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LEGAL STATUS OF CRYPTOCURRENCY IN INDIA

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LEGAL STATUS OF CRYPTOCURRENCY IN INDIA

Harsh Kumar1
Sarita2
Dr. Satish Kumar Mishra3
“Innovation is not always liked in its early stage until it becomes a public point of discussion and interest.
Bitcoin was like the Internet of the early 20s, and today we all use it. Most aspects of our lives revolve around
the internet, the same way blockchain technology and other decentralized apps (DApps) will become
mainstream solutions to our world in the future.”
― Olawale Daniel, Real estate entrepreneur, Lagos, Nigeria
Abstract:
With the rapid development of information & technology & it’s role in human’s lives, online solutions for every
routine works are becoming a new normal. As most of the time of human beings is spent being online or
connected with the online services so now the transactions regarding the financial services as buying, selling &
different kinds of trading are also being made available on online platforms with the use of new technology of
Cryptocurrency. Cryptocurrency is a new kind of intangible property which can be used as an online alternative
of physical currency for all the purposes that we can serve with the later. The use of this intangible currency
isn’t new & its usage is spreading more day by day. It has become a new avenue of trading & investment in
India & having its futuristic implications as the number of online users is ever-growing at exponential rates.
Although India is not having any structured regulatory framework for regulating the use of this virtual currency,
but Indian government has restricted its use time to time & the role of courts especially Supreme Court of India
has also been noteworthy regarding this. This paper focuses on clearing the picture of cryptocurrency in India as
well as its effect on the Indian economy. The study of this research paper also discusses about the present as
well as future aspects of cryptocurrency in India.
Key Words: Cryptocurrency, legality, regulation on cryptocurrency, crypto index

Introduction:
There can’t be any second opinion about the fact that with the advancement of information and technology, the
form & way of doing business & trading has also changed completely. Now the trading is done on the virtual

1Assistant Professor, School of Law, IMS Unison University.

2
Research scholar, Panjab University, Chandigarh.
3Assistant Professor, School of Law, IMS Unison University.

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space without any limits of time & place. As a greater number of people are becoming part of this online world
so this new way of doing business is focused to them.As a parallel virtual world is being created with the
advancement of technologies, following these developments financial services are also made available on this
platforms & one of them is the cryptocurrency, which is been widely used by a huge number of people all
around the world in which India is also not lacking. By cryptocurrency we mean any kind of financial
transaction or as a medium of exchange which is not done using real money, in favor of real or virtual
transactions. Cryptocurrency is the intangible asset or currency which can be used for different virtual platforms
existing in the forms of applications & networks. This new kind of virtual financial tool presents an alternative
to the real money which is very useful in this parallel virtual world that human beings have created by making
the advancements & developments in the information & technology. This is more comfortable way for investors
& traders saving their valuable time & resources as well as giving them full privacy of working.

Cryptocurrency In India:
India, a country with over a billion population has witnessed a new era of economic growth in the past decade
that even few years ago, IMF had no option but to state that India is the fastest growing emerging economy. In
India, where more than 40 percent people use internet & telecom services, online financial transaction services
system seems a viable option. Bitcoin & other cryptocurrencies are being used successfully for financial
transactions from several years now. In a very short period, the use of these digital currencies has become
widespread. After the unprecedented policy changes that were made by Indian government most specifically
demonetization on November 8, 2016, the people in India were seeking the alternatives for the investment. This
change of demonetizing 86 percent of the paper currency in India, was a wake-up call for the investors as well
as people in general, whose paper currency became worthless suddenly. So, after 2016, more people started to
invest in this digital currency & started to sell it later at proper times. Although the use of cryptocurrency has
started from 2012 even at such a small level Pizza shop but still the global percentage of the use of
cryptocurrency in India is very low that amount only 2 percent. Having such a large population this figure of the
use of digital currency in India seems very disappointing, but there are several factors which are responsible for
this:

 High prices of Cryptocurrency in India which 5-10 percent higher than the average prices globally
 Rigid stand of Indian Government over international money flow having a number of restrictions
making it so difficult for the people of India to buy or transact with various foreign digital currencies
platforms
 Ever changing guidelines of RBI regarding the buying or using of cryptocurrencies making it ambiguous
for the people of India the position of the digital currency, that’s why people are in fear while dealing
with this digital currency

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These are main responsible factors which are making the usage of cryptocurrency in India very low if we talk
about it in reference to global percentage of usage. Although the courts and most specifically the apex court in
India has played very important role while lifting the ban over the use of cryptocurrency.

