- Date : 10/09/2021
- Read: 9 mins
The Supreme Court may have set aside an RBI order banning virtual currencies in the country, it also acknowledged that cryptos could easily slip out of all regulatory control
A cryptocurrency, such as bitcoin, is a medium of exchange, just as a fiat currency, only digital. As of now, it is not a replacement for the latter. Cryptos involve the use of encryption techniques to control the creation of monetary units and monitor fund transfers.
Today, the craze for cryptocurrency has spread from the metros and bigger cities to tier-2 and tier-3 towns, with the number of Indians believed to have dabbled in cryptos ranging from over 70 lakh to 1.5 crore, and having invested more than $1 billion in various digital currencies cryptos.
Current status of cryptocurrencies in India
India is yet to decide whether cryptocurrency is legal or not, and is set to take a final decision as a proposed legislation awaits approval from the Cabinet.
The government faces the challenge of creating the necessary infrastructure in the fintech space to enable cryptos to flourish without diluting safety issues. However, an inter-ministerial panel set up in 2017 recommended banning cryptos, calling for legislative changes to make cryptocurrencies “expressly illegal and punishable”.
The Reserve Bank of India (RBI) is also against them, and has made its misgivings known on numerous occasions, making a formal move in April 2018 when it directed banks not to extend banking services to customers dealing in cryptocurrencies.
However, in March 2020, the Supreme Court set aside the RBI order, saying it could not impose “disproportionate restrictions” as there was no legislative ban on cryptocurrencies. RBI has since then rolled back its directive.
A government decision can be expected once the Cabinet takes a call on the proposed legislation.
So, what is the reason for these misgivings about cryptocurrencies? To understand that, we need to go back to the beginning – to the birth of cryptocurrencies, and their entry into India.
History of cryptocurrency in India
At the height of the global meltdown following the subprime crisis in the US in 2008, an unidentified person or a group of unidentified people, using the pseudonym ‘Satoshi Nakamoto’, released a paper that explained the concept of Bitcoin.
The first commercial transaction in a cryptocurrency took place on 22 May 2010, involving one Laszlo Hanyecz paying 10,000 bitcoins for two pizzas at a Papa John’s outlet in Florida.
Bitcoin was followed by other cryptocurrencies such as Litecoin, Namecoin, and Swiftcoin emerging in 2011. During this time, rumours also emerged of bitcoin being used in the illegal trade in guns and drugs.
India got its first cryptocurrency exchange, Unocoin, in 2013, which enabled citizens to buy and sell Bitcoin. However, the RBI issued an advisory against the use of cryptocurrencies, saying these were not backed by any assets.
Despite the RBI warning, several new exchanges came up in India over 2014-2016, a major boost coming from demonetisation. Following this, in 2017, the finance ministry, RBI, and the Securities and Exchange Board of India (SEBI) joined hands to institute a committee to look into regulatory aspects of cryptocurrencies.
The finance ministry also issued a statement, comparing cryptos to ponzi schemes. Two PILs were also filed against their use in the Supreme Court. They recommended legislative changes that would make the possession, trade, and use of cryptocurrencies “expressly illegal and punishable”.
The first official action was taken in April 2018, when the RBI issued a circular banning all financial entities (banks, NBFCs etc.) from dealing with any entity dealing in crypto, effectively banning these in India.
In response, several cryptocurrency exchanges approached the Supreme Court a month later, moving to petition to get the RBI ban overturned. October 2018 saw Nischal Shetty, CEO of WazirX, India’s largest cryptocurrency exchange, start a daily campaign on twitter, #IndiaWantsCrypto.
As the hearing dragged on in the Supreme Court, the committee drawn from officials of the finance ministry, RBI, and SEBI submitted its report in July 2019, recommending a ban on “private cryptocurrencies” in India.
But in March 2020, the luck turned for the better for those lobbying for cryptocurrencies, when the Supreme Court overturned the RBI directive to banks to deny services to customers who dealt in cryptos.
In view of the Supreme Court order, the RBI in May 2021 asked in banks to ignore its 2018 directive.
