. The document examines blockchain technology, its impact on society, challenges, the role of government and national strategy principles in addition to SWOT analysis.
The document also urges the Reserve Bank of India to issue regulated digital coins which would be decided soon.
You can go through the whole document HERE.
05-12-2019:– The Governor of the Reserve Bank of India, in a press meet clearly said that the RBI is completely against cryptocurrencies and would ascertain its functionality.
28-01-2020:- Final arguments from both sides were heard and concluded. The judgement was kept reserved.
05-08-2019:- The exchanges which are the members of the Internet and Mobile Association of India(IMAI) assembled for the final round of arguments in Supreme Court. During the course of the argument, RBI admitted that it did not have jurisdiction to speak on the legality of cryptocurrency and the RBI & Payment Settlement Act does not imply on Cryptocurrency. But argued that it has the power to take action if found cryptocurrency is a threat to the payment system. Yet the RBI was asked to provide a reply to the representation done by IMAI.
07-06-2019:- The Indian Government drafted a bill to deal with cryptocurrencies called,” Banning Cryptocurrencies and Regulation of Official Digital Currency Bill 2019”. It prohibited any activities dealing with cryptocurrencies and suggested equivalent punishment excluding the usage of cryptocurrency in experimenting, research or teaching. It clearly mentioned to declare and dispose of any cryptocurrency under possession before 90 days from the commencement of the act. A person would be sentenced to 10 years of imprisonment if found guilty in the involvement of cryptocurrency activities and the exchanges would be punished for 5 years of imprisonment. This bill, however, got deferred till now.
The detailed bill can be accessed HERE.
25-10-2018:- All four petitions, two petitions for the ban and other two challenging the ban assembled for hearing. The Government of India informed the committee which was set up to research crypto assets. Hence the court adjourned to enable the committee to come up with their recommendations.
14-10- 2018:- Despite the RBI crackdown, one of the exchanges Unocoin launched a Bitcoin Atm in Bangalore for its customers. The user could deposit and withdraw money using their bitcoins in their wallets. Unfortunately, the cybercrime police seized the ATM only a week after its launch.
23-07- 2018:- SEBI sent its comments on the circular on the ban to the Department of Economic affairs. SEBI mentioned its objection to being part of regulators of crypto assets and tokens.
In the meantime, exchanges requested the RBI in writing, to lift the ban as they were open for more scrutiny and ready to be regulated.
January 2019:-At the beginning of the year in January, the Income-tax department started issuing notices to all the investors. Banks suspended the withdrawal and deposit facilities of some exchanges. Some lenders disassociated with them completely.
17-05-2018:- Supreme court passed interim order allowing the petitioners to submit a representation to RBI.
Amid the circular from RBI, one of the popular exchanges Zebpay suspended its operation in India on 04 July 2018. https://twitter.com/zebpay/status/1014431241226113024
05-04-2018:- RBI released a statement that prevented all financial institutions and payment providers to stop dealing with virtual currency and stop services to all entities that deal with virtual currency. And finally, on 6th April 2018, releasing circular, RBI banned Cryptocurrency in India declaring it an illegal entity which will come into effect from 6th June 2018. The exchanges dealt with heavy losses as all the transactions were stopped and there was no bank access. All the people were forced to sell the currency before they lost access. Many exchanges closed down and many users too faced loss.
The exchanges were disappointed with the blanket ban, the exchanges decided to take this matter to the court filing its first petition on 01 May 2018 challenging the ban.
The supreme court clubbed up all the petitions against the ban and scheduled 11th May 2018 for hearing.
05-03-2018:- Central Board Of Direct Taxes (CBDT) submitted a draft to the Department of Economic Affairs to ban cryptocurrencies. Later on March 19th and 20th, Finance Ministers and Central Bank Governors of G-20 member countries met for the G-20 summit. Here all acknowledge the fact that crypto-assets have the potential to improve the efficiency of the financial system and economy. But at the same time did raise concerns over consumer & investor protection, market integrity, tax evasion, money laundering and terrorist financing.
01-02-2018:- During a speech in parliament, Honorable Finance Minister of India, Late Mr Arun Jaitely mentioned virtual currencies as illegal tenders and the government does not support it. But mentioned that the government will look at the utilization of blockchain technology. Post to which SBI took the initiative to bring the banks and the tech firms together. Big tech firms IBM, Microsoft, Skylark, KPMG, and 10 commercial banks joined hands.
Dec 2017:- RBI and Minister of Finance held a joint press meet and declared Cryptocurrency as ‘Ponzi Schemes’ and they are not currency or coins.
07-11-2017:- The Reserve Bank of India announced its plan to ban cryptocurrencies as a form of payment across the country but has shown support to the blockchain.
At a conference held in Mumbai, India on Nov. 6, 2017, RBI executive director, S Ganesh Kumar, has hinted that the digital currencies such as Bitcoin and Ethereum will not be allowed to be legally used across the country.
“Our current position on bitcoins is that we will not be using it for any payments and settlements…though the technology underlying cryptocurrencies will not end.”
