In the present days Cryptocurrency is rapidly gaining ground as an exciting option among investors in India. The past few years have seen a burgeoning number of investors and analytics suggest that it isn’t just city slickers - most of its recent users come from small cities and towns in India.
However, In Spite of the booming enthusiasm, much ambiguity persists around the legality of cryptocurrency in India. If you are considering investing in cryptocurrencies, you want to be sure you are not breaking any law or regulations. Therefore, it’s important to understand the legality that surrounds cryptocurrencies clearly. Here’s a quick primer for you to get going.
About 100 million Indians own cryptocurrencies, according to a recent study by BrokerChoose, making India’s crypto user base bigger than any other countries in the world.
At the moment, there is no legislature that covers cryptocurrencies in India. But this doesn't mean that owning cryptocurrencies is illegal. It simply means that in the absence of a robust legislative framework, crypto owners may not be able to necessarily enjoy the same level of safeguards that owners of other asset classes do. For instance, in the banking system, the RBI has appointed an ombudsman who you can approach if you have a grievance with your bank. This may not be possible in the crypto space.
Even in the absence of a policy framework, cryptocurrency exchanges such as WazirX have developed robust systems that allow people to buy and sell cryptocurrencies in a seamless manner.
The massive spike in the price of the cryptocurrency has led to an increase in the number of crypto owners in India, as mentioned at the start of this article. Over the past one year, trading volumes on Indian cryptocurrency exchanges have increased from $200 million to $40 billion.
However, the lack of regulation surrounding bitcoin may change soon, as the government is set to table a cryptocurrency bill in Parliament. Media reports had previously indicated that the government was keen on banning cryptocurrency altogether, given the anonymous nature of its transactions. But Finance Minister Nirmala Sitharaman has pledged that the government will keep an open mind with respect to cryptocurrencies, given that it offers the scope for several promising innovations.
Cryptocurrency prices can soar or plummet within hours. Ten days ago, a “play-to-earn” cryptocurrency inspired by the South Korean dystopian show Squid Games came out and according to its white papers, presale Squid tokens sold out within a second. The Squid token is up by 75 thousand percent this week, according to CoinMarketCap, a market analysis agency, which also issued a warning about the need to exercise caution while trading as it had got multiple reports that people were unable to sell the Squid token.
The lack of regulation also means there is no protection for investors against the volatility of cryptocurrency or fraud.
Legal status of ads
Section 89 of the Consumer Protection Act 2019 states that a manufacturer or service provider involved in a “false or misleading advertisement” that is “prejudicial to the interests of consumers” faces imprisonment up to two years and a fine up to Rs 10 lakh.
This applies to all ads, cryptocurrency included.
In July 2021, the Delhi High Court issued notice to the centre, SEBI, and cryptocurrency exchanges in a plea seeking guidelines to regulate the advertisement of cryptocurrency asset exchanges in India. The petitioners sought guidelines mandating that the disclaimer text cover 80 percent of the screen, with a slow voice-over lasting five seconds.
The plea also prayed that the union ministry of information and broadcasting should prevent more audio-visual ads from being aired on television until the above guidelines are issued.
The Indian government is now considering the introduction of a new bill titled “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021”(“New Bill”) which is similar in spirit to its previous versions, however, intends to ban private cryptocurrencies in India with certain exceptions to promote the underlying technology and trading of cryptocurrency and provide a framework for creating an official digital currency which will be issued by the RBI. The New Bill recognizes the grey area of cryptocurrency laws and proposes to ban all the private cryptocurrencies in their entirety, however, it is still a grey area pertaining to which all kinds of cryptocurrency will fall under the purview of private cryptocurrency.
The RBI has cautioned the general public regarding the possible misuse of private cryptocurrencies in different possible ways. However, if the New Bill imposes a complete ban on private cryptocurrencies, it shall lead the cryptocurrency investors to invest and deal in cryptocurrency in unmonitored markets. Further, the objective of introducing a law related to virtual currency/ cryptocurrency is to simplify the process of trading and holding in a safer technological environment. However, even with the introduction of state-owned cryptocurrency which shall be regulated by the RBI, the risk factor involved in investment and holding of cryptocurrency shall remain the same.
Further, recently in the last week of March 2021, according to the latest amendments to the Schedule III of the Companies Act, 2013, the Government of India has directed that from the newly begun financial year, the companies disclose their investments in cryptocurrencies. That is to say, the companies have to now disclose profit or loss on transactions involving cryptocurrency/ virtual currency, the amount of holding, and details of deposits or advances from any person for the purpose of trading or investing in cryptocurrency/ virtual currency. This particular move has been welcomed with open arms by the people dealing in the crypto sector, as it is understood the same would open the door for all Indian companies to have Crypto on their balance sheets.
Regulation is the Solution: Regulation is needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
The regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
Clarity on Crypto-currency definition: A legal and regulatory framework must first define crypto-currencies as securities or other financial instruments under the relevant national laws and identify the regulatory authority in charge.
Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the government shall rather regulate the trading of cryptocurrencies by including stringent KYC norms, reporting and taxability.
Ensuring Transparency: Record keeping, inspections, independent audits, investor grievance redressal and dispute resolution may also be considered to address concerns around transparency, information availability and consumer protection.
Igniting the Entrepreneurial Wave: Cryptocurrencies and Blockchain technology can reignite the entrepreneurial wave in India’s startup ecosystem and create job opportunities across different levels, from blockchain developers to designers, project managers, business analysts, promoters and marketers.
A legal framework to regulate and govern the burgeoning cryptocurrency investment market in India may now see the light of the day by next February. Finance Ministry officials have said that a law for cryptocurrencies would most likely come around by the time of the next general Budget.
The proposed framework is likely to veer away from an earlier approach that had proposed a complete ban on cryptocurrencies. Instead, the government is likely to opt for regulating cryptocurrencies as an “asset” class, somewhat on the lines of commodities, with appropriate taxation of transactions and gains. Officials of the Finance Ministry and the Reserve Bank of India (RBI) remain engaged in fine-tuning the conceptual framework and the necessary regulations, another official added. The thinking, the Finance Ministry official said, was towards a regulation that seeks to avoid potential pitfalls. “What should not happen tomorrow is that if I start a personal digital currency, and after good marketing everybody buys it and once it has appreciated, I run away since I am a private player! Everybody has actually bought that currency by using other assets. Government needs to look at regulation in order to avoid the above”.
A minute governing method should consider both the potential upside and downside. It fosters financial innovation, safeguards investors and unshackles the Indian crypto ecosystem.