The blogpost is Part-2 of the Cryptocurrency Series taken up by the Centre. The present post is authored by Ms. Navya Bhandari & Mr. Pratham Pratap Mohanty, Third Year Law Students at National Law University, Jodhpur.
“Bitcoin & other cryptocurrency have as much of a future as the internet itself”
-Christine Lagarde, MD, IMF
Currency evolution is perplexing; technology advancement can be viewed as a constant in our way of life, from cattle sales to the daily worldwide trade of trillions of highly advanced algorithms reflecting monetary value on a trading floor. The internet has been critical in this transition. It has altered the way the world functions in a handful of years. The most frequently cited example is the boon of globalisation. In this tremendously fast-paced world, new advancements are being made to satisfy humanity’s insatiable demands; cryptocurrency is one such development.
The world is becoming increasingly virtual with each passing day. Even when the internet began to pervade every area of our lives on a daily basis, cash did not have a virtual face until 2009. Satoshi Nakamoto’s introduction of the world’s first cryptocurrency, Bitcoin, was most likely motivated by this realisation.
Significant fintech advancements in recent years have simplified complex monetary transactions and introduced us to the concept of virtual currency. Virtual currencies are defined as a ‘digital representation of value that is capable of being traded digitally.’ They serve as a means of trade and a store of value, but do not have the legal tender status in the majority of jurisdictions, which gives fiat currencies an advantage over cryptocurrencies in that regard.
At first, India viewed cryptocurrency as a wild west frontier and was sceptical of Blockchain technology. The Reserve Bank of India [“RBI”] advised users of cryptocurrencies on December 24, 2013, via Press Release number 1261, of a potential ‘financial, operational, legal, customer protection, and security risk associated with the same.’ However, as a result of the rise of digitization and demonetisation, the Indian populace embraced virtual currency as well. Even amid COVID’s 2020 economic slump, India’s cryptocurrency market surged by 317.20 percent.
The RBI issued a legal prohibition on banks enabling any virtual currency service on April 6, 2018. This circular was challenged in the Supreme Court of India by the Internet and Mobile Association of India in Writ Petition (Civil) No.528 of 2018. The Court ruled in its 180-page exhaustive analysis that the RBI circular violated the Indian Constitution’s Fundamental Right to Trade and Profession granted by Art. 19(1) (g).
This series of blogposts will analyse the legal evolution of cryptocurrencies in India, and give a perspective of what the future holds. This first posts seeks to analyse the Subhash Garg Committee Report, and the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
The Subhash Garg Committee Report and the Draft Bill
On November 2, 2017, an Inter-Ministerial Committee under the chairmanship of Mr. Subhash Garg was constituted to analyse the issue of virtual currencies in India and suggest a legislative framework. The committee submitted a report in February 2019.[i]
The committee proposed a complete prohibition on virtual currency trading and the imposition of criminal penalties on the violators. It called for the promotion of distributed ledger technology without virtual currency, as well as for investigation into the viability and use of a sovereign digital currency. The committee also recommended the government remain open to the idea of a State backed digital currency.
The suggestions of the committee seemed to be in shallow waters. The committee observed that that private cryptocurrencies poses challenges to consumer protection due to absence of accountability. However, this fact in itself does not call for banning the instrument, but regulating it. The committee seemed to have missed this, and called for a blanket ban on cryptocurrencies in India. Further, even though the committee recommended the government to come up with its own digital currency, if failed to access whether India has the necessary technical know-how and resources to do it on such a large scale. Also, even though the committee has proposed that cases under the act will be investigated as criminal cases, it forgot to take into consideration that it is improbable to track movement of cryptocurrencies because of it is pseudonymous nature.
The committee report also included the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.”[ii] The draft bill seeks to ban mining, generation, holding, selling, dealing in, issuing, transferring, disposing of or using ‘cryptocurrency’.[iii] The main risks as identified by the committee included, lack of concrete statistic to prove the competence of the distributed ledger technology, cybersecurity, absence of a central infrastructure and entity governing it, lack of clarity about ownership and jurisdiction, lack of sovereign backing, high volatility, consumer protection and inter alia, that mining takes up a huge amount of electricity.[iv] Though the researchers do not question the possibility of risks caused by these factors, they believe in taking a look at the bigger holistic picture, i.e. conducting a cost benefit analysis. The Garg committee, nowhere in its report mentioned or analysed the benefits accruing from cryptocurrency, though the committee has acknowledged the benefits of central bank issued virtual currencies and the distributed ledger technology.[v]
Analysis and Conclusion
Though the risks associated with cryptocurrencies are acknowledged, there are no attempts to minimize the same. The lawmakers refuse to make laws to minimize the risks, and instead adopt a ‘wait and watch’ approach. Thus, the risks associated still remain.
One major threat identified by RBI is illicit money laundering. However, the step taken to mitigate the threat is not a proportionate one. A blanket ban on trading of cryptocurrencies because of money laundering is the same as asking the government to prohibit foreign exchange because money laundering is a threat to it as well. Instead, like other foreign currencies, the government should also try to regulate and monitor it.
One more view to the situation is that, if the government really wants to regulate the crypto transactions, then it should come out with its own RBI virtual currency. A blanket ban is arbitrary to the people who want to reap benefits out of the technology. It will be interesting to see how the government would justify a blanket ban when other nations, which are too faced with the same problems, have at least tried to regulate it, rather than simply giving up on a technology. Further, it is to be kept in mind that the consumption of a good/service does not stop if the government bans it. It instead shifts to the black market. The market continues to exist, but the government cannot tax it.
This lax attitude of the government only exemplifies it’s already proven technological backwardness and a blind eye towards embracing new technological developments. The same was also recognised by the inter-ministerial report in its committee. The report had said, “Given the nascent yet evolving nature of the technology, the Committee recognises that it would be advisable to keep a close watch on developments both globally and within the country.”[vi]
As talked about earlier, any new technology has its own set of potential risks. However, the strategy always has to be to explore and make full use of the technology, and at the same time find ways to mitigate the risks. The outlook of the US is plausible in this regard and will help in understanding how cryptocurrencies can be regulated.
[i] Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, Department of Economic Affairs, Ministry of Finance, Government of India, (Feb. 28, 2010), https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf.
[iii] §3(1), Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, https://www.prsindia.org/sites/default/files/bill_files/Draft%20Banning%20of%20Cryptocurrency%20%26%20Regulation%20of%20Official%20Digital%20Currency%20Bill%2C%202019.pdf
[iv] Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, Department of Economic Affairs, Ministry of Finance, Government of India, (Feb. 28, 2910), https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf.
[v] Id, Section 3(3).
[vi] Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf.