A law to ban Cryptocurrency Trading

With the sprouting of online trading and transactions, a solid increase in the use and demand of cryptocurrencies can be seen. But with the surge in crypto trade, there has also been an increase in the security concerns which come with it. And hence, the legality of cryptocurrency trade in India has been quite a discussion. This article helps to understand the basics of Cryptocurrency. It also addresses the pros and cons and the criticism of trading in the aforementioned currency. The article then speaks about the legal implications of cryptocurrency. It gets to grips with the present status of the bill to ban cryptocurrency trading. It works its way to the conclusion pondering upon the current situation of cryptocurrency trading.

Introduction

What is Cryptocurrency?

Cryptocurrency is a digital or virtual currency that is secured by cryptography (the art of writing and solving codes). This makes it nearly impossible to counterfeit or double-spend the currency. Most of the cryptocurrencies are based on blockchain technology associated decentralized networks—a distributed ledger administered by a diverse network of computers. [1] 

Cryptocurrencies are generally not issued by any central authority; this is one of their most important features. It presents them apparently immune to government interruption or manipulation.

Cryptocurrencies are arrangements that allow for secure payments done online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. 

Types of Cryptocurrency

Bitcoin was the first blockchain-based cryptocurrency. It still remains the most popular and valuable one. Today, there are thousands of alternate cryptocurrencies with various roles and specifications. Some of these currencies are a replica of Bitcoin; some are new currencies that were built from the base. [2]

 As of November 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion, this number rose to 18.5 million bitcoins in the third quarter of 2020.

At present, the total aggregate value of all the cryptocurrencies in existence is almost $214 billion. Out of this bitcoin alone represents more than 68%. [3]

Understanding Cryptocurrency

Cryptocurrencies promise to make it easier to do transactions directly between two parties, eradicating the need for a trusted third party, for example, a bank or credit card company. These transfers are rather secured by the use of public keys and private keys [4] and different forms of incentive systems, like Proof of Work or Proof of Stake [5].

 Under the cryptocurrency systems, a user’s account address also referred to as their “wallet, has a public key. On the other hand, the private key is known only to the owner and is used to undertake transactions. The transactions are completed with minimal processing fees, allowing users to avoid the huge amount of fees charged by banks and other financial institutions.

Whilst all the positives of cryptocurrency, the semi-anonymous nature of these transactions makes them well-suited for a number of illegal activities, such as money laundering and tax evasion. However, cryptocurrency supporters often highly value this semi-anonymous nature, citing benefits of privacy like protection for activists living under repressive governments. 

It is believed that the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals this makes bitcoins quite poor for conducting illegal business online. More privacy-oriented coins do exist, but there are currencies such as Dash, Monero, or ZCash, are far more difficult to trace.

Criticism of Cryptocurrency 

As market prices for cryptocurrencies are based on supply and demand of the free market, the rate at which a cryptocurrency can be exchanged for another currency can shift widely. Moreover, the design of many cryptocurrencies confirms a high degree of scarcity. 

Bitcoin has experienced some rapid changes in value, climbing as high as $20,000 per Bitcoin in late 2017 and then dropping to around $7,000 in the following months.

Cryptocurrencies are thus considered to be a short-lived fad or speculative bubble. 

However, some researchers have identified that the cost of producing a Bitcoin, which requires a large amount of energy, is directly concerning its market price.

Cryptocurrency blockchains are highly secure, but other characters of a cryptocurrency ecosystem, like exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year long history, numerous exchanges have been the subject of hacking and theft. Even so, sometimes with millions of dollars’ worth of “coins” stolen. 

Nevertheless, many observers see the implied advantages in cryptocurrencies. For instance, the possibility of saving value against inflation and facilitating exchange while being much easier to transport and divide precious metals and being outside the influence of central banks and governments.

Legal implications on Cryptocurrency

On April 5, 2018, the Reserve Bank of India issued a press release stating that virtual currencies (VCs), attributed to as cryptocurrencies and crypto-assets, raise concerns of consumer protection, market integrity and money laundering around virtual currencies.

On this day, the banking regulator declared that banks shall not deal with crypto-related businesses. Also, the entities regulated by the Reserve Bank of India should stop providing such services. A day later, the RBI had issued the formal notification stating that entities regulated by it shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.

The central bank’s decision had been challenged by the industry grouping Internet and Mobile Association of India (IMAI), which questioned the RBI’s powers to impose the ban since cryptocurrencies weren’t a “currency” in the legality of the term.  The IMAI pointed out that cryptocurrencies were more of a commodity instead of a currency in nature.

In its submission before the bench comprising justices Rohinton Nariman, Aniruddha Bose and V Ramasubramanian, the central bank had stressed the fact that it had treated cryptocurrency as a digital means of payment that had to be restricted so that the country’s payment system is not jeopardised.

In this context, the RBI had referred to the many occasions when it had cautioned users of cryptocurrencies.

