CryptocurrencyFinTechFinTech and Cryptocurrency – The Next Economic Revolution

INTRODUCTION

In this rapidly developing world where everything is accessible at your fingertips, user convenience and seamlessness have resulted in shifting everything towards digitalization. This modern era of digitalization has various impacts on our lives including finance. With this constantly developing ecosystem, the regulatory agencies find it difficult to strike a balance between the existing schemes and the emerging new concepts.

The FinTech industry in India as a result of profound customer demand, Digital India initiative, favorable demographics, and enabling Government policies has witnessed exponential growth in India over the past few years. The FinTech Industry in India has become one of the fastest-growing sector in the entire world bringing development in a plethora of sectors such as Digital Lending, Peer to Peer Lending, Digital Payment, Banking etc. The FinTech market in India is currently valued at $31 billion and as per the Federation of Indian Chambers of Commerce & Industry (FICCI) and Boston Consulting Group (BCG) ‘India FinTech: A USD 100 Billion Opportunity’ report is expected to reach a valuation of $150 billion by 2025.

The rapid growth of the FinTech industry in such a short period shows massive adoption of the digital means in India, which has intrigued the investors and FinTech companies in the development of the cryptocurrency market in India. Since, cryptocurrency and blockchain technology holds the key to the massive growth of the FinTech industry in the tech-drive future.

In this article, we attempt to discuss the current status of cryptocurrency in India and how cryptocurrency holds the key to the future development of the FinTech industry in India.

LEGAL FRAMEWORK GOVERNING FINTECH IN INDIA

In India currently, there is no specific set of laws governing the FinTech sector, therefore, each segment is regulated by its own regulating authority such as, payment and lending segment is governed by the Reserve Bank of India (“RBI”). The Insurance segment is governed by the Insurance Regulatory and Development Authority of India (“IRDAI”) and the Investment segment by the Securities and Exchange Board of India (“SEBI”) etc., by their own set of laws, few of them are mentioned hereunder –

• Payment and Settlement System Act, 2007 – It essentially governs digital payments within India and prohibits the commencement and operation of a digital payment system without any prior permission or authorization of the RBI.

• Information Technology Act, 2000 – FinTech companies are required to operate in a digital ecosystem. Therefore, to ensure that they have a secure IT framework in place, and to implement that, they are required to adhere to the directions set out under Section 43A of the IT Act, which inscribes the responsibility of corporate organizations to pay damages in the event of negligence in maintaining fair security measures for the protection of their users’ private confidential personal data.

• IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 – In order to ensure the protection and security of personal sensitive data of the consumers, the FinTech Companies must comply with the aforesaid rules and formulate a Data Protection Policy of their own to ensure the safety of its user data.

• Prevention of Money Laundering Act, 2002 – In order to protect its users from unlawful laundering of money, these companies are required to comply with the Prevention of Money Laundering Act, 2002 and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

• Foreign Exchange Management Act, 1999 – Since, FinTech companies majorly deal in cross-border payment and transaction, there was a dire need to regulate these cross-border transactions conducted by the FinTech Companies in India. Therefore, to regulate the same these Companies are now required to comply with FEMA.

CURRENT POSITION OF LEGAL FRAMEWORK FOR CRYPTOCURRENCY IN INDIA

In the current scenario, cryptocurrencies are not regulated by any Central Authority. However, considering the decentralized ecosystem of the cryptocurrency, Government has several times warned its users, holders, and traders about the potential financial, operational, legal, and security-related risks they are exposing themselves to.

Further, in 2017, the RBI issued a circular, clarifying that cryptocurrency is not a legal tender, and thereafter, in 2018 issued a circular with the intention of banning cryptocurrency in India, because the circular refrained commercial and co-operative banks, payments banks, small finance banks, NBFCs, and payment system providers from dealing in virtual currencies, or providing services to all entities which deal with crypto exchanges.

However, the Supreme Court in the year 2020 came to the rescue by setting aside the imposed ban on cryptocurrency. The Supreme Court in the case of Internet and Mobile Association of India vs. Reserve Bank of India [MANU/SC/0264/2020], stated that the ban was “manifestly arbitrary, based on non-reasonable classification, and it imposes disproportionate restrictions”. The Supreme Court stated that such kinds of bans cannot arise from any circular but through proper legislation. This order of the Supreme Court acted as a foundation for the implementation of the regulation of the cryptocurrency market in India.

Thereafter, in the year 2021, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was tabled in the budget session in the Parliament, but was consequently held up.

The main aim of the bill was to put a ban on the existing private cryptocurrencies transactions and to introduce an official digital currency. The official digital currency will be monitored by the Central Authorities and will be regulated by them.

NEED FOR REGULATING CRYPTOCURRENCY

The cryptocurrency market is unregulated and decentralized due to which there are higher risks involved and they are highly prone to manipulation. As per the RBI, cryptocurrencies are termed to be stateless digital currencies and it opined that the use of encryption method to carry out the transactions which safeguard them from any external interference and allow them to function independently can also be used to carry out various illicit transactions and activities, such as –

• Prone to Manipulation and Antitrust Practices

The cryptocurrency market is prone to manipulation and antitrust practices, since it is not controlled by any Central Authority. The cryptocurrency market functioning in a decentralized and unregulated ecosystem opens up the investor to the risk of insider trading because one can easily escape from the liability of the crime.