What helped cryptocurrencies become popular?
One may wonder what made cryptos so popular, given the amount of scepticism in official circles regarding it – not only in India but elsewhere too. What’s more, they can be highly volatile. As a World Gold Council report shows, the annual volatility of bitcoin is multiple times higher than that of equities and bonds, and is less stable than gold.
Yet the popularity of crypto does not seem to be diminished. There are seven main reasons why this is so.
- Profit potential: A lot of people who invested in cryptocurrencies when they were cheap have made a fortune, but investors still stand to make money as the market does not seem to have cooled off. For instance, The price of Bitcoin jumped by more than 700% between April 2020 and February 2021.
- Ease of use: With more and more online companies adopting crypto, it is getting easier to use them all the time. There are even cryptocurrency debit cards now, though not yet widespread.
- Affordable fees: There are very few fees associated with using a crypto, and they are relatively low as well.
- Wealth protection: Many investors see cryptos as a wealth protector as these are not associated with world governments – and therefore not influenced by global developments. This was seen during the pandemic.
- Security: One can pay for things online using cryptocurrency without revealing one’s identity. It is also a lot safer than many other traditional payment options. This is one of the primary reasons why cryptocurrency became so popular in less than a decade.
- Ease of access: One can easily get cryptocurrencies from reputable sources, which has helped it to grow in popularity.
- Currency of the future: Many people argue cryptocurrencies are the future of money. China is in the process of developing its own digital currency, and so is India. Leading first-world economies like the US, Australia, Canada, and the European Union promote it in varying degrees. Blockchain technology is still developing, and is expected to make trading in cryptos more transparent.
Are cryptocurrencies Illegal in India?
First things first: one of the biggest myths surrounding cryptocurrencies in India is that they are illegal. This is not true. They may be frowned upon in certain quarters in India, but they are not illegal.
That is why you can buy or trade in Bitcoin in any of the several cryptocurrency exchanges in the country. In fact, when overturning the RBI ban on cryptocurrencies, the Supreme Court noted that crypto may be unregulated but not illegal in India simply because there was no legislation in place outlawing their trade.
Also, the government took the decision to set up an inter-disciplinary committee to look into the issue precisely because several cryptocurrency exchanges had urged it to set up a mechanism to regulate virtual coins instead of arbitrarily banning them.
Furthermore, it is because cryptocurrencies are not illegal that any transaction involving cryptos are taxed – if the person making that gains is an Indian taxpayer or where the crypto is said to be located in the country.
There are a few more myths around cryptocurrencies. Let us look at some of them:
- They are used for criminal purposes: They are not – at least not to the extent feared. By that yardstick, even the INR is often spent on illegal activities. The Supreme Court ruling will now give it the required stamp of legitimacy – till there is a legislation banning them.
- They will replace the Indian rupee: The rupee is printed and issued by the RBI, while the crypto is mined digitally. The former has sovereign backing, while the latter does not.
- Crypto trading is complex: It is not. In fact, it can be as simple as using a share trading platform; one opens an account and transacts. However, it is advisable to learn the ropes.
- Cryptos are now unaffordable: This too is not entirely correct. Even if you missed jumping on the bandwagon early, there is still time as several platforms allow one to buy a fraction of a coin.
What is the likely future for cryptocurrencies in India?
This is the million-dollar question for which many people in the country are waiting for an answer. While ruling on the contentious RBI circular, the Supreme Court acknowledged that the uncertainty over the status of cryptos could easily lead them to slip out of all regulatory control.
But at the same time, the court believed virtual currencies possessed the fundamental elements of money and so should be treated as such.
The Court also noted that “anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system”.
Legal experts said what this meant was though the court considered a complete prohibition was “disproportionate”, it also believed RBI’s regulatory powers covered cryptocurrencies as well. To them, the outcome may prove to be only “a momentary relief” for the petitioners, especially as various government agencies have moved for punitive legislation for those trading in cryptos.
However, the belief is that the latest Supreme Court ruling would influence the government to move towards more balanced regulation and not ban cryptos outright.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.