IS BANNING CRYPTOCURRENCY MORE FRUITFUL THAN REGULATION?

Hani Dipti* and Kaustubh Kumar**

INTRODUCTION

In an environment of severe recession all around the world, cryptocurrencies got transformed into
cryptoassets with a promise of high value on returns which has also become a thing of attraction for
Indian investors. To date, there is no official regulation to regulate the use of cryptocurrency in India.
Due to such a deficit of regulation, there is a high probability of fraud and scams. Furthermore,
cryptocurrency is being used for illegitimate purposes such as terror funding and money laundering. It
also has become a cause of global concern for various governments. That’s why Indian financial
institutions released several circulars regarding the circulation and use of cryptocurrencies principally
for Bitcoins, and imposed a ban on them. Thus, this ban severely affected many Indian businesses
and individuals who have invested in digital currencies. Cryptocurrency has the potential to enable
economic growth throughout the globe, and imposing a ban on trading and regulation of
cryptocurrencies leads to dire consequences in the Indian economy, which has already been awfully
affected because of the global pandemic.

A satisfactory reaction by the lawmakers to the challenges introduced by the bitcoins is certainly the
need of the hour. The article attempts to analyze the historic instance of cryptocurrency, more
specifically bitcoins in India, and judicial response towards it. Moreover, it also discusses the current
regulation governing cryptocurrency and compares the global position dealing with the same. Further,
it also attempts to elucidate the way forward.

CRYPTOCURRENCY & BITCOIN

Cryptocurrency is a digital money that is viewed as more secure than actual money; it is used without
any geographical restrictions around the world. A cryptocurrency is a form of money that normally
utilizes decentralized control in comparison to the centralized digital money which is issued by a
centralized financial institute. When a cryptocurrency is minted or made before issuance, or gave by a
solitary user, it is considered to be centralized. ‘Bitcoin’ is a kind of digital currency that is a peer-to-
peer electronic cash system with no involvement of a third party. It enables instant payments to
anyone. Bitcoin was first introduced in 2009, and it is one of the earliest forms of cryptocurrency. 1
Bitcoin works on an open-source protocol that is not issued by any central authority. Originally, Bitcoin
was intended to give an option in contrast as an alternative to fiat money, which is a government-
issued currency backed by an item like gold. National banks have more noteworthy power over the
economy since they can control how much cash is printed. Most paper currencies, like the US dollar
and Indian Rupee, are fiat currencies and have become a universally accepted medium of exchange
directly between two involved parties.

On the contrary, Bitcoin being a cryptocurrency belongs to the same class of digital currencies,
alternative currencies, or virtual currencies. It uses cryptography to secure its transactions. All the
transactions at any point made contained in a publicly accessible, open ledger, albeit in an
anonymous and encrypted form called a blockchain. Blockchain is a common, unchangeable ledger
that encourages the process of recording transactions and tracking assets in a business organization.

* 1st Year B.B.A. LL.B. (H) Student at Chanakya National Law University, Patna. [Authored on April 15, 2021]
**1st Year B.A. LL.B. (H) Student at National University of Study and Research in Law, Ranchi.
1 Frankenfield J, 'Bitcoin' (Investopedia, 2021) https://www.investopedia.com/terms/b/bitcoin.asp accessed 15 April 2021

Published in Article section of www.manupatra.com

Other forms of cryptocurrencies include Lite coin, Ripple, Ethereum, Zcash, Dash, Dogecoin, etc. that
can also be considered cryptoassets. 2

EXCHANGE AND REGULATION OF CRYPTOCURRENCY

Various terms are used by different countries while referring to cryptocurrencies, such as digital
currency (in Australia, Argentina, Thailand), virtual commodity (in Canada, Taiwan, China), cyber
currency (in Italy), electronic currency (in Colombia and Lebanon), and virtual asset (in Honduras and
Mexico).

After the high prominence of cryptocurrency around the globe, several digital currency trades, began
working in India, somewhere between 2012 and 2017, building up the Indian cryptographic money
market.3 Different well-known digital currency traders have grown like Litecoin, Ripple, Ethereum,
Zcash, and so on, reflecting the prompt shifting from the method of payments. However, at the same
time, such an immediate transition alarmed the Reserve Bank of India ("RBI"). RBI acts as a legal
expert in the formation of the economy and has the power and capacity to build the financial and
money-related policy framework system in India. Likewise, it maintains price stability while keeping a
check on the development of the economy. In 2013, the RBI considering the rapid growth of
cryptocurrency gave a Press Release directing the public against managing virtual monetary
currencies, including Bitcoin. 4

Notwithstanding the above direction by RBI, Bitcoin usage got up after the demonetization of high-
esteemed cash notes in November 2016.5 Demonetization triggered the shifting from prompting
conventional web-based financial services to computerized instalments as digital currencies into the
public cognizance. The growing popularity and the adoption of digital forms of money by several
Indian clients forced the RBI to give another Press Release in February 2017 repeating the concerns
raised before and explaining that there is no permitting authority to operate through Bitcoins or Virtual
Currencies.6 In October and November 2017, two petitions were filed in the Supreme Court
by Siddharth Dalmia and Dwaipayan Bhowmickin to limit the sale and purchase and regulate the use
of cryptocurrencies in India. 7

Further, the Inter-ministerial committee under the chairmanship of Secretary (Economic Affairs) was
set up to give the complete analysis of the issue related to cryptocurrencies and put forward specific
actions to be taken. 8 The committee’s report recommended that apart from those virtual currencies
issued by the state, all other private virtual currencies should be completely prohibited in India.
Nonetheless, they do not provide any legal provision which can be implemented against the
cryptocurrencies.