For instance, in December 2013, the RBI cautioned users, holders and traders of virtual currencies, including Bitcoins, about the potential financial, legal and security related risks that come with it.

However, The Supreme Court in March 2020 ended a 2018 ban on banks from dealing in virtual currencies such as cryptocurrencies including bitcoins. A three-judge bench led by Justice Rohinton Nariman quashed the Reserve Bank of India notification issued in April 2018 that had introduced the restriction.

The decision is a big win for the Indian crypto enthusiasts.

The SC held that the RBI had failed to actually demonstrate the damage caused by the use of Cryptocurrencies to RBI regulated entities, given that the RBI had not identified any specific adverse impacts of Cryptocurrencies on banking and financial institutions in India, and had specifically argued that Cryptocurrencies were not actually banned under Indian law.  

Draft banning of cryptocurrency and official digital currency bill, 2019

The Indian government has been weighing on how it will treat cryptocurrencies in the country after a draft crypto bill was submitted by an interministerial committee headed by former Finance Secretary Subhash Chandra Garg last year. 

However, as per recent news on the topic, Cryptocurrency ban legislation does not appear in the list of 45+ bills on the agenda for the 18-day session, and the discussion is kept on hold for now 

The government bill to ban cryptocurrency in India has been floated for inter-ministerial consultations by the finance ministry, say media reports. The decision led to a brief renewal in crypto trading in India. 

However, what cannot be ignored is that the new bill can not only finish the market but poses a significant legal risk if one has invested in cryptocurrencies.

The bill proposed:

  • To forbid mining, holding, selling, trade, issuance, disposal, or use of cryptocurrency in the country.
  • To take possession of, use, or trading in cryptocurrency, a criminal offence and prescribes imprisonment of up to 10 years for such activities. 
  • A person must declare and dispose of any cryptocurrency in his possession. This should be done within 90 days from the enforcement of the Act.
     
  • The draft bill allows the use of various processes or technology underlying any cryptocurrency for the purpose of the experiment, research, or teaching.
     
  • Digital rupee may be issued as legal tender by the central government, in consultation with the RBI. The RBI may also notify a digital currency recognised as legal tender in a foreign jurisdiction, as a foreign currency.  

Key Issues and Analysis of the bill

  • Based on the potential risk associated with cryptocurrencies, the draft Bill proposes a ban on all cryptocurrencies. Such risks include the use of money-laundering, risks to consumers and traders and threats to the country’s financial stability. However, it cannot be ignored that cryptocurrencies also have potential benefits such as better record keeping and more efficient cross border payments.  Several countries are already trying to mitigate some of these risks through regulations.
     
  • The Bill requires cryptocurrency to include information, such as code or token which has a digital representation of value and is generated through cryptographic means or otherwise. This definition may prove to be too broad and include various forms of digital tokens that have not been generated through cryptography.  Such tokens may not pose the risks in question.
  • The penalties prescribed for certain offences under the Bill may be disproportionately higher in comparison to other similar economic offences in the country. [6]

Trade after Ban (by RBI in 2018)

Despite the RBI payments ban, Crypto trading never completely died in India. India’s largest crypto exchange, CoinDCX continued to operate even after the ban. The exchange told that a sharp rise in users and trading volumes were observed after the Supreme Court’s judgment. 

According to the former head of the BACC (Blockchain and Cryptocurrency Committee of the IAMAI) and former CEO of Zebpay, Ajeet Khurana around 50 lakh Indians held a cryptocurrency around a year ago; this would have gone up by around 10%. He estimated a sum of ₹3,500 crores of Indian money is invested in it.

“Two factors are driving up volumes. First, most volumes on crypto exchanges are trading volumes and some traders have come back to the market post the SC judgment. It is largely not fresh investor money pouring in yet. If the latter had happened the price of say bitcoin would’ve been far higher than it is. This is because fairly small fiat currency inflows change cryptocurrency price in a big way,” said Ajeet Khurana “Second, people are sitting at home and have time to trade on their computers. This helps cryptocurrency trading,” he added.

The draft bill to ban cryptocurrency provided a time of 90 days for holders of cryptocurrency to declare and dispose of it. However, a forced sale could trigger substantial losses on holdings and not all crypto investors may be able to sell their holdings in this time period.

Crypto industry leaders in India are distributed over whether some of the newfound interest in virtual currencies is driven by the aggressive monetary policies of central banks in response to the economic downfall caused by the covid-19 pandemic. 

There are various regulatory risks associated with virtual currencies that should be carefully considered by investors. The Supreme Court has invalidated the RBI ban but it has not ruled on the legality of cryptocurrency in India.

Apart from regulatory risks, investors should also keep in mind that cryptocurrencies are highly unpredictable and can lead to plentiful losses. 

