Open Access Research Article
THE EVOLUTION OF BLOCKCHAIN AND CRYPTOCURRENCY LEGISLATION IN INDIA: REGULATIONS, CHALLENGES AND FUTURE PROSPECTS.
Published Paper
Article Details
THE
EVOLUTION OF BLOCKCHAIN AND CRYPTOCURRENCY LEGISLATION IN INDIA: REGULATIONS, CHALLENGES
AND
FUTURE
PROSPECTS.
AUTHORED BY
- GANESH. VAJRAPU
CO-AUTHOR -
SHAIK ISHRATH SADIQUA
Alliance
University, Bengaluru.
Ph. -
6300317914 & 9000208345
ABSTRACT
The technological development and
changes in the market opened gates for the payment industry which gave scope to
virtual digital assets and virtual currency. Cryptocurrency falls under the
broader category of virtual currency giving digital representation of values,
tokens, and other digital assets using blockchain technology and cryptographic
techniques. Some well-known cryptocurrencies include Bitcoin, Ethereum, tether,
and others with a volatile market, and secure transactions, allowing access to
the global financial system. These cryptocurrencies operated by blockchain
technology with a decentralized network have scalability and technological
challenges. It has a problematic side which includes usage for illicit
activities like money laundering, terrorist financing, frauds, scams, market
manipulation, energy consumption, and regulatory risks. After demonetization in
the year 2016, India was introduced to the Unified Payments Interface (UPI).
Since then, the digital payment, and digital currency market in India has
experienced many changes with mixed regulatory developments, activities, and
interests. The status of cryptocurrency in India is dynamic as initially in
2018 Reserve Bank of India prohibited financial institutions from providing
services associated with cryptocurrency, later this was overturned by the
Supreme Court in 2020. Whereas in the recent budget 2022, it was discussed that
they are not recognized as legal tender in India but are subjected to capital
gains tax and introduced Cryptocurrency Bill 2021 in Lok Sabha which is still
in process. Considering all these aspects it is unclear about the status of
legality or illegality of cryptocurrency along with the hype, evolving stances,
and mixed signals. This paper will look at the need for proper legislation
associated with the regulations on the blockchain and cryptocurrency in India
to get clarity on the status of cryptocurrency and how it can be beneficial.
Keywords: Blockchain, Cryptocurrency,
Regulations, Legislations, Reserve Bank of India, Financial Institutions
Introduction
Blockchain technology has become a
revolutionary force in the era of digital transformation, providing efficiency,
security, and transparency across a broad spectrum of different sectors.
From finance and supply chains to healthcare and governance,
blockchain technology is the cornerstone of the digital revolution and has
continuously reshaped numerous spheres. Fundamentally, blockchain is a
decentralized ledger system that keeps track of transactions across
multiple devices in a way that prevents data from being changed after it has
been recorded. Blockchain's
unchangeable structure fosters confidence among users[1].
India's crypto narrative began
modestly, mirroring global trends. The early 2010s saw the advent of Bitcoin
and a nascent interest in digital assets. However, without clear regulatory
guidelines, the Indian crypto ecosystem operated in a nebulous space,
characterized by enthusiasm but tempered by uncertainty[2].
The Indian government is still in the
process of drafting rules specifically pertaining to virtual currencies.
However, it has updated existing laws, such as the Prevention of Money
Laundering Act, to apply to digital assets. But this emerging technology is
evolving faster than the current legal frameworks, especially in India This is
where blockchain legislation becomes crucial. Government regulations and the stances made
by the Reserve Bank have a significant influence on the development of
cryptocurrencies in India[3].
The country's adoption and use of cryptocurrencies in the future will depend on
how these regulatory components progress.
As the world struggles with all
aspects of blockchain technology, India, with its vast technological potential
and growing digital economy, Acknowledges the revolutionary possibilities of blockchain technology,
the country has set out to create legislation that combines protecting
consumers' interests with promoting innovation. As technology advances across
sectors, the absence of clear regulatory guidelines can lead to ambiguities,
potential misuse, and missed growth opportunities. Furthermore, typical
legislative frameworks frequently fall short due to the
decentralized nature of blockchain, requiring creative solutions served
specifically to India's distinct socioeconomic structure[4].