08-11-2016:-The major boost for the crypto market-led when the Prime Minister of India, declared Rs 500 and Rs 1000 had been demonetized with immediate effect. These denominations were about to 86% of the country’s paper currency. The people with large cash holdings were looking out for more options to exchange the money as the time was limited. Investment in gold was also tracked by the government, and hence the people tried investing in Bitcoin.
This increased the bitcoin volume nearly double and the investors summed up nearly 1,30,000. In India, the price of a bitcoin reached $1020 but in the U.S. it remained $770.
15-06-2016:- The Financial Action Task Force, set up by RBI in 1994, came up with guidance for a risk-based approach to virtual currency. As mentioned in the guidelines, the possibility of fraud as cryptocurrency transactions can be carried out for anonymous accounts internationally. It also raised concern over virtual currency being operated by terrorist organizations to promote bitcoin donation.
Subhash Chandra Garg Committee
The Indian Government Constituted a Committee under the leadership of Finance Secretary, Subash Chandra Garg in 2017. The members of the committee were top officials of the
- Securities and Exchange Board of India(SEBI)
- Central Board of Excise and Customs (CBEC)
- Income Tax department
- Financial Intelligence Unit
The purpose of the committee was to study issues related to virtual currencies and propose the possible actions that could be taken.
The committee has held a series of meetings with the inter-ministerial meetings with representatives of the Ministry of Corporate Affairs, the Central Board of Direct Taxes and MeitY.
The committee briefed the FDSC council about the report on 31-10-2018.
The Committee Concerns
- The customers could be misled and subjected to fraud or Ponzi schemes due to the non-official nature of the virtual currency.
- Virtual currencies cannot be controlled by any authority. This lack of control could lead to excessive volatility which could affect the economy at a larger pace.
- The excessive use of energy resources which could result in environmental disaster as Bitcoin mining requires humongous processing power. This, in turn, requires crippling levels of the energy system which is difficult in a country with a huge population.
- RBI could lose control over the monetary policy by allowing private cryptocurrencies to function as it cannot keep the track of the transactions or any other activities.
- The decentralized nature of cryptocurrencies could lead to usage of them in illegal activities like money laundering or terror funding etc.
- In this technology, once the transactions are done, it cannot be reversed, which could be difficult sometimes.
The Committee Recommendations
The panel made a clear distinction between the private cryptocurrencies and the official one which the government could issue in the future. It also specifies the benefits of Digital Ledger Technology (DLT). The recommendations:-
The committee headed by Subash Chandra Garg has made the following recommendations:-
- Cryptocurrencies should be banned by enforcing the law and imposing fines & penalties for those who deal with cryptocurrencies.
- The committee has proposed a draft bill called ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’. According to which, the individuals who hold the currencies need to declare their holdings within 90 days of law enforcement. The individuals found guilty under the law will be fined with imprisonment and heavy penalties.
- The committee has recommended the government to be proactive and progressive towards the launch of official digital currency.
- The committee has also proposed setting up of a standing committee to revisit the addressed issues in the report as and when required.
- The committee has suggested implementing the distributed ledger technology or blockchain technology in banking sector and other financial services like loan-issuance tracking, collateral management, fraud detection and claims management in insurance and reconciliation systems in the securities market.
- The committee also identified potential use of blockchain technology in various areas such as payments systems, data identity management or KYC requirements.
The Indian Cryptocurrency – Lakshmi Coin
The Lakshmi Coin is a government- stated alternative to Indian Rupee. It has not yet been published nor released for mining as RBI is not sure with the concept of non-fiat currency. And also the Indian Parliament needs to amend the Indian Coinage Act to introduce Lakshmi Coin. However, the needed developers are also not available here in India.
The government constituted a committee to explore feasible methods and after-effects of introducing Lakshmi Coin in India. The Panel includes top officers from the Indian Securities and Exchange Board(SEBI), RBI, the CBEC, the Income Tax Department and the Financial Intelligence Unit.
The RBI would have full control over the coin and it will be similar to fiat currency and hence never have Bitcoin’s value. The Lakshmi Coin will be a Fiat Currency, unlike Bitcoin which is a Non-Fiat currency. The valuation would be at par with the Indian Rupee. The transfers would be supported on various government websites such as IRCTC and thus will be able to track everything in the blockchain. The coin will be intended to stop illegal activities but not for any profitable gains.
Is India Confused with Cryptocurrency Adoption?
The government has always had bifurcated opinions on cryptocurrencies and technology behind it. On one hand, it stated cryptocurrencies as ‘Ponzi Schemes’ and also banned the banks to deal with it, and on the other hand, it has expressed its desire to bring the possible government services on the blockchain technology starting with the banking industry.
For several years, it had a very passive approach to the crypto industry and allowed it to grow without any hindrance. It issued only warnings and guidelines and when the customer base grew and exchanges started to flourish it stopped their activity.
It would be very exciting to witness the further course of action, as India is a big market for cryptocurrencies which has not yet explored.
Cryptocurrency is now legal in India. Many developments are yet to be observed in the coming days. It would be a great deal when the government would initiate steps towards the regulation of the cryptocurrencies.
The new laws need to be framed and taxes need to be thought of as of now. We will hope for a good future for cryptocurrencies in India and expect a positive approach from the government.