| Date | Version | March 06, 2021 | 1.0 |
| Keywords | Cryptocurrency, Bitcoin, RBI |
| List of Legislation Referred |
|
| Jurisdiction | India |
Introduction
Cryptocurrency is a digital medium of exchange created and stored electronically using blockchain technology. Bitcoin is the most widely known cryptocurrency. Unlike traditional fiat currencies, cryptocurrencies do not have a physical form, are not issued by a central bank, and operate on decentralized peer-to-peer networks.
Blockchain technology functions as a decentralized ledger that records all transactions across a network and relies on cryptographic techniques to validate and secure transactions.
Benefits of Cryptocurrency
- Protection from Inflation: Most cryptocurrencies have a predetermined supply, which may help preserve value over time.
- Decentralized Governance: Transactions are verified and maintained by network participants rather than a central authority.
- Security and Privacy: Blockchain technology provides strong security mechanisms and allows users to transact through pseudonymous identities.
- Ease of Currency Exchange: Cryptocurrencies can be exchanged across multiple currencies and jurisdictions through digital wallets and exchanges.
- Cost-Effective Transactions: Cross-border transactions can often be completed with minimal fees by eliminating intermediaries.
Apprehensions and Challenges
Despite their advantages, cryptocurrencies raise several concerns. Their high price volatility limits their practical use as a stable medium of exchange. Adoption by merchants remains limited, and governments may seek greater regulation to ensure transparency and prevent misuse.
Additionally, loss of access to digital wallets, hardware failures, cyberattacks, or corruption of wallet files may result in permanent loss of cryptocurrency holdings without any recovery mechanism.
Legal Framework
2018 RBI Ban
The Government of India has historically exercised caution regarding privately issued cryptocurrencies. Prior to introducing any comprehensive legislation, the Reserve Bank of India issued multiple advisories warning users, investors and traders about the risks associated with virtual currencies.
On April 6, 2018, the RBI issued a notification prohibiting banks and regulated financial institutions from dealing in virtual currencies or providing services that facilitated cryptocurrency transactions, including account maintenance, trading, clearing, settlement, loans against virtual assets and related activities.
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. The Court held that although RBI possessed regulatory powers and could take preventive action, the restriction imposed was disproportionate because RBI failed to demonstrate actual harm suffered by regulated entities due to virtual currencies.
The Court further observed that the RBI circular had effectively
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