An Overview of Concept of Cryptocurrency and its Legal Status with Special Reference to India

I. Introduction

A cryptocurrency is a digital or virtual currency that uses cryptography for security. The cryptocurrency is based on blockchain technology. Blockchain technology is an organisational method that ensures the integrity of data in transition. It is essentially a structure that stores "transactional records" known as "blocks" of users or the general public in many "databases" known as "chains" that are linked via a peer-to-peer network. A peer-to-peer network means a network that uses interconnected nodes or peers to share resources or information among each other without using a centralised administrative system. This kind of storage is referred to as a "digital ledger."² Every transaction was authorised by the owner's digital signature, making it more genuine and secure. It is also difficult to forge the coin due to this characteristic. Cryptocurrencies have the potential to become a viable alternative to traditional fiat currencies. It is a decentralised method of exchange, meaning it does not need any intervention from the government, financial institutions, banks, or any other centralised organisation, resulting in transaction anonymity³. And this feature of anonymity attracts a huge number of investors, entrepreneurs, criminals, etc., despite the fact that it is not backed by anyone⁴.

Cryptocurrency offers various benefits over conventional monetary or banking systems, such as making payments or transfers easier, faster, and more secure; processing costs are lower since there is no need to pay commission to banks or financial institutions as it follows a decentralised method of exchange. No third parties are involved in the transaction. Each wallet holder has the ability to send money to anybody, anywhere, and for any amount, resulting in almost limitless transaction possibilities. It cannot be reproduced, counterfeited, or transformed into fake currency, etc.⁵

With the many positive aspects or advantages of cryptocurrency, there are also many negative aspects or disadvantages. Some negative aspects are inherent in nature, while some come with the possibility of misuse⁶. 'Decentralisation’ and ‘anonymity’ are the crucial features of cryptocurrency; hence it is capable of creating a new shadow financial system and thereby aiding and abetting global terrorism, money laundering, tax evasion, etc.⁷ It cannot be neglected that the increase in usage of cryptocurrency will also open up more avenues for conducting white-collar crime easily. It has become a huge global challenge for law enforcement agencies⁸. It has also reduced the effect of economic sanctions on individuals, including countries, and these economic sanctions are considered one of the best ways to enforce discipline among various sovereign powers. It had also increased the avenues for cybercrime, like in 2014, when some anonymous hackers stole bitcoin worth approx—$ 350 million. And because of these reasons, cryptocurrencies are facing a fair degree of fear, criticism, as well as opposition from investors, governments of different countries, etc.⁹

Cryptocurrency has now become a global phrase, and its regulation on a global and local level is a massive undertaking that requires a complete grasp of the economic, financial, legal, technical, and other elements of cryptocurrencies. One of the most serious concerns is defining cryptocurrency's legal character since it impacts the interests of numerous stakeholders, such as investors, society, entrepreneurs, banks, owners, governments, and so on. Countries such as Egypt, Bangladesh, Indonesia, and others have declared it illegal and illegitimate; countries such as Nigeria, South Africa, and others have issued warnings to their citizens not to deal in cryptocurrency; countries such as India, and others, have not made a decision on its legality or illegality; and countries such as Japan, China, the Philippines, the United Kingdom, Singapore, and others have given legal status to cryptocurrency¹⁰. Even a nation called "El Salvador" has designated "Bitcoin" (one of the most prominent cryptocurrencies) as the country's legal tender money¹¹. Another big issue with cryptocurrency regulation is the definition of cryptocurrency since various countries have varied perspectives on the nature of cryptocurrency, such as considering it as "commodities," "securities," "assets," and "goods," among other things. Many nations are attempting to safeguard the interests of their citizens in connection to various aspects of cryptocurrencies by defining cryptocurrency differently and according to their perspective¹².

With respect to the legal status of cryptocurrency in India, the Reserve Bank of India issued a circular on April 6, 2018, prohibiting banks and financial institutions from dealing in virtual currencies or giving any sort of service to anybody dealing in virtual currencies. The same was challenged in a writ petition by IMAI (a non-profit organisation that represents the interests of the digital service sector and connected parties (petitioners). In this case, "Internet and Mobile Association of India vs Reserve Bank of India"¹³, the Supreme Court of India set aside the circular issued by the RBI on the grounds of "proportionality" as it was not reasonable to impose a blanket prohibition in dealing with cryptocurrency.

