Recent Developments on Virtual Currencies in India

The issuance of currency is a sovereign function and fiat currency is the currency that the government has declared to be legal tender. A virtual currency (“VC”), on the other hand, is a digital representation of value that can be digitally traded and function as a medium of exchange. Cryptocurrencies such as Bitcoin Ethereum, Ripple, etc. are a subset of virtual currencies that are decentralized and protected by cryptography. VC does not have an intrinsic value and is not backed by any kind of assets or sovereign guarantee. 

VC is not legal tender in India and India’s Central Bank, Reserve Bank of India (“RBI”) has repeatedly cautioned Indian users and institutions about the potential risks associated with the use of VC and clarified repeatedly that RBI has not authorised any entity in India (whether regulated or unregulated) to deal with Bitcoin or any VC.1 

A high level inter-ministerial committee (“Committee”) was set up on November 02, 2017 to study issues related to the VC, review the existing legal framework for VC in India considering the global perspective and propose specific measures to handle issues pertaining to it. In the Budget Speech 2018, the Hon’ble Union Finance Minister clarified that cryptocurrency is not a legal tender.2 Accordingly, in July 2019, the Committee released a report titled “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies” (“Report”) which also proposed a draft bill titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” (“Bill”). It is also noteworthy that while vehemently opposing and prohibiting use of such cryptocurrencies in India on one hand, the Government also appears keen, on the other hand, to explore potential utility of the underlying technology of cryptocurrencies i.e. Distributed Ledger Technologies (“DLT”). 

The aforementioned circular3 of RBI prohibiting regulated entities from dealing in cryptocurrency was subsequently challenged in the Supreme Court and writ petition is still pending in the Supreme Court.  

Key Recommendations of the Committee 

The Committee has distinguished between an official and non-official VC. The VC issued by private enterprises lack sovereign backing and shall accordingly be construed as non-official VC. The major recommendations of the Committee can be broadly categorized into three namely, acknowledging the key benefits of DLT, imposing a ban on the use of private cryptocurrency and mulling the introduction of Central Bank Digital Currency (“CBDC”) by Government. Few countries such as Venezuela and Tunisia have introduced blockchain based national currency i.e. CBDC while Ecuador also experimented with the same. 

The Committee has acknowledged the importance of DLT which includes, amongst other things, (a) recording, sharing and transfer of data without the need of central record keeping, (b) improving the efficiency and inclusiveness of the financial system (e.g.: lowering cost of KYC), (c) improving access to credit/trade financing, (d) decentralization, immutability and transparency, and (e) potential utility in financial services like insurance, securities and commodities market. 

The Committee has also recommended a ban on the use of cryptocurrency in India except for proposed CBDC. The ban has been proposed considering the anonymity associated with cryptocurrencies and the volatility in their prices. The Committee further criminalizes carrying on any activities connected with cryptocurrencies with a fine up to INR 250 mn (c. USD 3.70 mn) or imprisonment up to ten years.  

The proposal of introduction of CBDC has also been considered keeping in mind the increasing cost of fiat paper and metallic money. CBDC is the digital form of fiat currency which will enable the greater access to central bank liabilities and better potential for the retail transactions. RBI has already set up an inter-departmental group to study feasibility of introduction of CBDC4. The Committee has further allowed RBI to be the appropriate regulator to issue digital currency5.  

Risk and Regulatory Challenges  

The report also discusses several challenges associated with DLT, broadly categorized into three i.e. technological, legal and regulatory. The absence of a central authority to ensure effective governance is an area of concern for effective implementation of DLT which is still evolving as a technology. Key issues such as data localization and cyber security have also been highlighted by the Committee.  

Global Position 

Globally, countries have accorded different legal treatment to virtual currencies, e.g.: Russia, Japan, Canada, Thailand and Switzerland have permitted the use in the form of payment system or means of exchange regulated subject to licensing, registration or reporting requirements. However, China has put a blanket prohibition on all kinds of transactions in cryptocurrency. Nevertheless, no country across the world treats virtual currencies as legal tender. 

Way Forward 

VC is still evolving globally and the risks associated with it prevent it from being legal tender. In financially conservative India, VC and its acceptability may remain in the shadows for long. However, the Committee has rightfully acknowledged the importance of underlying technology of virtual currencies i.e. DLT and rightfully made the distinction between the use of block chain technology and private cryptocurrency. It appears DLT would potentially find many uses in tech-savvy India and the financial sector. The use of blockchain technology for digitizing land records in the States of Andhra Pradesh and Telangana is a case in point. The Bill shall be examined by all concerned departments of Government and regulatory authorities before a statutory mandate is given to it.