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.
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:
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.
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.
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.
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.
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.
Timeline of Crypto Regulation
- 19-06-2024 : Binance Penalized $2.25 Million for Anti-Money Laundering Breaches in India : Binance, the world’s leading blockchain and cryptocurrency platform, was slapped with a hefty fine of Rs 18.82 crore ($2.25 million) by India’s Financial Intelligence Unit (FIU) for failing to comply with anti-money laundering (AML) regulations. This fine was critical for Binance to resume its operations in the country.
- 09-06-2024: Orissa High Court Legalizes Cryptocurrency Dealings under OPID Act (Odisha Protection of Interests of Depositors ): The Orissa High Court ruled cryptocurrency dealings legal under Indian law. In a fraud case, Justice Sasikanta Mishra clarified that cryptocurrency isn’t money under the Prize Chits Act or a deposit under the Odisha Depositors Act, thus not offenses.
- 5-Sept-2023: India opening international doors to discuss crypto : India’s Finance Minister, Nirmala Sitharaman called for a global crypto framework at the G20 Summit, highlighting the need for international cooperation.
- 2- Feb-2022: Finally, Crypto in India Were Taxed to 30% :Finance Minister Nirmala Sitharaman announced a 30% tax on cryptocurrency and RIFT income, putting them in the highest tax bracket. Losses can’t offset other income.
- 4- Mar-2020: Uplifting ban imposed by RBI on cryptocurrency: Supreme Court ruled in favor of IMAI, overturning RBI’s cryptocurrency ban. A celebrated victory for the global crypto community.
- 28- Jan-2020: Final arguments from both sides heard and concluded: Supreme Court ends case on cryptocurrencies. RBI lacks authority to regulate them, but can act if they pose payment system risk.
- 05-Dec-2019: Governor of RBI Said No to Crypto :The RBI Governor firmly opposed cryptocurrencies during a press conference, highlighting the need for a thorough evaluation of their functionality.
- 07-June-2019: 3rd Attempt to Ban Crypto, presented in Parliament Bill: The Indian Government introduced a bill in 2019 to ban cryptocurrency activities, except for research and education, with harsh penalties.
- 06- April -2018: Ban and Lift Ban of Crypto: RBI banned cryptocurrency transactions in India on June 6, 2018. Exchanges faced losses and legal challenges. Some banks severed ties. SEBI opposed regulation. Unocoin’s Bitcoin ATM was seized.
- 05-Mar-2018: Second Attempt to Ban Crypto : CBDT proposed cryptocurrency regulation. G-20 finance leaders acknowledged crypto’s potential for economic growth but raised concerns about safety, tax evasion, and illegal activities.
- 1- Feb-2018: No Support to crypto : Finance Minister Arun Jaitley declared virtual currencies illegal but showed interest in blockchain. State Bank of India coordinated collaboration with tech firms and banks for blockchain exploration.
- 07- Nov-2017 First Announcement to Ban Crypto by RBI: Reserve Bank of India plans to ban cryptocurrency use for payments nationwide, stated by executive director S Ganesh Kumar
- 08-Nov 2016 Increased Bitcoin Adoption With Demonetization Announcement: Indian Bitcoin prices surged after demonetization announcement, reaching $1,020 in 18 days, while US prices stayed at $770, indicating an Indian premium.
- 15- June -2016 The First Official concern was recorded : FATF expressed concerns that these digital currencies had the potential for fraudulent activities and posed a risk of being utilized by terrorist organizations for illicit donations.
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.
