In India, there is a lapse in the legislation on regulation of virtual currency, which either prohibits trade and dealings or legalises their use. The Supreme Court, in the case of Internet and Mobile Association of India v. Reserve Bank of India, set aside the curb imposed by the RBI on banks and NBFCs from trading or providing services in cryptocurrencies. Nevertheless, the court also put emphasis on the dire need of an umbrella legislation for regulation of virtual currencies.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is being reviewed and would be introduced in Parliament soon. The bill’s specifics have not yet been made available. However, market commentary indicates that it would enable the issuing of a central bank digital currency (CBDC) as well as the usage of blockchain and distributed ledger technologies which underpin cryptocurrencies. In terms of private digital currencies, recent remarks by Finance Minister Nirmala Sitharaman suggest that, rather than an outright prohibition, there could be experimentation, discovery and promotion of the emerging technologies behind these.
The draft Bill prohibits all cryptocurrencies due to the threats associated with them, such as alleged money-laundering, consumer risks, and a danger to the country’s financial stability. However, cryptocurrencies have the ability to have additional advantages such as improved record tracking and more effective cross-border transfers. Several countries are using laws to attempt to minimise some of these threats.
According to the draft Bill, cryptocurrency is any content, code, or token that has a digital representation of value and is created by cryptographic or other means. This description might be too vague, encompassing different types of digital tokens that are not developed using cryptography and not in consonance with international standards. Such tokens could not carry the same risks as cryptocurrencies.
The penalties prescribed by the Bill for such offenses could be disproportionate in comparison to other comparable economic offenses in the country. To illustrate, mining, holding, issuing, transferring or any usage of crypto, barring created exceptions, is punishable with a fine or imprisonment of up to 10 years which is synonymous with punishment for possession of marijuana under NDPS.
NATIONAL STRATEGY
The MEITY issued a draft national strategy on blockchain which proposed the establishment of a ‘National Level Blockchain Framework’ which will be a multi-layered infrastructure to host sector-wise specific blockchains. Users under the draft will have the mechanism to access the infra through a ‘National Blockchain API’ which will be linked with Aadhar and E-sign. It has established legal and regulatory barriers to blockchain acceptance, such as privacy concerns, the RBI’s unfavourable views on cryptocurrencies, and impediments due to data localisation criteria. Nevertheless, the draft needs to revisit the data localization requirements as it identifies it as a barrier to the adoption of blockchain. Localisation should be exempted for decentralised storage as it would better security.
According to the draft, privacy is not an important characteristic of blockchain which should not be the case, and it is believed by numerous entities that use privacy-enhancing features on top of blockchains. French Data Protection Authority recommendations on privacy protection could be a potential way forward.
There is an urgent need for regulatory harmonisation since most blockchain technology advancement occurs in the permissionless blockchain domain, it should be proposed that the MEITY collaborate with the RBI and other sectoral regulators to develop an inclusive platform for blockchain in India.
THE WAY FORWARD
In the longer run, licensing and compulsory registration could be a plausible solution that helps in facilitating the compulsory registration of the trader. Any activity or business involving a transaction in crypto should be permitted, however it should be subject to requirements of licensing. Zebpay, a Bitcoin wallet app, often follows a self-regulation scheme thus adhering to KYC and anti-money laundering standards. This allows the rules of the Prevention of Money Laundering Act, 2002 to be applied to ensure that no individual or agency misuses these networks.
In India, a Special Regulatory Body dealing with the Regulation of Virtual Currencies could be empaneled. This body’s responsibilities may involve issuing licenses to virtual currency merchants and organisations receiving virtual currency payments, as well as promoting the registration of different types of virtual currencies floating in the Indian and global markets. This agency would also seek to deter illicit activity using virtual currency and to track down the perpetrators. Its members may involve RBI’s board of directors, governors’ delegates, senior intelligence officers, and economists.
Citizens should be trained on the complexities of using cryptocurrencies. The RBI can provide regular alerts about the opportunities that cryptocurrencies provide for illicit activities such as money laundering and terrorism.