UncategorizedCryptocurrency In India: Navigating Recent Legal Developments

Introduction Of Cryptocurrency In India

Technology Has Created Ease Of Life Which Have Transformed Many Routine Tasks, Making Them Faster And More Convenient. As A Result, A Significant Number Of People Have Shifted Their Activities Online. Many Startups, Investors, And Youth Are Gaining Interests In Cryptocurrency Due To Its Ever-Growing Nature. Cryptocurrency Is A Kind Of Digital Money That Can Be Used For Transactions Through A Computer Network. It Created A New Market For Buying, Trading, Selling, Of Digital Assets.

In India The Legal Cryptocurrencies Include Bitcoin , Elrond, Tether , Shiba Inu , Ripple, Litecoin, Usd Coin , And Dogecoin ,Ethereum . Unlike Traditional Currencies, Crypto Did Not Have A  Central Authority Like A Government Or The Rbi To Regulate It. Instead, It Operates Independently And Allows People To Exchange Value Directly With Each Other. Such Exchange Without Regulation Has Its Own Pros And Cons.

A Brief Overview: India’s Crypto Journey

India’s relationship with cryptocurrency has been one of uncertainty and mixed signals. The Reserve Bank of India (“RBI”) has historically taken a cautious approach, often warning against the risks associated with digital assets, particularly around financial stability, fraud, and money laundering concerns.

The key turning point came in 2018, when the RBI issued a circular on “Prohibition on Dealing in Virtual Currencies (“VCs”) dated April 6, 2018 prohibiting banks from providing services related to virtual currencies. This effectively choked off the flow of cryptocurrency trading in India, sending exchanges and investors into a state of limbo.

However, this ban was short-lived. In a landmark judgment of Internet and Mobile Association of India (IAMAI) vs. Reserve Bank of India (RBI), Writ Petition (Civil) No. 528 of 2018, delivered on March 4, 2020, the Supreme Court of India struck down the RBI’s circular, stating that the ban on banking services related to cryptocurrencies was disproportionate and not adequately justified. This ruling was seen as a victory for the growing crypto community in the country.

Following the Supreme Court’s decision, India saw a surge in cryptocurrency trading, with several exchanges registering record growth. Despite this boom, the legal status of cryptocurrencies remains a grey area. The Indian government has since been mulling the introduction of a comprehensive regulatory framework, creating both excitement and anxiety within the industry.

Recent Regulatory Developments

1. Cryptocurrency And Regulation Of Official Digital Currency Bill, 2021

The Indian government put forward the Cryptocurrency Bill 2021 in the Lok Sabha to regulate the market. This bill is designed to create a structured and supportive environment for the Reserve Bank of India (“RBI”) to launch and manage its own official digital currency. The goal is to ensure that there is a clear framework in place to guide the use and management of cryptocurrencies, making it easier for the RBI to oversee and implement its digital currency effectively. Despite wanting to support emerging business owners and investors, the government understands that an uncontrolled market poses significant risks.

Since, the Bill was never passed by Parliament, India still does not have a detailed cryptocurrency law. The Official Digital Currency Bill aims to align with global standards and might be introduced by 2025.

In the backdrop of this regulatory uncertainty, the Union Budget 2022 offered a significant development. The Finance Minister, Nirmala Sitharaman, announced the taxation of cryptocurrencies and other virtual digital assets, bringing them into the formal tax regime. A 30% tax on income from the transfer of any virtual digital assets and a 1% TDS (Tax Deducted at Source) on transactions above a certain threshold were imposed. This step was interpreted as a signal of the government’s intention to regulate, rather than ban, the sector.

2. Enforcement Directorate And Anti- Money Laundering Regulation ( Prevention Of Money Laundering Act, 2023)

In March 2023, the Finance Ministry took VDAs under its supervision, creating new AML rules for cryptocurrencies. According to these rules all crypto businesses must now get a license from the FIU-IND and follow its guidelines. These guidelines mandate the platforms and companies to keep the record of the users identities, conducting due diligence; keep the record of  transactions, give a timely reporting of transactions; maintaining confidentiality Additionally, they must set up an internal system to manage and store this data. The FIU-IND has released AML & CFT Guidelines for Virtual Digital Asset (“VDA”) services. These guidelines suggest best practices for the industry.

FIU-IND in 2023 blocked 9 offshore for crypto exchanges as they were operating illegally  violating the provisions of PML Act which sets a precedent for mandatory compliance with PML Act 2023.

Reporting And Compliances

The Government Currently mandates the individuals only to report their VDA activities through the Companies Act of 2013 and by declaring any income or gains in their tax returns . The Ministry of Finance has also currently mandated to  entities like virtual asset service providers, and virtual asset exchanges to keep and hold  customer KYC data, as a compulsion by a MeitY circular. This helps the government to keep a track of large transactions. But  P2P  sales remain largely unregulated, unless there is a need to give  transaction details tax authorities under the Income Tax Act.

Impact Of New Regulations On The Market

Regulations can create a clear and structured environment for cryptocurrency trading and investment. This would help traders and exchanges understand the rules they need to follow, including what is allowed and what is not. When there are clear guidelines, businesses feel more confident to grow and operate without fear of breaking the law. The new framework for digital assets introduces a simple classification system, categorizing digital assets into different types, like security tokens and utility tokens. Each category has specific regulations designed to manage the risks and features unique to that group. AML and Know Your Customer (“KYC”) procedures would make trading safer and give investors more confidence. However, high taxes might discourage some investors and slow down market growth. Also, stricter AML and KYC rules could increase costs for cryptocurrency companies, making it more expensive for them to operate.

Challenges For India’s Crypto Market

1. Regulatory Ambiguity: The lack of a comprehensive legal framework creates a risk of sudden policy changes. This uncertainty discourages long-term investments in the crypto space.
2. High Taxation: The 30% tax rate on crypto transactions is seen by many as punitive, potentially driving crypto businesses and traders to explore offshore alternatives.
3. Fraud and Scams: Cryptocurrencies, by their nature, carry a risk of fraud, especially in a market like India, where awareness and understanding of digital assets are still evolving.

AMLEGALS Remarks

The journey from introducing Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 to introducing The Cryptocurrency Bill 2021 shows the inclination of the Government to create proper legislation for cryptocurrency but the question is why it is taking so long. India’s lack of clear cryptocurrency regulations puts it at a disadvantage because investors might prefer countries that have more supportive rules for cryptocurrency innovation and investment. This can impact India’s position in the global cryptocurrency market and make it harder for the country to attract and keep investment. One of the main reasons the government needs to step in is to protect investors. The regulators should have an approach where both the risk factor and the consumers, investors protection can be ensured.

The government’s stance on cryptocurrencies is cautious, prioritizing financial stability, consumer protection, and prevention of illicit activities. However, with a growing crypto ecosystem and the rise of blockchain-based applications, the demand for clear regulations is louder than ever.

As India continues to navigate these legal developments, the hope is that the government will adopt a progressive approach that supports innovation while addressing the risks associated with digital currencies. The next few years will be critical in determining whether India becomes a global crypto hub or adopts a more restrictive stance.

– Team AMLEGALS assisted by Ms. Mugdha Morey (Intern)

For any queries or feedback, feel free to get in touch with mridusha.guha@amlegals.com or liza.vanjani@amlegals.com