• Prone to Money Laundering and Terror Funding

The usage of cryptocurrency for terror funding and money laundering is one of the foremost concerns for the entire world. Since they are unregulated and are not being governed, it makes the transfer of cryptocurrency untraceable. Therefore, regulatory authority must be established to monitor all the transactions.

• Prone to Cyber Risks

Although blockchain mechanism is being used for cryptocurrency transactions. However, in absence of a secured networks, the digital transactions are more prone to cyber-attacks. One of the major reasons of vulnerability to cyber-attacks is that these currencies are decentralized.

Further, ransomware attacks can also take place since the criminals can easily hide their identities and can ask for ransom in the form of cryptocurrencies. Since it is untraceable they can easily get their ransom and convert them into fiat currency.

That the rapid increase in the investment of cryptocurrencies, rising interest of the Investors, Banks, Financial Institutions, and FinTech companies in digital currency and considering the risks associated with cryptocurrency market, it is essential that cryptocurrency market gets regulated and governed by the appropriate authorities and vide robust policy safeguard the interest of the people investing in cryptocurrency.

CRYPTOCURRENCY AND REGULATION OF OFFICIAL DIGITAL CURRENCY BILL, 2021 

The Central Government considering the risks associated with the cryptocurrency / Digital Currency introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Crypto Bill”) in the budget session which aimed at banning the private cryptocurrencies in India and replacing it with an official digital currency, which will be regulated by the RBI. As per the Lok Sabha bulletin, the significance of bill is,

“To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”

Thus, the Bill essentially deals with two aspects. Firstly, it will focus on issuing a ban on the private cryptocurrencies in order to safeguard the investors from the associated risks. Secondly, it aims to create a framework for the introduction of an official digital currency which will be regulated by the RBI.

The Bill focuses on providing a proper and robust framework for regulating cryptocurrency transactions. The main reason behind banning the private cryptocurrencies is to prevent the illegal transactions and lower the risk of money laundering, terror funding, and cyber risks. Once a regulation is in place the investors will be protected since the transactions will be monitored and be governed by a Central Authority.

INTERRELATION BETWEEN FINTECH AND CRYPTOCURRENCY 

It is essential to understand that the Cryptocurrency or Digital currencies are not just modes of making payments but they are also a way to store value and transact within the global economy, which paves way for the countries to have global standing.

The relationship between Cryptocurrencies and FinTech companies is very unique, as the cryptocurrency ecosystem provides huge potential to the FinTech industry to transform every vertical of the financial sector, from trading and investments to payments or lending, as cryptocurrencies offer a borderless, fast and secure medium of transaction, which is far better than traditional asset types.

It is evident that Cryptocurrency market and FinTech market has an unbending relationship. Since, with the upsurge in the popularity of cryptocurrency market, the FinTech industry has been the quickest to evolve and grow. Even when there is a situation of pandemic in the country, the FinTech industry has observed a steady rise. More and more people are getting aware of the digital currencies and have started to invest their money into this form of currency.

With the implementation of a decentralized financial platform accepting cryptocurrencies as a legal payment method and Government backed policy regulating cryptocurrency market in India, it can solve multiple financial problems.

The use of popular cryptocurrencies in the cryptocurrency market can make the monetary policy of India stronger and better than the existing one. It will give Indian economy a stronger and robust global standing. Furthermore, Bitcoin holds the potential to reduce huge burden on the regulators of controlling fraudulent activities such as, terror financing and money laundering amongst other benefits.

Cryptocurrency is one of the sector of FinTech industry, which is not yet regulated. However, with the introduction of the cryptocurrency Bill in the Lok Sabha, it is a step forward towards creation of a policy to regulate cryptocurrency and with the Government backed policy on cryptocurrency, it will provide potential of ample growth to the FinTech industry in India.

The interrelation of FinTech and Cryptocurrency market will help creation of job opportunities, utilizing tech talents, developing financial infrastructures, eliminating scams and frauds etc., It will subsequently promote increase in revenue and motivate the FinTech industry to become one of the global powerhouses across the world..

AMLEGALS REMARKS

There is a substantial amount of suspicion regarding ban on cryptocurrency in India. However, putting a blanket ban on digital currency is not an optimum solution against the various risk factors involved, especially for a developing nation with a feeble economy like India’s.

With the increase in popularity of both cryptocurrency market and FinTech industry it is necessary to design a proper regulation and policy to govern them. Models from various other countries who have successfully implemented them can be adopted in India rather than deciding to put a complete ban on it.

The use of blockchain technology will provide seamless and transparent transaction as it will allow regulators capture transaction in real-time basis, which is not possible for the traditional methods used for transaction. Further, the Supreme Court decision has also proven to be a boon to the cryptocurrency market.

Therefore, the Government shall consider adopting cryptocurrency technology instead of imposing on blanket ban on cryptocurrency after knowing the fact that it has potential of enormous growth for FinTech industry in India.

The introduction of Crypto Bill shows that the Indian Government is taking a step towards formation of policies for regulating digital currency, which will help regularize the cryptocurrency market in India. Furthermore, considering the pace at which the cryptocurrency technology is developing, it will be interesting to see how it will help evolve the cryptocurrency market and in turn develop the FinTech industry in India.

For any query or feedback, please feel free to get in touch with arushi.vyas@amlegals.com or tanmay.banthia@amlegals.com.