The victory in court prompted a solid 450% surge in trading in just two months. According to TechSci Research, there is an increasing concern as more and more Indians are risking their savings amid job losses and an economic slowdown due to the pandemic. 

Paxful reported 883% growth from January to May 2020 from around $2.2 million to $22.1 million in Bitcoin. A Mumbai based crypto exchanger; WazirX grew 400% in March 2020 and 270% in April 2020 on a month-on-month basis, according to TechSci. [7]

Regulating Trades

India’s decision will be crucial as more Asian countries are weighing its pros and cons. China, which banned initial coin offerings and virtual currencies in 2017, recently allowed Bitcoin trading as virtual property, not as fiat money. It is also planning to arrange its own central bank digital currency.

Both Singapore and South Korea regulate crypto trades.

India’s federal government think tank, Niti Aayog, is analyzing possible uses of blockchain structures that publicly store transactional records or blocks in several different networked databases, like to manage land records, pharmaceutical drugs supply chain, or records of educational certificates. 

However, the government is averse to the idea of the cryptocurrency trades.

A renewed trading ban could affect more than 1.7 million Indians trading in digital assets many of which are less than 25 years old and a rising number of companies setting up platforms for the trade.

It will also affect companies like Singapore-based CoinSwitch. Chief executive officer Ashish Singhal said that the state-owned banks are reluctant to work with companies given lack of regulatory clarity. And because there’s no legal recourse, there is the risk of attracting “fly-by-night, negative players trying to cheat” investors.

Conclusion

From the above article, one can conclude that whether a law banning the Cryptocurrency Trade will come or not is still a question. Considering the potential threats proposed by the trade-in question like money laundering, tax evasion, a risk to consumers, the ban seems to be the right decision.

 However, it cannot be overlooked that there has been substantial growth in the trade since the last ban by RBI in 2018. To protect uninformed retail consumers, India needs a regulatory framework instead of an airtight ban “to ensure adequate oversight of the government and the RBI over cryptocurrency businesses,” as said Sanjay Khan, Partner, Khaitan & Co, a New Delhi-based lawyer. 

Such a framework will attract cryptocurrency investors and businesses, which can help improve the economical situation of India. Cryptocurrencies should be subject to considerable regulation, and not a blanket prohibition, under Indian law. 

Moreover, the bill is expected to be discussed shortly by the federal cabinet before it is sent to parliament to be tabled. Despite multiple ban reports, the cryptocurrency users and traders in India firmly believe that the government will not impose a full blanket ban on cryptocurrencies since there is a vast involvement of funds in the trade. If an air-tight ban is imposed most of them would be marked as losses, which further will not be favourable for the country’s financial stability.

FAQs

What is Cryptocurrency?

Cryptocurrency is a digital or virtual currency that is secured by cryptography (the art of writing and solving codes). This makes it nearly impossible to counterfeit or double-spend the currency. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger administered by a diverse network of computers. 

What is the most widely used Cryptocurrency?

Bitcoin was the first blockchain-based cryptocurrency. It still remains the most popular and valuable one.

Is Cryptocurrency Safe?

Cryptocurrency blockchains are highly secure, but other characters of a cryptocurrency ecosystem, like exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year long history, numerous exchanges have been the subject of hacking and theft. Even so, sometimes with millions of dollars’ worth of “coins” stolen. 

How is Cryptocurrency trade a threat?

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a multitude of illegal activities, such as money laundering and tax evasion.

Is there any law to ban Cryptocurrency trade at present?

A law banning the Cryptocurrency Trade will come or not is still a question. A bill to ban Cryptocurrency trade is introduced in the parliament. However, it is kept on hold, whilst to be discussed in other concerned departments of the government prior to the discussion in parliament.

References

[1] https://www.investopedia.com/terms/c/cryptocurrency.asp

[2] https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain#:~:text=Blockchain%20is%20a%20system%20of,computer%20systems%20on%20the%20blockchain.

[3] https://www.statista.com/statistics/247280/number-of-bitcoins-in-circulation/#:~:text=In%20the%20third%20quarter%20of,through%20online%20exchanges%20or%20ATMs

[4] https://www.investopedia.com/terms/p/public-key.asp

[5] https://www.investopedia.com/terms/p/proof-work.asp

[6] https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currency-bill-2019#:~:text=Draft%20Banning%20of%20Cryptocurrency%20%26%20Regulation%20of%20Official%20Digital%20Currency%20Bill%2C%202019,-Ministry%3A&text=The%20draft%20Bill%20seeks%20to,of%20cryptocurrency%20in%20the%20country.&text=The%20central%20government%2C%20in%20consultation,digital%20rupee%20as%20legal%20tender.

[7] https://www.lexology.com/library/detail.aspx?g=b5b38e45-8f4e-46c3-b23e-b4fe69266add#:~:text=In%20a%20landmark%20judgement%2C%20the,virtual%20currencies%20(Cryptocurrencies)%20such%20as

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