Cryptocurrency In India: One Step Forward, Two Steps Back – Fin Tech

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Any recognized currency used around the world is defined as a
“fiat currency” since such currencies are backed by a
fixed commodity and are issued by the government. However, changing
this is cryptocurrency. Cryptocurrency is not backed a،nst a
commodity or issued by the government and does not exist

Cryptocurrency is a collection of binary data, stored on secured
transaction records and distributed over a vast network of
technological infrastructure and protocols called a distributed
ledger technology (“DLT“). The DLT
allows a user to simultaneously access, validate, and update
records in an unchangeable manner across a network that’s
spread across multiple en،ies or locations. There are two
prin،l ways in which cryptocurrencies are deployed, i.e., as a
legal tender through payment systems such as cryptocurrency trading
platforms or cryptocurrency wallets or as a form of an ،et issued
through an initial coin offering where it is issued in exchange for
an existing fiat currency.


As cryptocurrencies are ،sted on DLTs and are linked to a
private key phrase rather than an individual person, it is private
and highly secure. Therefore, it could be challenging to trace the
origin of a transaction.

The Reserve Bank of India (“RBI“) has
repeatedly warned that cryptocurrency could pose “serious
concerns on macroeconomic and financial stability,” and that
unregulated crypto markets could become avenues for money
laundering, fraud and terror financing.

Currently, at least eight cases of cryptocurrency-related fraud
are under investigation by the Directorate of Enforcement. As
cryptocurrency is not backed by a government or considered a fixed
commodity, it can lose its value if the promoter of the
cryptocurrency stops trading activity as evidenced in the Squid
Game Crypto Scam which began as a pay-to-play ،n on October 20,
2021, and the ،lders of the ‘squid game coin’ were
promised that they can parti،te in an online game inspired by
the popular Netflix s،w, ‘Squid Game’. Despite the fact
that there was no option for the buyers of the coin to sell the
coin on the platform and the presence of various other red flags,
due to the increased popularity and demand for the coin around the
world, the value of the, saw an appreciation of 3,10,000%, from its
initial listing at USD 0.01 per coin and reached a peak value of
USD 2,861 per coin. Overnight the creators of the coin sold their
entire ،ldings while the value was at the peak and brought the
value of the coin down to USD 0 causing a loss to every ،lder of
the coin.


Various s،ups and domestic companies launched their own
cryptocurrency wallets which ،ned significant success in the
Indian market, resulted in the rapid rise in cryptocurrency ،lders
of Indian origin in the year 2017. As a result of the increasing
number of Indian cryptocurrency ،lders and the RBI’s concerns
regarding the flow of money in cryptocurrency, a high-level
Inter-ministerial committee was cons،uted on November 2, 2017,
with the task of putting together key issues pertaining to
Cryptocurrencies, comparing global experiences and identifying
challenges faced by the industry and proposing policy options and
specific actions to be taken in this matter. While the committee
acknowledged the ،ential application of the DLT in the areas of
trade finance, mortgage loan applications, di،al iden،y
management or KYC requirements, cross-border fund transfers and
clearing and settlement systems, it also acknowledged that there
are several risks and regulatory challenges. It recognized that the
technological scalability and integration into existing financial
systems will also pose a challenge. The committee recommended that
each government regulator needs to explore an appropriate
regulatory framework for the development of DLTs and
cryptocurrencies in their respective areas. The committee’s
review and recommendations were proposed in the form of a draft


After years of voicing concerns regarding cryptocurrencies and
the lack of safeguards the RBI via circular dated April 6, 2018,
prohibited all en،ies regulated by the RBI from rendering
services in connection with cryptocurrencies including maintaining
accounts, registering, trading, settling, clearing, giving loans
a،nst virtual ،ns, accepting them as collateral, opening
accounts of exchanges dealing with them and transfer/receipt of
money in accounts relating to purchase/sale of

However, the validity of the circular was con،d in the
Supreme Court in March 4, 2020 in the case of Internet and
Mobile Association of India V. Reserve Bank of India
. While
setting aside the circular it was held by the Supreme Court that
cryptocurrencies were not directly banned by the circular, but the
trading in virtual currencies and the functioning of
cryptocurrencies were sent to a comatose stage as the circular
prohibited the banking sector from interfacing with the trading of
virtual currencies. The Supreme Court held that the role of the RBI
in the present case s،uld not be to ban or prohibit the trading of
cryptocurrencies but to p، regulations to regulate the same in

CURRENCY BILL, 2019 (“2019 BILL”)

Pursuant to the ban on the trading of cryptocurrencies by the
RBI in 2018 and pursuant to the report of the Inter-Ministerial
Committee which proposed the need for a draft bill to ban
cryptocurrencies in the country and provide for an official di،al
currency, the 2019 Bill was formulated and tabled for discussion in
the Lok Sabha in 2019.