2 'What Is Blockchain Technology? - IBM Blockchain' (Ibm.com) https://www.ibm.com/topics/what-is-blockchain accessed 15

April 2021
3 'Cryptocurrency In India: The Past, Present And Uncertain Future' (The Economic Times, 2021)
https://economictimes.indiatimes.com/tech/trendspotting/cryptocurrency-in-india-the-past-present-and-uncertain-
future/articleshow/81410792.cms accessed 15 April 2021
4 'Reserve Bank of India - Press Releases' (Rbi.org.in, 2015)
https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462 accessed 15 April 2021
5 Mishra A, 'Demonetisation: On Nov 7, It Was Govt Which ‘Advised’ RBI to ‘Consider’ Note Ban, Got RBI Nod Next Day' (The

Indian Express, 2017) https://indianexpress.com/article/business/economy/demonetisation-on-november-7-it-was-govt-which-

advised-rbi-to-consider-note-ban-got-rbi-nod-the-next-day-rajya-sabha-4467235/ accessed 15 April 2021
6 'Reserve Bank of India - Press Releases' (Rbi.org.in, 2017)
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435 accessed 15 April 2021
7
Murali A, 'Two Young Indians Turn to Supreme Court to Make Laws Around Bitcoin, Cryptocurrencies Less Turbid'
(FactorDaily, 2017) https://archive.factordaily.com/bitcoin-regulation-pil-supreme-court/ accessed 15 April 2021
8 'Inter-Ministerial Committee on Virtual Currencies Submits Its Report Along with Draft Bill ‘Banning Of Cryptocurrency &

Regulation Of Official Digital Currency Bill, 2019’' (Pib.gov.in, 2019) https://pib.gov.in/Pressreleaseshare.aspx?PRID=157975

accessed 15 April 2021

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On 6th April 2018, the RBI circular ruled the banks to not only manage or settle with virtual currencies
but also guided them to not provide services to individuals or companies dealing with bitcoins or
cryptocurrencies. 9 This circular disabled the business activities of the cryptocurrency exchanges that
rely on the banking services for conversion of cash to cryptocurrencies and vice versa. It influenced
the cryptocurrency exchange administration and the ordinary administrators, such as paying for office
space, staff salaries, worker space, and so forth.

CRYPTOCURRENCY AT THE ALTAR OF INDIAN JUDICIARY

The members of the Internet and Mobile Association of India ("IMAI") representing interests of the
online and digital services industry filed a writ petition before the Apex Court, on the grounds that
individuals and companies faced a loss of access to banking services due to RBI circular. Further,
they stated due to the RBI's circular substantial reduction in the number of transactions has made
them hard to sustain on operational grounds. Thus, breaching their right to practice any legitimate
profession and trade under Article19(1)(g).10

In this case, the Internet and Mobile Association v. RBI,11 the Supreme Court propounded a 180
pages long judgment in favour of IMAI, quashing the circular released by RBI on the ground of
disproportionality. The court said that RBI has empowered to regulate cryptocurrencies but such
powers must be exercised with proportionality, backed by adequate empirical evidence. The judgment
further noted that RBI has failed to show at least sim balance of any damage suffered by its regulated
circular to effectively ban cryptocurrencies in India. This landmark judgment will play an important role
in shaping the future of cryptocurrencies in India.

CRYPTOCURRENCIES REGULATIONS AROUND THE WORLD

The Financial Action Task Force (FATF), a global watchdog on money laundering and terror funding,
released a report in 2020 named “Virtual Asset Red Flag Indicators” on illegitimate use of
cryptocurrencies in Money Laundering and illegal terror financing.12 To overcome these illicit usage
problems, it recommended countries follow the FATF Travel Rule,13 in which cryptocurrencies
exchanges, digital money, and financial institutions dealing with cryptoassets need to follow Virtual
Asset Service Providers (VAPs) standard.14

Following the FATF’s report, many countries have considered cryptocurrencies illegal because of their
usage in illicit trade, money laundering, and the dark web. For instance, countries such as Canada,
Australia have instituted laws to bring cryptocurrency transactions under the range of illegal activities.
Countries like Nepal, Pakistan, Bolivia, and Vietnam have restricted investments in cryptocurrencies.
Whereas China, Lebanon, Columbia, and Bangladesh have imposed explicit bans by limiting their
country's investing. Further, the countries like Spain, Belarus, the Cayman Islands, and Luxembourg
are developing a cryptocurrency-friendly environment to enhance development in their countries