Legal Status of Cryptocurrency in India:

If we look into historical aspect of currency in India, it as old as regime of Sher Shah Suri (1486-1545)who was
the pioneer in introducing the rupee in India. There has been a long history of changes of currency in India. If
we talk about the authority, then under the entry of 36 and 46 of 7th schedule of the Constitution of India the
power to make laws on the matters of Indian currency as well as regarding the foreign exchange matters is
assigned to the Central government in India. There have been various laws which were made by the central
government of India from time to time whenever there was a need, therefore we need to look into those laws
before we can talk about the legal status of cryptocurrency in India:
i. The Foreign Exchange Management Act, 1999 (“FEMA”)
ii. The Reserve Bank of India Act, 1934 (“RBI Act”)
iii. The Coinage Act, 1906 (“Coinage Act”)
iv. Indian Contract Act, 1872
v. The Payment and Settlement Systems Act, 2007 and
vi. The Securities Contracts (Regulation) Act, 1956 (“SCRA”)
vii. The Sale of Goods Act, 1930
The first three acts if we talk about them jointly then these acts are having guidelines regarding circulation, use
and dumping of the currency. If we analyze these acts then we can only have idea that what could be the
definition of currency for legal purposes although currency, bank notes & legal tenders are not mentioned
anywhere clearly.

Definition of currency
As no definition of currency is mentioned under the RBI Act, so for this purpose we refer to FEMA Act in
which currency is defined. According to the definition of the currency under FEMA Act a currency is kind of a
legal tender only if a notification is given by RBI regarding this. As per the definition part under Sec.2 of
FEMA Act:
"Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, traveller’s
cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar
instruments, as may be notified by the Reserve Bank.”

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After analysing the different parts, by currency in India we mean “Currency which is expressed or reeled
inIndian rupees yet does not include special financial institution notes and special one-rupee notes issued under
section 28A of the RBI Act, 1934 (2 of 1934)."
Under the FEMA Act the meaning of the foreign currency is given:“any currency other than Indian currency.”
Legal Tender
Legal tender is nothing but a medium of payment which is legally allowed to transact. Although legal tender is
not defined specifically under Indian laws still, we can have a referral of it under RBI Act:
"Every bank note shall be lawful tender at any of area in India in settlement for the amount stated therein".
If we go through the Coinage Act, 1906 (“Coinage Act”), If we find a reference to legal tender under Section
6& Section 8
Section 6 - Coin when a legal tender
“(1) The coins issued under the authority of section 4 shall be a legal tender in payment or on account, in case
of—
(a) a coin of any denomination not lower than one rupee, for any sum not exceeding one thousand rupees.
(b) a half-rupee coin, for any sum not exceeding ten rupees.
(c) any other coin, for any sum not exceeding one rupee: Provided that the coin has not been defaced and has
not lost weight so as to be less than such weight as may be prescribed in its case.
(2) All new coins in the naya paisa series, designated as such under the notification of the Government of India
in the Ministry of Finance, Department of Economic Affairs, Number S.R.O. 1120, dated the 11th of May 1956
issued prior to the commencement of the Indian Coinage (Amendment) Act, 1964, shall continue to be a legal
tender in payment or on account, in case of, --
(a) a half-rupee or fifty naye paise coin, for any sum not exceeding ten rupees.
(b) any other coin, for any sum not exceeding one rupee.”
Section 8- Power to call in coin
“Notwithstanding anything contained in section 6, the Government may, by notification, call in with effect from
such date as may be specified in the notification, any coin, of whatever date or denomination and on and from
the date so specified, such coin shall cease to be a legal tender, save to such extent as may be specified in the
notification.”
Currency Notes

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"Currency notes means and includes cash in the form of coins and bank notes.”