Methodology
The research adopts a historical,
descriptive, and analytical approach. Historically, it traces the evolution of
blockchain legislation in India, emphasizing pivotal moments like the 2021
BILL. Descriptively, it outlines cryptocurrency's legal status, India's stance
in the global crypto market, and facets of Digital India and UPI transactions.
Analytically, the study evaluates the pros and cons of cryptocurrency, existing
regulations, and taxation implications, and underscores the imperative for a
comprehensive legal framework.
I.
What are Blockchain and Cryptocurrency?
Blockchain is a unique kind of
decentralized ledger system that operates without a central authority and
guarantees safe and open digital transactions. For industries like banking and
finance, its decentralized nature offers heightened security, scalability, and
reduced costs, making it invaluable Blockchain is a transparent ledger that facilitates safe
transactions and provides a platform for trading digital coins in the world of
cryptocurrencies. In India, cryptocurrencies are treated as capital assets and
are thus liable to capital gains tax even though cryptocurrency is not recognized as legal tender in
India, it is viewed as a
capital asset, making it subject to capital gains tax. Specifically, India's
Income Tax Department deems crypto income as capital gains, and the tax rate is determined by how
long the asset is held[5].
Regulation-wise, India remains
cautious. Cryptocurrency is not considered legal tender, and the Reserve Bank
of India (RBI) has cautioned against its risks. The RBI previously prohibited
banks from crypto dealings, but this was reversed by the Supreme Court in 2020,
signaling potential legalization prospects. While owning and trading digital currencies is not outlawed,
The RBI's order prohibiting the
provision of services connected to cryptocurrencies places limitations on
cryptocurrency mining. All things considered, India's stance towards
cryptocurrencies exhibits a combination of caution and expectation, with
regulatory clarification still pending[6].
II. Current
State of Blockchain Legislation in India
India's blockchain legislative
landscape is currently in a state of changing and evolving. No separate law
solely governs blockchain yet, but the government is actively exploring
frameworks to regulate the technology and its applications, particularly around
cryptocurrency[7]. India
does not have a specific law governing cryptocurrencies or blockchain technology.
Instead, the regulatory landscape is shaped and created by various advisories,
circulars, and guidelines issued by different regulatory institutions,
primarily the Reserve Bank of India (RBI) and the Securities and Exchange Board
of India (SEBI). The absence of specific legislation has led to uncertainties,
with stakeholders eagerly awaiting clear directives[8].
Status of Cryptocurrency in India:
legal or illegal
The legality of the cryptocurrency in
India has been a hot topic in the recent times. However, the approach towards
this has been dynamic considering all the decisions taken by the Government of
India. The Inter-Ministerial Committee established in November 2017 gave a
report suggesting a complete ban on private cryptocurrencies. Later Reserve
Bank of India (RBI) in April 2018 released a circular about cautioning users of
virtual currencies (VCs)[9].
It cautioned the holders, users, and traders of VCs which also includes
bitcoins. Through that RBI advised that “The Reserve Bank of India advises that
it has not given any license/authorization to any entity/company to operate
such schemes or deal with Bitcoin or any virtual currency. As such, any user,
holder, investor, trader, etc. dealing with Virtual Currencies will be doing so
at their own risk”[10].Consequently,
the expansion of the cryptocurrency industry in India was impeded since
exchanges need banking institutions to send and receive funds[11].
The committee along with the report
submitted a draft bill on ‘Banning of Cryptocurrency & Regulation of
Official Digital Currency Bill, 2019’ which highlighted positive aspects of
distributed-ledger technology (DLT) and risks associated with them like
volatility in prices and recommended banning of cryptocurrencies, imposing
fines and penalties for carrying any activity connected with crypto in India[12].
Trading platforms for
cryptocurrencies responded by submitting a writ petition to the Supreme Court.
In the matter of ‘Internet and Mobile Association of India v. Reserve
Bank of India[13]’
the apex court in its judgment was of the view that complete prohibition of
cryptocurrency trade and indirect elimination of VC exchanges from the
country’s industrial setup was not an appropriate measure and exceeded the
bound of reasonableness. This struck down particular RBI circulars but did not
comment on the legality or illegality of VCs.
