This blog is inscribed by Meenakshi Sharma.
The daily activities of our life have become pliable and efficacious and have been consolidated electronically and virtually, because of the prompt evolution of artificial intelligence and computer technology. The extension of web surfers has resulted in the activation of the notion of virtual worlds and the concept of Cryptocurrency, to promote monetary transactions which comprises of merchandise, purchasing etc. Cryptocurrency means a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. In recent years, virtual currency has been widely used in many different systems.
This article explores the abstract idea of cryptocurrency and also scrutinizes the strength and challenges in the usage of virtual currency. In addition, this article investigates to measure the spread of cryptocurrency usage and view it from a practical perspective and its economic status in India, in order to clearly understand their impact on various Indian laws to regulate them.
The new prototypes for monetary transactions and alternative capital channels have been emerging because of the transformation and modification of the financial and technological world. These transformations have generated many encouraging window of opportunities in several arenas. The financial industry is among the other arenas that have been benefited from the evolution of technology.
Cryptocurrency is one of the prominent monetary formations, which has been materialized being a result of such evolution. It can be explained as a channel of trading other than real-world currencies, whose usage can be in virtual and real monetary transactions. Cryptocurrency is an incorporeal valuable asset which can be utilized in an electronic and virtual manner, in almost a variety of programs, software and web works, which includes games.
By definition, Cryptocurrency means, digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend
As the name suggests, cryptocurrency is based on encryption technology and cryptography is an encryption service which anticipate a technique to covert the data or information to the system. It is a research field that uses various advanced and complex mathematical techniques. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Cryptocurrency does not possess any physical form moreover it is not issued by any Central Authority or banking institution. In contrast to centralized virtual currencies and central banking systems, some cryptocurrencies use decentralization. Ledger technology, usually a blockchain, is used as a public financial transaction database. Bitcoin, the first decentralized and among the approved cryptocurrency, whose utilization and function commenced during 2009, but still there is enigma present about the founder and creator of such technology.
It is expected to provide less transaction cost as compared to the customary e-payment machinery, whereas the second category of virtual currency is Namecoin, which emerged in 2011. At present, hundreds of cryptocurrencies with market value are being traded, and thousands of cryptocurrencies exist at a certain time.
The person needs to transmit the recipient’s public key and the amount of Bitcoins payer wants to consign, in order to trade, to the bitcoin system. An individual and particular code is handed over to every bitcoin subscriber and this individual code works as a countersigned, to guarantee that every transaction is secured and accredited.
Status in India
In India, there has always prevailed a discord and postulation regarding the legality of cryptocurrency. The decentralized nature of currency and lack of bankrolled, has always made cryptocurrency the focus of concern. This currency can be used for the purpose of terrorism or corruption because of its illegal status.
The RBI (Reserve Bank of India) has admonished the citizens about the potential peril associated with cryptocurrency, since quite a long period of time. As a result in April 5th, 2018, RBI declared transactions associated with cryptocurrency as illegal and government also refused to acknowledge the legality of such virtual currency. Moreover, this ban resulted in a situation of turbulence in the cryptocurrency industry prohibiting all financial institutions from rendering any assistance and resources to the merchandise industries of cryptocurrency.
The landmark case in the history of cryptocurrency, Internet and Mobile Association of India v. RBI, the credibility and rationality of the ban imposed by RBI was in dispute. The circular issued by RBI, was challenged on the pretext that:
- The administration and management of the virtual currency does not fall within the jurisdiction of RBI, because of its tradable status.
- The circular was in violation with the fundamental rights of the petitioner.
The first contention of the petitioner was rejected by the S.C on the grounds of the objectives of Reserve Bank of India. The Supreme Court held that, the RBI doesn’t use excessive power and prohibiting anything which may act as a danger or peril to nation’s financial system, falls within the ambit of the RBI.
Supreme Court overturned the circular of RBI, on the foundation of the second contention that is proportionality doctrine. It was held that circular lacks the evidence of proportional loss undergo, because of the trading with cryptocurrency, by the RBI. In addition, the circular deprives the traders of cryptocurrency, of their fundamental rights under Article 19(1)(g) of the Indian Constitution.S.C supported this contention by making segregation among those who use cryptocurrency trading as a hobby and those who use cryptocurrency trading as professionals.
The Supreme Court ruled that the first category of people who buy and sell cryptocurrency only as a hobby cannot file a claim based on Art 19 clause 1, sub clause (g), because it only covers trade, occupation, profession, or business. It further held that people in the second category, who use cryptocurrencies for transactions cannot claim that the circular has the effect of completely shutting down their business, because they can still continue to use “crypto to crypto” currency pairs to trade or use crypto currency pairs. Therefore, it is only the third category, that is, cryptocurrency exchanges that suffered due to circular, because if they are disconnected from the banking channel, they will have no other means of survival.
The Supreme Court pointed out that although the Reserve Bank of India did not find any problems with the operation of these exchanges, the circular still disconnected the banking sector from cryptocurrency exchanges.
Therefore, Cryptocurrency, including Bitcoin, possesses a legal status in India, as Supreme Court overturned the circular imposed by Reserve Bank of India. But there are some red flags or say the judgment has given an interim relation to the business of virtual currency, which revolves around the production of bill to the legislature in order to ban virtual currency. As it is the basic structure of our Constitution that legislation or law have an overriding effect over the verdicts of the judiciary.
Merits of Virtual Currency
In a long period of time, Cryptocurrencies can be considered as a commercial and cost effective undertaking, due to its benefits. Such advantages include:
- Smooth Accessibility – It is easily available to everyone and anyone can invest in it via internet, because of the fact that virtual currency is not assigned by any institution or any particular country.
- No Intermediary – Cryptocurrency facilitate trade without involvement of any middle man because it does not belong to any bank or financial institution.
- Cost Effective – cryptocurrency transactions are very reasonable, low priced, easy and uncomplicated in comparison with traditional mechanism of money transfers. In transactions of cryptocurrency individual details are also secured by way of encryption.
Demerits of Virtual Currency
There are several problems regarded with the usage of virtual currency, more than its benefits.
- Potential security hazards:If hackers and malevolent malicious clientele break the framework and understand the strategies of the virtual currency manifestation, they can obtain the required benefits from virtual cash, which will result in the counterfeiting of currency.
- Hidden troubles in the cryptocurrency framework:Unlimited issuance of virtual cash in a classified virtual network will prompt currency issues because its issuance does not depend on demand and supply.
- Illegal Money: Money laundering is a menace that may rise with the use of virtual currency, especially on platforms that allow customers to use real cash to trade virtual cash.
- Identity risk: Persons involved in cryptocurrency transactions are not under obligation to disclose their true identity, which enable offenders to get paid in virtual currency for illegal means and transactions.
With the implementation of Cryptocurrency, the revenue of various institutions can expect a stretch and moreover it provides an effective online system for conducting monetary transactions. But, despite its benefits cryptocurrency is not administered by authority and lacks adequate laws, putting financial systems at risk.
 2020 SCC Online SC 275