Here’s a brief history of India’s regulatory stance regarding cryptocurrencies, to better understand the current position.
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Nowadays, if you watch TV, you cannot miss the plethora of ads for cryptocurrency exchanges on every channel. Every time India takes (or loses) a wicket in the T20 World Cup, you have a Bollywood star trying to get you to invest in cryptocurrencies. They are everywhere and every-when! The interesting thing here is that, while ads for every other product on TV are for items or services that are regulated, cryptocurrencies in India have the unique distinction of being completely unregulated.
The history of India’s regulatory relationship with cryptocurrencies has been one filled with caution and warnings. This started in 2013 and has not really eased up even now. More recently, the government has however made a conscious distinction between blockchain technology and cryptocurrencies. It is in favour of a wider adoption of the former while it remains suspicious of the latter. Before we get into that, here’s a brief history of India’s regulatory stance regarding cryptocurrencies, to better understand the current position.
The Time of Warnings
In 2013, in the wake of cryptocurrencies such as Bitcoin making waves on the international scene, and indications emerging that this popularity was spreading to India as well, the Reserve Bank of India on December 24 issued a short press release cautioning users about the risks of using cryptocurrencies.
The RBI went on to list the various ways in which users stood to lose their money if they invested in cryptocurrencies. These ranged from hacking, loss of password, compromise of access credentials, malware attack, and the loss of e-wallets.
Further, it warned users that since payments using cryptocurrencies took place on a peer-to-peer basis without any authorised central agency to regulate them, users would have no recourse in the event of losses, frauds, or disputes.
The third risk the RBI cited was the one most people are wary of, the huge fluctuation in the prices. Since there is no real asset backing the value of cryptocurrencies, their price was solely governed by speculation, the RBI said.
Finally, the RBI said that the absence of information on the real identities of the parties in cryptocurrency transactions could the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.
While all of these were dire warnings, the popularity of cryptocurrencies in India continued to grow, prompting the Central Bank to issue two more such warnings over the course of the next four years.
Such was the seriousness with which the regulatory mechanism in India took cryptocurrencies that in December 2017 even the Ministry of Finance issued a statement on them. The Ministry repeated all of the RBI’s warnings, and added a few others. It informed users that there was a “real and heightened risk of an investment bubble of the type seen in ponzi schemes", which could result in sudden and prolonged crashes that could lead to retail investors losing their hard-earned money.
In short, the Ministry as of the end of 2017 was very wary of cryptocurrencies and was even likening them to Ponzi schemes. Overall, that’s three warnings from the RBI and one from the Government over the span of four years. None of it seemed to work, apparently, because the RBI on April 6, 2018, took the next step and issued the country’s first (and so far only) binding regulation regarding cryptocurrencies.
This came in the form of the RBI banning any of the entities it regulated (basically, banks, NBFCs and some other kinds of financial institutions) from dealing in cryptocurrencies or providing any service or facilitating any person or entity in dealing with or settling cryptocurrencies.
Such services included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs. Further, any entities it regulated that were already providing such services were given three months to exit such relationships.
Basically, the RBI had ring-fenced the entire financial system from cryptocurrencies. Indians could no longer use the rupee to buy or sell cryptocurrencies, and could not use bank accounts to link to their cryptocurrency accounts. This was, in effect, a ban on cryptocurrencies in India.
During this time, the government had in 2017 set up a high-level Inter-Ministerial Committee to study the issues related to cryptocurrencies and propose specific action to be taken regarding them. The Committee submitted its report to the government in 2019. In its report, it took a cue from then Finance Minister Arun Jaitley, who in his Budget speech of 2018 had made a distinction between cryptocurrencies and blockchain—he wanted to ban the former and explore potential uses of the latter.
The Committee was quick to realise the uses that distributed ledger and blockchain technology could be put to. It suggested that blockchain technology could be used in the areas of trade finance, mortgage loan applications, Know-Your-Customer databases, cross-border transactions, and a variety of other uses.
On cryptocurrencies, the Committee was not quite as encouraging. It drafted the ominously-titled ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’, which it suggested the government should enact. With the word ‘banning’ in the title of the law meant to regulate cryptocurrencies, there was no doubt about the Indian government’s attitude towards such digital assets.
While the Government has not enacted that law, and has in fact reframed it in consultation with industry experts, comments from various officials and Ministers reveal that it still largely wants to set severe limits on the trading of cryptocurrencies in India in the larger public interest.
Meanwhile, the Supreme Court on March 4, 2020, overturned the RBI’s order, which effectively lifted the ban on cryptocurrency trading in India. Since then, crypto trading in India has grown at a furious rate.
So, that’s where we stand right now as far as cryptocurrency regulation in India goes: there is none. The RBI tried to ban cryptocurrencies, but was overruled. The Government of India has framed a law to regulate cryptocurrencies but has not yet even laid it in Parliament. In the meantime, Indians continue to trade!