The Finance Ministry in Lok Sabha
introduced ‘Cryptocurrency and Regulation of Digital Currency Bill, 2021’ (the
“New Bill”) aiming to ban all private cryptocurrencies and introduce a Central
Bank Digital Currency (CBDC)[14].
Later considering the increase in transactions in virtual digital assets along
with the magnitude and frequency of the transactions, the finance minister
Nirmala Sitharaman, in the Union Budget 2022 introduced taxation on Virtual
Digital Assets (VDAs). The income from the transfer of VDAs will be taxed by
30% and no deduction concerning expenditure or allowance while computing such
income, except the cost of acquisition[15].
However, the fact that
cryptocurrencies are taxed does not mean that they are fully legal, and there
are currently no operating regulations for them. Cryptocurrency traders are
still waiting for the government to investigate this issue and publish a bill
containing all the regulations governing cryptocurrency transactions and mining
in India[16].
Existing Regulations
There are periodic discussions
regarding the introduction of a "Crypto Regulation Bill" by the
government. Presently, blockchain activities fall under the purview of existing
regulations: the Companies Act of 2013 mandates companies involved in
blockchain to disclose virtual digital assets (VDAs) in their financial
reports. Meanwhile, under the Income Tax Act of 1961, earnings from VDAs face a
30% tax rate, accompanied by a 1% TDS for transactions above 50,000 INR.
Moreover, the Prevention of Money Laundering Act (PMLA) and the Foreign
Exchange Management Act (FEMA) are potential instruments against crypto-related
financial offenses. On the regulatory front, the Reserve Bank of India (RBI)
has adopted a guarded approach, barring banks from direct crypto dealings while
concurrently exploring the development of a Central Bank Digital Currency
(CBDC) initiative. [17]
Even in the absence of a dedicated
law. Notably, the Inter-Ministerial Committee (IMC) Report on Virtual Digital
Assets (VDAs) in 2021, spearheaded by the Finance Ministry, suggested a
regulatory framework for VDAs rather than outright prohibition. The report
advocated for the formation of a Digital Currency Regulatory Authority (DCRA)
and the potential introduction of a Central Bank Digital Currency (CBDC).
Furthermore, during its G20 presidency in 2023, India emerged as a frontrunner
in advocating for international collaboration on cryptocurrency regulation,
underscoring the importance of a measured and harmonized global approach.
III.
Cryptocurrency and Regulation of Digital Currency
Bill, 2021
The ‘Cryptocurrency and Regulation of
Digital Currency Bill, 2021’ bill was introduced during Parliament’s winter
session in Lok Sabha, under this bill the issues associated with banning
decentralized cryptocurrencies are mentioned. It prohibits all private
cryptocurrencies in India. The Ministry of Finance said that any regulations or
prohibitions imposed by law will only take effect following extensive
international cooperation in assessing the advantages and disadvantages and
developing a uniform taxonomy and set of criteria.
Under this bill the crypto-assets are
recognized under a regulatory framework, aiming to reduce unauthorized trading
of private crypto-assets. It also applies legislation like the Prevention of
Money Laundering Act, 2022 to deter terror financing activities. This will aid
the implementation of RBI’s imposed CBDC as legal tender in India. However,
there are drawbacks like cryptocurrency trading and the application of
blockchain technology will be deprived of their important feature which is
decentralized Finance (DeFI). These crypto-assets and trading of
cryptocurrencies will be limited to Indian exchanges, unable to maintain
private crypto wallets. There are no regulatory frameworks for crypto and
digital assets[18].
IV.
Analysis of the Impact of Existing Legislation on
Blockchain Technology in India
India has approached blockchain
technology with an umbrella of evolving laws, policies, strategies, and
regulations. With the 2021 release of the National Strategy on Blockchain,
India envisioned a geographically distributed blockchain infrastructure, aiming
to offer "blockchain as a service". Yet, this enthusiasm is balanced
by the Reserve Bank of India's (RBI) concerns about macro-financial risks
associated with Virtual Digital Assets (VDAs). In its 2023 report, the RBI
underscored challenges like consumer protection, financial stability, and the
unique risks posed to emerging economies. The
regulatory landscape has also expanded to address cybersecurity.
