Asian jurisdictions have been cautious in developing legal frameworks around virtual currencies, but the volatile market and relentless evolution of cryptos are pushing regulators to act
The cog that turned the regulatory machinery in India to regulate cryptocurrencies, or virtual currencies (VCs), was the circular dated 6 April 2018, issued by the Reserve Bank of India (RBI), prohibiting the banks and financial institutions from dealing or providing services to people dealing in VCs. So far, the regulatory position regarding trading and investing in cryptocurrencies in India fit broadly under two categories: First, the position followed with the issuance of a prohibitory circular by the RBI; and second, the position advent with the pronouncement of a decision by the Supreme Court that struck down the said prohibitory circular of the RBI, being unconstitutional.
Before April 2018, the crypto industry in India remained fairly unregulated, posing a potential impact on the effectiveness of monetary policy, along with risks and concerns about consumer protection, market integrity and systemic safety associated with dealing with digital currency. However, the issue of how to deal with VCs has been lingering with the RBI since June 2013, when in its financial stability reports of 2013, 2015 and 2017 the regulator has consistently raised concerns about legal and operational risks associated with VCs, and has also issued public warnings about the risks associated with VCs.
Between 2013 and 2018, there was a significant rise in the value of many cryptocurrencies, and rapid growth in initial coin offerings (ICOs). This caused wariness with the regulators, triggering the constitution of an inter-disciplinary committee in 2017, comprising the Special Secretary (Economic Affairs) at the Ministry of Finance, and representatives from the departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronic and Information Technology, and from the RBI, NITI Aayog, and the State Bank of India, to examine the regulatory and legal structures and suggest measures for dealing with VCs.
The report submitted by the committee recommended issuance of a clear warning through public media, stating that the government does not consider cryptocurrencies as either coins or currencies, to warn investors to offload such currencies, and to recommend action against those who, despite warnings, indulge in buying or selling, or offering the platform for trading of cryptocurrencies. However, the committee clarified that there is no restriction to using blockchain technology for purposes other than creating or trading in cryptocurrencies.
On 2 November 2017, an inter-ministerial committee was set up to examine the pros and cons of banning and regulating cryptocurrencies. While submitting a draft bill known as the Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018, the committee recommended regulating private cryptocurrencies. The committee believed that banning cryptocurrencies would be an extreme measure, and therefore advised regulatory tools for regulating VC exchanges to permit the sale and purchase of private VCs.
This aided the advent of regulation of the crypto industry in India, though an about face to the recommendations of the inter-ministerial committee in the form of total prohibition, by introducing the circular dated 6 April 2018, issued by the RBI, that prohibited banks, financial institutions and online payment system providers from dealing in VCs or providing any services to people dealing in such currencies with immediate effect.
In this way, the oxygen support to various VC exchanges in India was removed, since access to banking services in the modern economy is essential, especially in light of the restrictions on cash transactions under the Income Tax Act,…
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