Are Cryptocurrencies Legal in India?

If we are to let good sense prevail, our legal system is likely to work out a framework for increased regulatory clarity around cryptocurrencies. We are doubtless looking at the ascent of crypto activity in India with a more enthusiastic nod from the center.
Although there is no straightforward answer to this question, we can be certain that cryptocurrencies are not illegal in India. They are, however, frowned upon by the central bank in the country, The Reserve Bank of India. And the RBI isn’t the only central bank which is at odds with cryptocurrencies — let’s take a look at how various countries around the world have responded to the entry of Bitcoin and other cryptocurrencies into the financial system.

There has been a common action across global discourse around cryptocurrencies. Governments have warned their citizens about the pitfalls of investing in cryptocurrency markets. This was at large to remind stakeholders to make the distinction between fiat currencies issued and guaranteed by the state and cryptocurrencies that fall outside their authority. There is also high volatility associated with cryptocurrencies and all transactions or investments are ultimately at personal risk and very little legal recourse is available in the event of a loss. This is not to say that it is impossible for fiat currency and central banking systems to develop flaws — for all those who remember, 2020 saw the Yes Bank crisis which put its users at an inconvenience. RBI’s decision to cap withdrawals at Rs. 50,000 caused panic among the general public and deposit holders in Yes Bank.

We must bear in mind that at its genesis, Bitcoin was formulated as a result of disillusionment with the conventional banking system which had failed its users, especially following the 2008 global meltdown.

In 2009, a pseudonymous person or entity called Satoshi Nakamoto published the white paper on Bitcoin, bringing into use and common parlance a system of transacting money on a decentralized, peer-to-peer network supported on a technology called cryptography. In the past few years, cryptocurrencies have become ubiquitous, causing national and regional authorities to grapple with their regulations. Countries around the world have responded variously — from banning citizens from engaging in any crypto activities to developing their own system of cryptocurrencies.

Algeria, Bolivia, Nepal, Pakistan, Morocco and Vietnam, for example, ban all activities involving cryptocurrencies. But some, while not recognising Bitcoin or other cryptocurrencies as legal tenders, see potential in the technology behind it. Spain, Luxembourg and Belarus, for example, have developed a crypto-friendly regulatory regime as a means to attract investment in tech companies which thrive in this sector. Qatar and Bahrain bar their citizens from engaging in crypto activity locally but allow them to do outside beyond their borders. Countries like Bangladesh, Iran, China and Thailand do not bar their citizens but pose indirect restrictions to regulate crypto-trading.

Here’s a chronology of India’s regulatory evolution with respect to cryptocurrencies.

2013

• Unocoin is founded
• The Reserve Bank of India cautions users, holders and traders of virtual currencies (VCs) about potential financial, operational, legal, customer protection and security related risks that they were exposing themselves to in its press release dated December 24, 2013.

2017

• The Special Secretary of Economic Affairs forms a committee to suggest ways of dealing with the potential AML/CFT and consumer protection issues related to cryptocurrencies.

2018

• Notice from RBI on 6th April restricts banks and financial institutions from providing accounts or other banking services to individuals or entities dealing with crypto assets like Bitcoin.
• In October 2018, Unocoin decides to move ahead in installing Kiosk machines across metropolitan cities and continue expanding to Tier-II cities that would enable cash collection and cash deposition for customers.

2020

• On 4th March 2020, the Supreme Court quashed an order by the RBI banning financial services firms from trading in virtual currency or cryptocurrency
• The Government of India is reportedly discussing a regulatory framework for cryptocurrencies with the Central Bank, the RBI and the Securities and Exchange Board of India (SEBI).

Cryptocurrency as a medium of payment is not recognised under Indian law, and specific regulations governing virtual currencies are yet to be fully fleshed out in the country. The RBI, however, hasn’t declared dealing in cryptocurrencies as illegal and nor can it maintain the ban on financial services firms from trading in virtual currencies. There are thus a few entities in India which offer Bitcoin exchange platforms which enable millions of users to buy, sell, store, use and accept Bitcoins, such as Unocoin, Zebpay and WazirX.

What comes next for the regulatory framework around cryptocurrencies?

With reports of the Indian economy having shrunk by 25.5% in the first quarter of this fiscal year, we can hardly afford to pull the plug on cryptocurrencies, which have the potential to enable social and economic growth throughout the world, including India, by offering easy access to capital and financial services. Moreover, earlier this year, as Vatsal Gaur has argued in the YourStory piece “Why the Government should regulate and not ban cryptocurrency”, banning cryptocurrency would negatively impact early-stage startups from raising funds. An Initial Coin Offering (ICO) is one way for early-stage startups to raise funds.

The center is evidently aware of this and there has been progress since the Supreme Court’s decision in March 2020. The Government of India is reportedly discussing a regulatory framework for cryptocurrencies with the Central Bank, the RBI and the Securities and Exchange Board of India (SEBI). If we are to let good sense prevail, our legal system is likely to work out a framework for increased regulatory clarity around cryptocurrencies. We are doubtless looking at the ascent of crypto activity in India with a more enthusiastic nod from the center.