CERT 2022 directions
CERT-In's
2022 (Computer Emergency Response Team) directions mandated rapid reporting of
cyber incidents related to blockchain and VDAs, emphasizing the criticality of
information security. Concurrently, the RBI's introduction of the e-rupee,
India's Central Bank Digital Currency (CBDC), marked a significant stride. With
successful pilot tests involving numerous banks and millions of users by
mid-2023, the e-rupee exemplifies India's intent to harness digital currencies
for efficiency and innovation[19].
Money Laundering, Taxation, and
Digital Lending in the VDA Space
Concerns
around money laundering prompted the Ministry of Finance to extend the
Prevention of Money Laundering Act (PMLA) to entities dealing with VDAs. The
move empowers authorities to scrutinize encrypted transactions, underscoring
the government's intent to ensure transparency and accountability. Taxation,
too, has been a focal point. The 2021 amendments to the Income Tax Act
introduced a nuanced taxation regime for VDAs. While non-fungible tokens found
inclusion, certain closed-system instruments were excluded. The implications,
including a 30% tax on VDA transfers and guidelines for peer-to-peer
transactions, reflect the government's attempt to balance innovation with
revenue considerations.
Digital
lending, an ancillary but significant domain, saw the RBI voicing concerns over
unregulated digital lending platforms. The central bank's recommendations
highlight the government's broader concerns about financial stability and
consumer protection in the digital realm[20].
Parliamentary Dialogue and debates
Parliamentary
inquiries have further illuminated the government's stance. While acknowledging
the potential of blockchain and Web3 technologies, the government has stressed
the need for international collaboration in regulating borderless cryptoassets.
Notably, investigations into evasion cases and illicit activities involving
cryptocurrencies emphasize the government's vigilance against malpractices. In
essence, India's legislative landscape for blockchain technology reflects a
delicate balancing act[21].
While the nation recognizes the transformative potential of blockchain and
digital assets, regulatory measures aim to mitigate associated risks, ensure
financial integrity, and safeguard consumer interests. As India navigates this
intricate regulatory maze, the implications for blockchain technology are
multifaceted, shaping its adoption, innovation, and integration into the
broader digital economy[22].
V. India's
Position in the Crypto Global Market
India's relationship with
cryptocurrency is a fascinating dichotomy. On the one hand, it boasts the
world's second-largest crypto market by transaction volume, a testament to its
tech-savvy citizens' passionate adoption of digital assets. On the other hand, the regulatory
environment is still unclear, with an inconsistent framework of current
standards and a lack of specific legislation creating a cloud of doubt for the
sector.
There is still uncertainty about the
legality of cryptocurrency mining in many places due to the fragmented global
legislative environment around cryptocurrencies. While nations like Israel
subject mining to business taxation, organizations like the U.S.'s FinCEN categorize
cryptocurrency miners under money transmitter restrictions. While the United
States and Canada have a favorable stance on cryptocurrency mining, only a
small number of countries have explicitly banned it[23].
Legal Status of Cryptocurrency in
Other Countries
As the cryptocurrency trade has a global
reach its legal status is different around the world. Countries like the United
States, Singapore, Australia, Japan, and others have spoken about its legality[24].
When it comes to ‘The United
States’ cryptocurrencies are not considered legal tender but cryptocurrency
exchanges are legal and the regulation varies by state. Similarly in Singapore
Cryptocurrencies are not legal but tender but their exchange is legal and
requires registration with the Monetary Authority of Singapore.
In ‘Australia’ the status of
cryptocurrency and its exchange is legal and it is treated as property, it must
be registered with AUSTRAC (Australian Transaction Reports and Analysis
Centre). They have also announced plans to introduce a new licensing framework
that would enable consumers to safely purchase and sell crypto assets in a
regulated environment.
In Japan, the cryptocurrencies
and their exchange status are similar to that of Australia but it requires
registration with the Financial Services Agency. It is considered as world’s
most progressive regulatory climate for crypto and recognizes Bitcoin and other
digital currencies as under the Payment Services Act (PSA). Its future
regulations aim to include new security protocols and new obligations for
crypto service providers to inform or report suspicious activities.