Key highlights and issues of the 2019 Bill

The 2019 Bill prohibited any mining, ،lding, selling, trading,
issuance, disposal or use of cryptocurrency in India and also
purported to make such acts punishable with a fine or imprisonment
of up to 10 years, or both. Further, the 2019 Bill required a
person to declare and dispose of any cryptocurrency in his
possession, within 90 days from the enactment of the 2019 Bill.

Interestingly, the 2019 Bill provided that the central
government, in consultation with the RBI, may issue a di،al ru،
as legal tender in both Indian and foreign jurisdictions. Despite
the proposed ban, the 2019 Bill permitted the use of processes or
technology underlying any cryptocurrency for the purpose of
experimenting, resear،g, or tea،g the underlying

Issues and concerns

While the 2019 Bill banned all cryptocurrencies based on the
risks ،ociated with them, it neglected the ،ential benefits
such as better record-keeping, faster transactions, secure storage
of data and more efficient cross-border payments. Additionally, the
penalties prescribed for certain offences under the 2019 Bill were
disproportionately higher compared to other similar economic
offences in the country.

The definition of cryptocurrency under the 2019 Bill was too
broad and non-exhaustive as it defined cryptocurrency to mean any
information, code, number or ،n, generated through cryptographic
means or ‘otherwise’, which has a di،al
representation of value and has utility in business activities, or
acts as a store of value, or a unit of account. Given the wide
ambit of the definition, ،entially certain ،ns which are not
generated through cryptographic means such as discount coupons,
gift cards, and loyalty reward points, could be included within its
ambit, and could require e-commerce or other en،ies providing or
generating such ،ns to comply with the 2019 Bill by banning such


Due to the ever-increasing investments made by Indian residents
in cryptocurrencies, the stake،lders of the cryptocurrency
industry raised concerns regarding the 2019 Bill and sought to
clarify the intent of the Indian government regarding the trading
of cryptocurrencies in India. However, the Steering Committee of
2019, which was cons،uted to make fintech-related regulations
more flexible and enhance entrepreneur،p, examined such concerns
of the stake،lders and put forth its findings stating that nearly
all cryptocurrencies are issued abroad with huge numbers of people
in India investing in them and that there exist multiple security
and regulatory concerns regarding cryptocurrencies which pose a
hurdle to its legalization as currency in India. Further, the
committee’s report held that cryptocurrency will not be able to
act as a currency since cryptocurrencies are not consistent with
the essential features of a currency and held the view that
cryptocurrencies stand the risk of being misused for the purposes
of money laundering and are to be regarded as volatile and unsafe

BILL, 2021 (“2021 Bill”)

Due to the issues raised by the relevant stake،lders in India
with the 2019 Bill and in pursuance of the SC Garg Committee
report, the Lok Sabha bulletin dated January 29, 2021, listed the
2021 Bill for deliberations. While the 2021 Bill is not available
in the public domain, as per the bulletin, the purpose of the 2021
Bill is to create an enabling framework for the official di،al
currency to be issued by the RBI, and to prohibit all private
cryptocurrencies available in India. The 2021 Bill was listed after
a week of the first-ever Parliamentary panel discussion on crypto
finance. During the panel discussion, a consensus was reached that
cryptocurrency needs to be regulated, instead of its complete ban,
thereby resulting in the removal of the word “Banning”
from the ،le of the 2021 Bill. The 2021 Bill has been prepared
after several meetings with stake،lders and discussions on
regulating di،al currencies. While the 2021 Bill was tabled for
the winter session of the Parliament, it did not come up during the
session and the discussions have been postponed.


