In a recent statement, the Reserve Bank of India (RBI) Governor has reaffirmed the central bank’s stance on banning crypto assets even as there seems to be a global trend emerging towards bringing them under the realm of regulations. A cryptocurrency is a digital currency, created by using encryption algorithms to be used both as a currency and as a virtual accounting system. This is very different from the normal ‘flat currencies’ duly recognized and issued by the government of any country.
There are apparently some risks involved in the use of crypto as an alternative payment system that need to be duly addressed before any country can decide whether it would opt for zero regulation for it or subjecting it to varying degrees of regulation or completely banning it. Well, it depends on how far a country can assimilate the risks involved with crypto and the modalities of regulatory framework considered as adequate to accommodate or mitigate such risks within its territories. And that is not easy by any means because dealing with cryptocurrency requires handling its risks not only within its own jurisdictions but also beyond its external boundaries.
Risks involved with Crypto currency
RBI had cautioned the users, holders, and traders of Virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they were exposing themselves to as early as about a decade ago (2013). As the entities carrying on such activities were largely unregulated, they posed several risks to their users on account of the following reasons:
- VCs are held in digital form and so they are stored in digital/electronic media (electronic wallets). In the absence regulation by an authorised registry if there are instances of hacking, loss of password, compromise of access credentials, malware attack etc., there may not be any protection available and the loss of the e-wallet could turn out to be the permanent loss of the VCs held in them because there may not be any dispute resolution mechanism available.
- Since there is no underlying or backing of any asset for any virtual currency its value is a matter of speculation and so it is always subject to high volatility and the probability of loss of value any time in future becomes quite high.
- If the VCs, are being traded on exchange platforms set up in various jurisdictions whose legal status is not clear then the traders of VCs on such platforms are obviously exposed to legal as well as financial risks.
- As per media reports that the VCs, might as well be deployed for illicit and illegal activities and the users may as well subject themselves to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.
Ring-fencing regulated entities from virtual currencies
Reserve Bank of India ( “RBI”) issued a “Statement on Developmental and Regulatory Policies” on April 5, 2018 and asserted that technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others.
In view of the associated risks, it was clearly mentioned that the entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs that with immediate effect. Further, the regulated entities which already provide such services shall exit the relationship within a specified time.
A circular was then issued dated April 6, 2018 wherein the entities regulated by the Reserve Bank were instructed not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs with immediate effect. Such services included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs. Further, it said that the Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.
This circular was set aside by the Hon’ble Supreme Court on the grounds of proportionality since the RBI had consistently maintained that they had not banned VCs and even the Government of India was not able to take such a call despite several committees coming up with several proposals. However, the Statement dated April 5, 2018, though also challenged in one writ petition, was not observed to be in the nature of a statutory direction and hence the question of setting aside was not considered.
RBI’s stance on banning crypto assets seems to have not changed. Reserve Bank of India Governor at the recently held conference at Mumbai, has stated that cryptocurrency should rather be completely banned from the country.
Cryptocurrency Bill 2021
The government of India introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Lok Sabha keeping in view the surge in trading on platforms like WazirX, CoinDCX, Zebpay, etc. particularly during the COVID era, both locally and abroad.
The Bill sought to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also sought to prohibit all private cryptocurrencies in India; however, it allowed for certain exceptions to promote the underlying technology of cryptocurrency and its uses. The Bill has not yet materialized.
Subjecting crypto earnings to Tax
In the Union Budget, 2022, it was proposed that the crypto earnings be subjected to 30 percent tax and 1 percent tax deducted at source while the set-off of losses was not available. However, there is no central authority in India that regulates the use of cryptocurrencies as a form of payment and so any form of crypto dealings is not subjected to any established norms or rules for resolving conflicts. Thus, any trading in cryptocurrencies is done at the risk of investors.
Since India’s finance minister suggested taxing digital assets, it led to some discussion about whether cryptocurrencies are allowed in our country. While many welcomed the government’s move to tax virtual currencies as the first step towards recognizing them, no formal statement has been made by the government about the legality of such currencies in India. Hence cryptocurrencies are unlawful but that at the same time there is no firm prohibition on them in India as well.
Symbolically, if the degree of regulation could be gauged between zero to ten, zero represents no regulation and 10 represents total ban according to the RBI Governor. Different countries may have their own degree of regulations depending upon what view they take about the legality of cryptocurrencies.
G20 Stance on Cryptocurrency
In the recently held summit of G20 countries, at New Delhi, the participating countries called upon for the swift implementation of the Crypto-Asset Reporting Framework (CARF) and amendments to the ‘Common Reporting Standard’ (CRS). The pace at which the crypto-asset market has been developing there is need for the reporting of tax information on transactions in crypto assets in a standardized manner through automatically exchanging such information with the jurisdictions of residence of taxpayers so as to make sure that such non-financial assets are not used by tax evaders to conceal their unaccounted wealth. Similarly, under the amended CRS, G20 countries are contemplating more tax transparency with respect to disclosure of bank accounts and asset holdings held abroad.
To conclude, cryptocurrency exists in decentralized virtual form through a network scattered across a huge number of computers without being subjected to the control of the central government or authorities. Even if we call it an asset or financial product it does not have any underlying asset and so given volatility in its prices it is akin to speculation or gambling. The volume of crypto trading has increased significantly in India but the fact remains that at the end of day, businesses and investors in cryptocurrency participate in an unregulated cryptocurrency market which is risky and dangerous.
Disclaimer
This article is intended to provide a general guide to the subject matter covered. Businesses and people dealing in or with cryptocurrency should seek specialist advice about their specific circumstances in the best of their own knowledge and assessment of risks involved