ARTICLE DETAILS
- Date: March 06, 2021
- Version: 1.0
- Keywords: Cryptocurrency, Bitcoin, RBI
- Jurisdiction: India
LEGISLATION REFERRED
- RBI Notification – Prohibition on Dealing in Virtual Currencies (VCs)
- Internet and Mobile Association of India v. Reserve Bank of India [(2020) 10 SCC 274]
INTRODUCTION
What is Cryptocurrency?
Cryptocurrency is a medium of exchange that is created and stored electronically using blockchain technology and encryption techniques. These technologies regulate the creation of new units and verify the transfer of funds between participants. Bitcoin remains the most widely recognized example of cryptocurrency.
Unlike traditional fiat currencies, cryptocurrencies have no intrinsic physical form and exist only in digital networks. Their supply is not controlled by any central bank, and the network itself operates in a decentralized manner.
Cryptocurrencies function on blockchain technology, which serves as a decentralized ledger that records and validates transactions across a peer-to-peer network.
BENEFITS OF CRYPTOCURRENCY
Early adopters have long argued that cryptocurrencies possess the potential to drive social and economic growth by providing easier access to capital and financial services. Bitcoin and other cryptocurrencies have increasingly been viewed as a digital alternative to conventional fiat currencies.
Today, cryptocurrencies are often treated as stores of value due to several unique advantages.
A. Protection Against Inflation
Most cryptocurrencies are launched with a fixed supply mechanism. For example, only 21 million Bitcoins can ever exist. As demand increases while supply remains limited, the value of the asset may increase over time, potentially providing protection against inflation.
B. Self-Governed and Managed
Cryptocurrency transactions are decentralized and maintained by developers and miners. These participants receive transaction fees as rewards for validating transactions and maintaining accurate records, thereby preserving the integrity of the network.
C. Security and Privacy
Blockchain technology relies on advanced cryptographic methods and mathematical algorithms that are difficult to compromise. Users typically transact using pseudonymous addresses, providing an additional layer of privacy and security.
D. Ease of Currency Exchange
Cryptocurrencies can be purchased using various global currencies including the US Dollar, Euro, British Pound, Indian Rupee and Japanese Yen. Through exchanges and digital wallets, users can convert between currencies with relatively low transaction costs.
E. Cost-Effective Transactions
One of the primary advantages of cryptocurrencies is the ability to transfer funds across borders with minimal transaction fees. By removing intermediaries such as banks and payment processors, cryptocurrencies significantly reduce transaction costs.
APPREHENSIONS AND RISKS
Despite their advantages, cryptocurrencies continue to raise several concerns.
- High price volatility limits their effectiveness as a stable medium of exchange.
- Merchant acceptance remains relatively limited compared to traditional currencies.
- Governments may impose restrictions to facilitate regulatory oversight and transaction monitoring.
- Loss of wallet credentials may result in permanent loss of cryptocurrency assets.
- Hardware failures, malware or corrupted wallet files may lead to irreversible loss of funds.
LEGAL FRAMEWORK
2018 RBI Ban
The Government of India has historically maintained a cautious approach toward privately issued cryptocurrencies. While no comprehensive regulatory framework existed, the Reserve Bank of India repeatedly cautioned users, holders and traders regarding associated risks.
On April 6, 2018, the RBI issued a notification prohibiting banks, lenders and regulated financial institutions from dealing in virtual currencies or facilitating related transactions.
The circular prohibited services such as:
- Maintaining cryptocurrency-related accounts.
- Registering and supporting cryptocurrency exchanges.
- Trading, clearing and settlement activities.
- Providing loans against virtual currencies.
- Accepting virtual currencies as collateral.
- Processing transfers associated with cryptocurrency purchases and sales.
Supreme Court Judgment
In Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court of India set aside the RBI circular and lifted the banking restrictions imposed on cryptocurrency businesses.
The Court observed that although the RBI possessed authority to take preventive measures, it failed to demonstrate actual harm suffered by regulated entities due to cryptocurrency-related activities.
The Court further noted that the circular had effectively eliminated cryptocurrency exchanges from the market and therefore interfered with the constitutional right to carry on trade and business under Article 19(1)(g) of the Constitution of India.
LOOKING AHEAD
Future Regulatory Framework
Following the Supreme Court judgment, the RBI continued expressing concerns regarding the potential impact of cryptocurrencies on monetary policy, financial stability and consumer protection.
The Government subsequently proposed the introduction of The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
The proposed legislation seeks to:
- Create a framework for an official digital currency issued by the Reserve Bank of India.
- Prohibit certain categories of private cryptocurrencies.
- Permit limited exceptions to encourage blockchain technology and innovation.
As the cryptocurrency ecosystem continues to evolve, India is expected to adopt a regulatory framework that balances innovation, technological development, financial stability and consumer protection.
Cryptocurrency represents a major innovation in financial technology. While it offers opportunities for efficiency, decentralization and financial inclusion, regulators continue to evaluate the appropriate balance between innovation and risk management.