In China cryptocurrency
exchanges are illegal and cryptocurrencies are not a legal tender. China banned
all domestic crypto mining and outlawed cryptocurrencies in September 2021.
China’s central bank is working to introduce official cryptocurrency and
completed pilot tests for e-CNY digital currency[25].
This implies that it is important to emphasize the regulations and some
countries may not have specific laws addressing their status.
VI.
Positive and Negative Aspects of Blockchain &
Cryptocurrency
Blockchain technology plays an
essential role in the cryptocurrency system, it is decentralized and secures
the record of cryptocurrency. As a coin has two sides in the same way
blockchain and cryptocurrency which are interrelated with each other have both
advantages and disadvantages[26].
Advantages:
·
It
supports immutability unlike traditional data by following the CRUD (create,
read, update, and delete) model. It makes it impossible to replace or remove
the recorded data and prevents tampering within the network. Since it creates
an irreversible audit trail, it is simple to track the network changes.
·
Transparency
of the blockchain makes the public trust the network as it is decentralized and
individuals cannot verify the data.
·
Because
blockchain technology is not centralized, it is unaffected by censorship. Thus,
the network cannot be stopped by any one authority, not even governments[27].
·
These
make cryptocurrencies easier to transfer funds directly between two parties
without the involvement of any third party. It can also be used to generate
returns.
·
Streamlining
remittances is another benefit as it makes cross-border transactions faster and
accessible.
Disadvantages:
·
Its
speed and performance are one of the negative aspects since blockchain
technology carries many operations related to cryptography.
·
This
is costlier compared to the traditional database which requires proper planning
and execution from the businesses.
·
Data
that has been recorded using blockchain technology cannot be easily modified;
instead, it is necessary to rewrite the codes in each block, which is costly
and time-consuming.
·
Cryptocurrencies
suffer from price volatility so investments require accurate price monitoring.
·
The
pseudonymous nature can be problematic in some cases as it keeps track of
financial transactions.
·
Popularly
used for illegal and nefarious activities like money laundering, illicit
purchases, and purchase of drugs on the dark web, used by hackers and
criminals.
·
Crypto
mining requires considerable energy sometimes it can be as much as a whole
country requires[28].
VII.
Need for the legal framework for the regulation of
Blockchain and cryptocurrency in India
Considering all the above aspects and
the rise in investments in unregulated digital assets, upward trend since 2020.
Over 1.5-2 crore Indians have reportedly invested in cryptocurrencies, with the
asset class surpassing $10 billion in November of this year, according to data
from multiple local cryptocurrency exchanges. The nation is known to invest
more frequently in gold and other safer assets, but the increasing number of
people adopting cryptocurrencies points to a change in the country's investment
paradigm[29].
The revenue in the cryptocurrency
market is projected to reach US $277.7m in the year 2023 and the number of
users is expected to amount to 328.80m users by 2028[30].
Acknowledging the rise in future and current market size, users there is a need
for a legal framework to secure consumer protection. It can enhance investor
confidence in the crypto market and curb usage for illegal activities making.
The regulations can establish rules or guidelines for the taxation of crypto
transactions and contribute to revenue generation.
The legal framework can encourage
innovation and technology development, it can make India more competitive in
the global market. The regulations can include risk mitigation measures
considering the cryptocurrency market's volatility. They can impact a country’s
monetary policy and financial stability. It can also align India with
International standards facilitating cooperation with other countries. All
these things show the need for the regulation of Blockchain and cryptocurrency
in India for a balance between innovation and the protection of users.
VIII.
RBI's Stance on Cryptocurrencies and Blockchain
Initially, in 2018 a circular
restricted banks from dealing with crypto-related entities, citing concerns
about market integrity and money laundering. However, the Supreme Court's 2020
intervention deemed this directive arbitrary, revitalizing India's crypto
landscape. In response, the RBI clarified banks could serve crypto businesses,
yet consistently issued warnings about crypto risks, from volatility to
cybersecurity threats. Concurrently, the RBI has embarked on Central Bank
Digital Currency (CBDC) explorations, envisioning a digital rupee. While
cautious about private cryptos, the RBI views blockchain optimistically,
acknowledging its transformative potential in sectors like trade finance and
identity verification.