Another major development in relation to the legal status of cryptocurrency can be seen in the Union’s Budget for the year 2022. The government of India has levied a 30% tax on the transfer of any virtual or cryptocurrency after deducting the cost of acquisition in this budget. However, there is no provision related to carried forward losses. In simple words, it can be said that in the case of profit, the government will get a tax of 30 per cent irrespective of slab rates, but in the case of loss, the assessee will not be able to carry forward such losses¹⁴. By imposing a tax, the government of India has made it clear that dealing in cryptocurrency is not illegal or illegitimate activity. It recognises virtual and crypto-currency as a valid asset class and eventually recognises trading in virtual and crypto-currency as a legal activity¹⁵. This step by the government of India can be seen as a favourable step towards the regulation of the cryptocurrency market in India.

After the imposition of tax on the transfer of cryptocurrency in India, it becomes the duty of the government to draught a proper regulatory framework in relation to the cryptocurrency market in India. And for that purpose, the government of India should conduct a thorough and deliberate study on the technical, economic, and financial aspects of cryptocurrency. Because of its huge financial, social, economic, and technological impact, the government of India should take prompt action in this regard because delay in making a regulatory framework will result in more opportunities for financial crimes and national security dangers, such as terrorism funding, money laundering, tax evasion, etc. Hence, monitoring and regulation of cryptocurrency are crucial for India in order to protect the interests of various related stakeholders, such as investors, owners, society, government, etc.¹⁶

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Footnotes

1. Author has pursued LLM at HNLU, India.

2. Neil Tiwari, The Commodification of Cryptocurrency, 117, Michigan Law Review, 611, 615-616, (2018). ↩

3. Dennis Chu, BROKER-DEALERS FOR VIRTUAL CURRENCY, 118, Columbia Law Review, 2323, 2326, (2018). ↩

4. Jonathan M. Warren, A Too Convenient Transaction: Bitcoin and Its Further Regulation, 8, Journal of Law & Cyber Warfare, 5, 5-7, (2020). ↩

5. Arabinda Sharma, RASHMI PRIYA SHARMA, USING CRYPTO CURRENCY AND ASSOCIATED ADVANTAGES AND DISADVANTAGES, 2, International Journal of Economics & Finance Research & Applications, 18, 18-22, (2018). ↩

6. Louise I. Shelley, Illicit Trade and Terrorism, 14, Terrorism Research Initiative, 7, 7-8, (2020). ↩

7. Elizabeth Rosenberg, Jesse Spiro and Sam Dorshimer, Financial Attacks on Democracy The Role of Cryptocurrency in Election Interference, Center for a New American Security, 1, 1-2, (2020). ↩

8. Paras Vishwakarma, Mr. Zohaib Khan, Dr. Taruna Jain, Cryptocurrency, Security Issues and Upcoming Challenges to Legal Framework in India, 5, International Research Journal of Engineering and Technology, 212, 214, (2018). ↩

9. Christian Catalini, Blockchain Technology and Cryptocurrencies: Implications for the Digital Economy, Cybersecurity, and Government, 19, Georgetown Journal of International Affairs, 36, 36-38, (2018). ↩

10. Claire Groden, Edoardo Saravalle and Julia Solomon-Strauss, UNCHARTED WATERS: A Primer on Virtual Currency Regulation Around the World, Center for a New American Security, 1, 2-17, (2018). ↩

11. Mark Kalakowaski, El Salvador Becomes Bitcoin Laboratory as First Nation to Adopt it as Legal Tender, Investopedia, (Feb. 02, 2022, 10:17 PM), https://www.investopedia.com/el-salvador-accepts-bitcoin-as-legal-tender-5200470. ↩

12. Ibid. ↩

13. Internet and Mobile Association of India vs Reserve Bank of India, 2020 SCC Online SC 275. ↩

14. Indian budget government, https://www.indiabudget.gov.in/, (Last Visited March 02, 2022). ↩

15. Amit Chaturvedi, Union Budget 2022: All you need to know about 'crypto tax', Hindustan Times, (Feb. 03, 2022, 8:10 PM), https://www.hindustantimes.com/budget/union-budget-2022-all-you-need-to-know-about-crypto-tax-101643717434139.html. ↩

16. Dr Afzalur Rahman, Mr K. Mohamed Jasim, Dr Ayub Khan Dawood, Legal Status of Crypto Currency in India: A critical review, 7, International Journal of Engineering & Technology, 960, 962-962, (2018). ↩