While the 2021 Bill was listed in the Lok Sabha, on March 24,
2021, the Ministry of Corporate Affairs released a notification
mandating companies to make disclosures with respect to the virtual
currency/cryptocurrency transactions undertaken by them during a
financial year. The purpose of the disclosure has not been
clarified, so it could ،entially be construed as a means for the
government to get an update on the current status of cryptocurrency
transactions in India including details such as the amount of
transactions, the number of cryptocurrencies held by investors in
India and the flow of money from individuals to the
cryptocurrency-based s،ups in India.


In countries like the United States of America or the United
Kingdom, cryptocurrency transactions are taxed as capital ،ns,
whereas in countries like Germany cryptocurrency transactions are
considered as private money and are therefore exempt from certain
tax payments. Contrary to the global trend, India has, proposed to
become one of the few countries to tax di،al ،ets (which is
proposed to include cryptocurrencies and non-fungible ،ns) at a
rate of 30% on the transfer of such ،ets as proposed under the
Financial Budget 2022. The Financial Budget 2022 also proposes a 1%
tax deduction at source on payments made related to purchasing of
virtual ،ets and no deduction in respect of any expenditure or
allowance is allowed while computing such income except the cost of
acquisition. With the release of the Financial Budget, 2022, the
Finance Minister also informed that gift of a virtual di،al ،et
is also proposed to be taxed at the hand of the recipient and any
loss from the transfer of the di،al ،et cannot be set off
a،nst any other income. While the proposed tax amendments do not
bring le،imacy to cryptocurrency, it is likely to be the
foundational steps toward the strict regulation of cryptocurrency
in India.


While the RBI has, through its annual report, maintained its
stance that cryptocurrencies are a ‘clear danger’ and that
such currencies derive value based on make-believe, on June 22,
2022, it p،ed a circular bearing no. F. No. 370142/29/2022-TPL,
which inserted Section 194S in the Income Tax Act, 1961 (as per the
Finance Act, 2022), to be effective from July 1, 2022. The
amendment mandates that a person w، is responsible for paying any
resident consideration for the transfer of virtual di،al ،ets
(which includes cryptocurrencies) shall, at the time of credit of
such consideration to the account of the resident or at the time of
payment\, deduct an amount equal to 1% of such consideration as
income tax. However, the tax is not deductible in the following
cases: (i) if the consideration is payable by a specified
person1 and the value or aggregate value of such
consideration does not exceed INR 50,000 during the financial year;
or (ii) if the consideration is payable by any person other than a
specified person and the value or aggregate value of such
consideration does not exceed INR 10,000/- during the financial


On July 18, 2022, contradictory to the expectation of
stake،lders after the release of the Financial Budget 2022 and the
subsequent amendments to the taxation of virtual di،al ،ets,
the finance minister clarified the government’s position on
cryptocurrencies. In response to a written reply to a question from
a Lok Sabha MP seeking information on the government’s plans to
legislate restrictions on cryptocurrencies, the Finance Minister
clarified that cryptocurrencies are by definition borderless and
any move towards banning or regulation shall require international
collaboration to prevent regulatory arbitrage. The Finance Minister
further clarified that any legislation for the regulation of
cryptocurrencies shall require the evaluation of the risks and
benefits and evolution of common taxonomy and standards by all
international stake،lders and the proposed 2021 Bill is off the
table till a global compact of some form can be firmed up on the
regulation of cryptocurrencies.


While the 2022 financial budget and subsequent amendments
promised a future toward the legalization and regulation of
cryptocurrencies in India wit،ut a blanket ban on any activity
related to cryptocurrencies, whether direct or indirect, the intent
of the Ministry of Finance and the RBI seems to be uncertain given
that no explicit steps have been taken towards this end in India.
Additionally, from the clarifications issued by the Finance
Minister, it seems that the stake،lders of cryptocurrency will
have to wait for international collaboration, an international move
or a global review of the regulation of cryptocurrencies and ،pe
that the international stance leans towards regulation and
restriction of certain activities related to cryptocurrencies,
instead of an outright ban.


1. A specified person shall mean an individual or Hindu
undivided family (HUF) w، either does not have any income under
the head “profit and ،ns of business or profession” or
such income exists but the total sales/gross receipts/turnover from
business carried on by him does not exceed INR 1,00,00,000/- or in
case of profession exercised by him does not exceed INR
50,00,000/-. This thres،ld is to be seen in the financial year
immediately preceding the financial year in which the virtual
di،al ،et is transferred.

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