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 digital medium of exchange created and stored electronically using blockchain technology. It utilizes encryption techniques to regulate the creation of monetary units and verify transactions between users.
Bitcoin is the most widely recognized example of a cryptocurrency. Unlike traditional fiat currencies, cryptocurrencies do not possess a physical form and exist entirely within digital networks.
Cryptocurrencies operate on decentralized systems where no central bank or governmental authority determines supply or controls transactions. Instead, blockchain technology acts as a distributed ledger that records transactions across a peer-to-peer network.
BENEFITS OF CRYPTOCURRENCY
Protection Against Inflation
Most cryptocurrencies are launched with a fixed supply mechanism. For example, Bitcoin has a maximum supply limit of 21 million coins. As demand increases while supply remains limited, the value of the asset may appreciate over time, providing a hedge against inflation.
Self-Governed and Decentralized
Cryptocurrency transactions are maintained by decentralized participants known as miners or validators. These participants verify transactions and maintain network integrity in exchange for rewards, reducing dependence on centralized institutions.
Security and Privacy
Blockchain systems rely on advanced cryptographic methods and distributed verification mechanisms. Users transact through pseudonymous addresses, enhancing privacy while maintaining transaction security.
Ease of Currency Exchange
Cryptocurrencies can be purchased and exchanged using various national currencies such as the Indian Rupee, US Dollar, Euro, British Pound and Japanese Yen through cryptocurrency exchanges and wallets.
Cost-Effective Transactions
One of the most significant advantages of cryptocurrencies is the ability to transfer value across borders with minimal transaction costs by eliminating intermediaries such as banks, payment processors and card networks.
APPREHENSIONS AND RISKS
Despite growing adoption, cryptocurrencies continue to face several concerns and challenges.
- High price volatility makes cryptocurrencies unsuitable as stable currencies.
- Limited merchant acceptance restricts practical use for everyday transactions.
- Governments may impose regulatory restrictions to enhance financial monitoring.
- Loss of private keys or wallet credentials may result in permanent loss of assets.
- Cybersecurity threats, malware and data corruption may compromise digital wallets.
LEGAL FRAMEWORK IN INDIA
2018 RBI Ban
The Government of India has historically maintained a cautious approach towards privately issued cryptocurrencies. While no comprehensive legislation regulating cryptocurrencies had been enacted, the Reserve Bank of India repeatedly issued advisories warning users, investors and traders about associated risks.
On April 6, 2018, the RBI issued a circular prohibiting banks, lenders and regulated financial institutions from dealing with virtual currencies or providing services facilitating transactions involving virtual currencies.
The circular restricted services such as:
- Maintaining cryptocurrency-related accounts.
- Registering cryptocurrency exchanges.
- Trading and settlement services.
- Providing loans secured against virtual assets.
- Accepting virtual currencies as collateral.
- Processing transfers related to cryptocurrency purchases and sales.
Supreme Court Judgment
In Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court of India examined the legality of the RBI circular and ultimately set aside the ban.
The Court acknowledged the RBI’s authority to take preventive action but held that the restriction imposed was disproportionate because the RBI failed to demonstrate actual harm suffered by regulated entities due to cryptocurrency activities.
The Court further observed that while cryptocurrencies had not been expressly banned by law, the RBI circular had effectively eliminated cryptocurrency exchanges from the market, thereby impacting the constitutional right to carry on business under Article 19(1)(g) of the Constitution of India.
LOOKING AHEAD
Following the Supreme Court judgment, the RBI continued expressing concerns regarding the potential impact of cryptocurrencies on financial stability, monetary policy and consumer protection.
The Government subsequently proposed the introduction of The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
The proposed legislation sought to:
- Create a framework for an official digital currency issued by the Reserve Bank of India.
- Prohibit certain categories of private cryptocurrencies.
- Allow limited exceptions to encourage development of blockchain technology and related innovations.
The future regulatory framework for cryptocurrencies in India is expected to balance innovation, financial stability, consumer protection and technological advancement.
Cryptocurrency represents one of the most significant technological innovations in modern finance. While its decentralized nature offers efficiency, transparency and accessibility, regulators continue to grapple with balancing innovation against concerns relating to financial stability, consumer protection and regulatory oversight.