Indian Government regulations

Since 2012 Bitcoin, one of the cryptocurrencies is in use in India. In 2017, a report was submitted by inter-
disciplinary committee which was formed by government of India for this purpose, the recommendations &
suggestions were to draft a clear legislation for making the use, trade of cryptocurrencies in India an illegal &
punishable act, although such a legislation has not been made yet.
During the year 2018, on February 1st, then finance minister of India Arun Jaitley has discussed about the
cryptocurrency in his budget speech:
“The government will do everything to discontinue the use of Bitcoin and other virtual currencies in India for
criminal uses. He reiterated that India does not recognise them as legal tender and will instead encourage
blockchain technology in payment systems. According to the Indian government people using these types of
currencies should take certain caution because there is no lawful protection for these currencies. And no help
can be gained by the people from the government side if some fraud is faced by the people.”
This shows that even after the 6 years of usage of cryptocurrency in India still government was denying the use
of Bitcoin, a cryptocurrency & was mentioning to take a cautious approach so that people can’t be affected
adversely by the misuse of it. So, the Indian government was weighing the disadvantages over so many
advantages of the use of digital currency.
RBI regulations
In the 2018 only, RBIby using its powers assigned to it under the Reserve Bank of India Act 1934 (“RBI Act
1934”) and the Payment Settlement Systems Act 2007, released a circular in which directions were given for the
entities which are regulated by RBI:
“Not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or
settling virtual currencies; and to exit the relationship with such persons or entities, if they were already
providing such services to them.”
Even though RBI did not directly put a ban on the usage of cryptocurrency by clearly stating but indirectly the
directions were given which resulted in cutting off the links between the digital currency providers and the
Indian economy.
The reasoning of RBI on banning the usage of cryptocurrency in Indian market was consumer centric. RBI was
citing its justifications of banning cryptocurrency on the basis of the concerns regarding the Indian customers:
“Consumer protection, market integrity and money laundering, among others”

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Supreme Court’s position on cryptocurrency

The financial investors of cryptocurrency & people from general public had filed a number of petitions against
this move of banning the use of cryptocurrency by the RBI. These petitions jointly were represented by the
Internet & Mobile Association of India (the “IAMAI”), a not-for-profit industry body with the purpose to show
thestand of digital services corporations.
When this matter came to the Supreme Court of India, there were mainly three issues for discussions:

 Whether cryptocurrency is equivalent to money?

 Whether RBI had the powers to exercise on the use of digital currencies?
 Whether the power is properly used or is there any excessive use of power by RBI?
IAMAI contended that RBI has breached its statutory limits in banning the use of cryptocurrency. The
restrictions made on the economic activities should be matter under the purview of economic policy and not a
matter to be dealt by the regulator. Even though it is considered permissible to intervene in the matters of
economic activities by RBI, still it would be a violation of fundamental right under Art. 19(1)(g)
“The right to practice any profession, or to carry on any occupation, trade or business.”
And whether the restriction on this fundamental right by RBI using Article 19(6) “the interest of the general
public” was based on sufficient grounds because it should justify the doctrine of proportionality. The court
accepted this fact that there is a violation of fundamental right by the issuance of this circular being against
Article 19(1)(g) of the constitution.
The court observed that less intrusive measures could have been taken by RBI but a blanket ban on the use of
cryptocurrency in India was not justified. When this contention was raised against RBI why lesser effective
measures were not applied, the RBI could not defend it. The court concluded that this excessive use of power
was “manifestly arbitrary, based on non-reasonable classification and it imposes disproportionate restrictions”.
It was further added by the court that the banning of an article on the basis of res extra commercium (i.e., not
susceptible to being traded) is a subject matter a policy on which legislation should give directions not an
executive authority as RBI which is acting just as a regulator.
Although this ban was considered disproportional because RBI could not justify it but still court kept the
cryptocurrencies under the purview of RBI, by this concluding remark “anything that may pose a threat to or
have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said
activity not forming part of the credit system or payment system”.
Crypto Index in India:
First crypto index in India named “IC15” has been launched with the function of monitoring top 15 most-traded
cryptocurrencies that are listed on crypto exchanges globally. It is launched by the global cryptocurrency super

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application cryptowire.The benefit of this index is that by tracking the value of a group of cryptocurrencies,
investors can save themselves from the risk of investing in a single digital currency.