IX.
Prospective
Legislation and Its Implications for
Blockchain
in India
India
is on the cusp of a significant legislative overhaul targeting the digital
realm. With a focus on internet governance, data protection, and cybersecurity,
the government aims to create a conducive environment for digital businesses[31].
Key legislations on the horizon include:
1. National
Data Governance Framework Policy (2022): Introduced
by MeitY, this draft aims to modernize data management, paving the way for
repositories of non-private data crucial for AI and blockchain sectors[32].
2. National
Cyber Security Strategy: Drafted by the National Security
Council Secretariat, this strategy seeks to address India's evolving
cybersecurity challenges comprehensively[33].
3. Digital
Personal Data Protection Act (2023): Replacing
the previously withdrawn Data Protection Bill of 2019, this Act emphasizes
safeguarding personal digital data, ensuring a secure digital ecosystem[34].
4. Digital
India Act: This proposed legislation intends to unify existing
IT laws, regulate emerging technologies like AI, and incorporate feedback on
blockchain and Web 3.0. It underscores the government's commitment to creating
a robust regulatory framework for the digital domain.
These upcoming
legislations highlight how crucial it is for blockchain companies operating in
India to conform to changing regulatory environments. As India positions itself for digital
transformation, the blockchain industry must remain vigilant and adaptable to
navigate the changing legislative terrain[35].
X. Recommendations
for Legislation in India's Blockchain Landscape
·
India
should consider a holistic regulatory blueprint, including a structured
approval process for Initial Coin Offerings (ICOs) and mandatory licensing
systems for trading platforms. This will ensure transparency and protect
investors from fraudulent activities.
·
Fostering
collaboration and stakeholder engagement is crucial, with inclusive dialogues
with industry experts and stakeholders.
·
Clarity
on cryptocurrency taxation is essential, as it should be treated as capital
assets.
·
Regulatory
sandboxes can help innovators and startups pilot blockchain solutions, meeting
regulatory standards while fostering technological advancement.
·
Embracing
global collaborative frameworks, such as Singapore or Switzerland, can provide
valuable insights into global best practices and technological innovations.
·
Public
awareness and empowerment can be achieved through education initiatives and
public awareness campaigns.
·
Comparative
insights from countries like Japan and Malta, as well as China, can provide a
richer perspective on the regulatory landscape in India.
·
India's
unique socio-cultural and economic fabric offers a fertile ground for
blockchain's transformative potential.
Conclusion
India is at a pivotal point in its
journey with blockchain and cryptocurrency, as it is one of the world's
fastest-growing digital economies. The country recognizes the potential of
these technologies but faces challenges due to their association with volatile
digital assets like cryptocurrencies. The evolving nature of India's stance,
from initial caution to recent legislative initiatives, demonstrates its
commitment to fostering a secure and innovative digital ecosystem. The upcoming
legislative initiatives, such as the National Data Governance Framework and the
Digital Personal Data Protection Act, signal India's proactive steps towards
harmonizing its digital laws. These efforts, combined with ongoing parliamentary
dialogues and international collaborations, suggest a maturing regulatory
environment. Understanding India's dynamic regulatory landscape is crucial for
stakeholders, innovators, and investors in the blockchain space. A clear,
balanced, and forward-looking regulatory framework will ensure consumer
protection, financial stability, and innovation, fostering a vibrant digital
economy for all. India can foster a vibrant blockchain startup ecosystem by
prioritizing inclusion, ensuring security through a robust cybersecurity
framework, and incentivizing innovation through fiscal incentives and research
grants, driving both technological and economic growth.
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Article Information
THE EVOLUTION OF BLOCKCHAIN AND CRYPTOCURRENCY LEGISLATION IN INDIA: REGULATIONS, CHALLENGES AND FUTURE PROSPECTS.
Authors: GANESH. VAJRAPU, SHAIK ISHRATH SADIQUA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/12/27
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
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