9 'Reserve Bank of India - Index to RBI Circulars' (Rbi.org.in, 2018)

https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11243 accessed 15 April 2021
10 The Constitution of India, 1950, Art. 19(1)(g).
11 Internet & Mobile Assn. of India v. RBI, (2020) 10 SCC 274: 2020 SCC OnLine SC 275: (2020) 2 CTC 528 (SC)
12 'Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing' (FATF 2020) http://www.fatf-

gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf accessed 15 April 2021

13
'FATF Travel Rule And AML/KYC Guide for Vasps - Sygna' (Sygna) https://www.sygna.io/blog/fatf-crypto-travel-rule-vs-aml-
know-your-customer-kyc/ accessed 15 April 2021
14 ‘12-Month Review of The Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers’ (FATF 2020)

https://www.fatf-gafi.org/media/fatf/documents/recommendations/12-Month-Review-Revised-FATF-Standards-Virtual-Assets-
VASPS.pdf accessed 15 April 2021

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through investing in technologies. Israel treats cryptocurrencies as tax assets. While the US,
Singapore, and Japan consider cryptocurrencies as a currency.

Because of the reason that cryptocurrencies are used as assets in boosting the economy, global
economies have taken several steps to overcome the illegitimate use of virtual currencies. To firmly
regulate cryptocurrencies within their country, South Korea, South Africa, Hongkong, and the United
States have advanced the FATF adjusting proposition to change their virtual resource guidelines in
2021.15 However, in its latest digital Finance Package and Markets in Crypto Asset (Mica), Europe
has decided to firmly control all crypto resources before 2024 by setting up an all-encompassing
advanced system.16

FUTURE OF CRYPTOCURRENCIES REGULATIONS IN INDIA

Despite the circulatory ban on cryptocurrencies by RBI, Indians invested billions of dollars in
Bitcoins.17 It can be deciphered that with such huge investments and booming trade, there is an
immediate need to regulate cryptocurrency. Recently, Minister of State for Finance Anurag Thakur
informed the Parliament that the existing laws are inadequate to deal with cryptocurrencies. 18
Regulatory bodies like SEBI and RBI do not have any legal framework to govern cryptocurrencies.
Moreover, the report submitted by the IMC has no legal provisions that can be applied to deal with
them.19 It is because these currencies are neither assets nor securities offered by identified users.
Despite all these legal uncertainties, cryptocurrencies like Bitcoin are growing rapidly in India. One of
the reasons for this can be that renowned personalities such as Tesla founder Elon Musk have been
abruptly promoting cryptocurrencies.

The government, in the budget session of 2021 has given a positive statement to bring a law on
cryptocurrencies named “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.” 20
However, the uncertainty still exists that the government whether considers cryptocurrencies to be
legit delicate or not. The main reason behind such disapproval is that these currencies are highly
volatile, and support terror funding, dark web transactions. Furthermore, these currencies do not have
any national or international regulations as such.

CONCLUSION

The emergence of bitcoin has started a discussion about its future and other cryptocurrencies. The
recommendation by ‘IMC’ was for an outright ban of private cryptocurrencies, on the other hand, it
highlighted the need for an official digital currency for the promotion of the underlying blockchain
technology. Cryptocurrencies have the potential to boost the economy, which is the worst affected
because of Covid19. It can help in enhancing technology, attracting FDI, and so on. The US and
Europe have already changed or moved their way forward by changing their litigation and regulation
guidelines in the regulation of cryptocurrencies so that they can use cryptos as an asset to their
economy and uplift their financial state to overcome recession. India should also take similar steps in

15 Vermaak W, 'How The FATF Is Driving Global Bitcoin and Crypto Regulation | Coinmarketcap' (Coinmarketcap.com, 2020)
https://coinmarketcap.com/alexandria/article/how-the-fatf-is-driving-global-bitcoin-and-crypto-regulation accessed 15 April 2021
16 Ibid.
17 Srikanth C, 'Indians Should Be Allowed To Have Crypto As An Asset Class: Nandan Nilekani' (Moneycontrol, 2021)

https://www.moneycontrol.com/news/business/indians-should-be-allowed-to-have-crypto-as-an-asset-class-nandan-nilekani-
6679891.html accessed 15 April 2021
18
'What Is Cryptocurrency Bill 2021; How It Will Impact Bitcoin Investors' (Businesstoday.in, 2021)
https://www.businesstoday.in/current/economy-politics/what-is-cryptocurrency-bill-2021-how-it-will-impact-bitcoin-
investors/story/431264.html accessed 15 April 2021
19 Ibid.
20 Ibid.

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changing its regulatory stance on cryptocurrencies. Thus, the need for the hour is that the RBI and the
government should structure an effective framework for cryptocurrencies rather than imposing a
blanket ban on them. A move by the government in favor of the cryptos can put India at the forefront
as a rapidly evolving industry. Thus, ultimately boosting the economy of the country.

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