Benefits From Crypto Index to India

There will be several benefits to the investors of crypto index:
(1) Diversification:Crypto index will act as a source of diversification. It will be better to invest in diverse
currencies than investing in individual tokens.
(2)It will track the top cryptocurrencies by market cap, and hence, would eliminate the random tokens with no
fundamental use or viable use.
(3) Indian investors are more risk averse so it will create suitable environment for Indian investors.
(4) It will be working as an ideal benchmark for Indian investors investing in the digital currency world.

Tax on Cryptocurrencies
In this finance budget 2022, the crypto assets have been classified as “Virtual digital assets”, these are not
recognised as currencies.
The taxing of cryptocurrencies will be applicable from 1 st April 2022 onwards:
(i) 30% tax on the transfer of crypto assets against income gains
(ii) Tax will be imposed on net profit
(iii) For maintaining the record of transactions 1% TDS (Tax Deduction at Source) will be taken at every sale
transaction, the reduced amount can be used for tax reduction purposes

Implications of Taxing Cryptocurrencies

After taxing the cryptocurrencies, now it’s clear that government is not going to take drastic steps of banning
cryptocurrencies. In the near future we assume that the market of cryptocurrencies will be fully regulated like
the share market. The announcement of taxing cryptocurrencies came day after principal economic advisor
Sanjeev Sanyal said the government would take a balanced view on cryptocurrency.
But RBI still stands for the complete ban of cryptocurrencies because of the fears that these investments in the
digital currencies can harm the macroeconomic stability in the economy. RBI officials informed that pilot
project of CBDC (Central Bank Digital Currency) will be launched very soon.

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Conclusion:
Although the decision of the Supreme Court of India is a relief to a great number of people but still it doesn’t
give the assurance regarding the future regulations of cryptocurrencies because still RBI can regulate it. If we
see previous stands of Indian Government on the matter of cryptocurrencies those have been mostly negative
only. So still a lot of clarity is being expected from the government & RBI side to envisage the future of digital
currencies in India.
Even after taking several steps regarding cryptocurrencies e.g., tax, crypto index etc., still there remains several
questions which need to be answered timely:

 Is cryptocurrency now legal, without bringing cryptocurrency bill, as the governments tax
cryptocurrency?
 What is about the regulator of cryptocurrency?
 What is about the regulation of cryptocurrency?
 What is about the investor protection or exchanges?
According to Purushottam Anand, founder of blockchain law firm, crypto legal:
“Taxing income from cryptocurrencies does not necessarily and explicitly legalise cryptocurrencies because
income tax is not concerned about the manner or means of acquiring the income, an income from both legal or
illegal activities can be taxed under Income Tax Act.”
“ However, looking from a broader context specific tax provisions for cryptocurrencies are a step towards
legalization.”
“The right way to look at it is that the government has the right to tax unaccounted money, the same way it has
right to tax gains from cryptocurrency- be it legal or illegal.” said Harry Parikh, Associate partner, BD India.
Further it is also highly unlikely that the government will collect tax from cryptocurrency transactions and will
then introduce a bill to make cryptocurrencies illegal, Anand Said.
At the “Summit for Democracy” organized by USA last year, PM Modi, too, had said that world leaders must
jointly shape global norms for emerging technologies like social media and cryptocurrencies, so that they are
used to empower democracy not to undermine it. Also, recently at India-Central Asia Summit, PM Modi asked
for common approach on cryptocurrencies.
References
Primary Sources
i. The Foreign Exchange Management Act, 1999 (“FEMA”)
ii. The Reserve Bank of India Act, 1934 (“RBI Act”)
iii. The Coinage Act, 1906 (“Coinage Act”)

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iv. Indian Contract Act, 1872

v. The Payment and Settlement Systems Act, 2007 and
vi. The Securities Contracts (Regulation) Act, 1956 (“SCRA”)
vii. The Sale of Goods Act, 1930
viii. The Banking regulation act, 1949
ix. Constitution of India
x. finance budget 2022

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