Cryptocurrency: 21st Century Myth or Future’s Money?

Presently, Internet and Mobile Association of India (IAMAI) has filed a writ petition in the Supreme Court against the Reserve Bank of India’s (RBI) notification released on April 6, 2018 terming it as arbitrary. This notification prohibits, entities regulated by RBI, their services to entities which operate in cryptocurrencies. Ayushi Gupta attempts to provide legal status of cryptocurrency in India in the light of RBI’s decision.

Introduction: What is Cryptocurrency?

Between the year 2008 and 2012, a programmer or group of programmers under the pseudonym Satoshi Nakamoto introduced peer to peer system of currency called the Bitcoin which later developed the idea of cryptocurrency. Cryptocurrency is one of the forms of the digital currency which is created and stored in blockchain technology. Blockchain is a decentralized database (that means there is no central bank or government determining the supply) based on a consensus of peer network. This is done through encryption techniques by which creation of monetary units can be controlled and transfer of funds can be verified. These currencies are called virtual currencies as they can’t be touched physically unlike the other currencies such as rupee and dollar. Bitcoin is a best known example of cryptocurrency. The importance of the Bitcoin does not lie in the fact that it is world’s first digital currency as digital currency is already in use in the form of debit or credit card. The importance lies in how it is managed: decentralized, peer to peer network (Transactions that do not need a third party intermediary such as Visa or Pay Pal).

Some of the most common features of cryptocurrency are:-

• Irreversible: Transaction involving cryptocurrency can’t be reversed by anyone. Having said that once the money is sent, it is sent even Satoshi Nakamoto can’t undo it.
• Pseudonymous: Transaction in cryptocurrency is not anonymous but pseudonymous which means that transaction is made in so called addresses. These addresses contain 30 characters. Hence, it becomes difficult to know the real world identity of its users.
• Secured: Funds of the cryptocurrency are locked in a public key cryptocurrency system. That means that cryptocurrency can be sent only by the owner of the private key.
• Permissionless: There is no permission required to use cryptocurrency. Anybody can use it after installing the software.
• Fast and Global: Transactions happen instantly and in a couple of minutes. Since they occur in a global network consisting of computers one can send money to anyone around the world irrespective of its physical location.

Reserve Bank of India’s (RBI) Move: The Notification

Reserve Bank of India on 6 April, 2018 released a notification titled as ‘Prohibition on dealing in Virtual Currencies’ which bans banks including commercial, cooperative, payment, small finance banks and NBFCs and payment system providers from providing its services to any entity or person which makes use of cryptocurrency. In short, this circular covers all the entities regulated by the RBI. These services include maintaining accounts, registering, trading, settling, clearing and giving loans against virtual tokens. A deadline of three months calculated from the date when the circular is passed is given to the entities who already operate in cryptocurrency to stop dealing in it.

Why the Ban?

The decision comes after a few public warnings issued before, in the form of public notices and press statements made by the RBI because of unregulated nature of the cryptocurrency, and the consistent negative announcements made by the government officials. In the press statement made by the RBI on 5th April 2018, it said that “Virtual Currencies (VCs), also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others.”

In the press release dated 24 December, 2017 RBI warned users about the associated possible risks in dealing with virtual currencies. These risks include:-

• Losses caused due to hacking, malware attacks, compromise of access credentials, loss of passwords etc. Since there is no authorized central agency to govern it, there could be the loss of e-wallet which could cause the permanent loss of virtual currencies stored in such e-wallets.
• Price volatility of virtual currencies could lead to potential loss to the customers for the reason value of virtual currency is the result of speculation. For instance in the past cryptocurrencies turned into rage in 2014 when the price of Bitcoin (the most well known currency) escalated $1,000. While the rally ended soon after, the frenzy continued when the prices of the Bitcoin went past $10,000 in the month of December 2017. Retail investors, uninformed of the dangers, started converging on virtual currencies exchanges in the nation, making volumes to rise in December 2017 and January 2018.
• Use of such virtual currencies could lead to money laundering, tax evasion and fraud due to the untraceable nature and difficulty in evaluating the taxability of the transaction. RBI also cited media reports which claim that dealing in such virtual currencies could lead to illicit activities. One can use it to buy and sell drugs or weapons.
• There are also legal and financial risks associated with dealing in virtual currencies to the investors as the legal status of the exchange platforms established in several jurisdictions is not clear. Apart from the price volatility, numerous unregulated cryptocurrency exchanges started mushrooming in the nation, putting investors to great dangers.

Impact of the Circular

The outcome of this RBI’s decision will be two-fold. One will be that those who have been investing in virtual currencies by buying and selling them with intent to make quick bucks will have to stop now. The reason being most of the currency exchanges in India for example Zebpay, Unocoin necessitates investors to transact with the help of their bank accounts. With the recent move, investors won’t be able to use the bank accounts to deal in these virtual currencies. Meanwhile, some of the exchanges can transact in cash, it puts such transactions in a shadow of illegality. The other outcome of this move will be that cryptocurrency exchanges will now have to be shut down. Entities governed by the RBI will now have to terminate their business within the stipulated time.

The consequence of the circular is that till now multiple petitions have been filed in the High Court and the Apex Court challenging the RBI notification. The first one to file is Kala Digital Eco-systems in the Delhi High Court. Later, Digital and Blockchain Foundation of India (consortium of cryptocurrency exchange) which merged into Internet and Mobile Association of India, has also challenged the aforementioned circular in Supreme Court. Certain exchanges such as Coindelta, Koinex, Throughbit, and Coin DCX together have filed petitions in the Apex Court. Supreme Court has clubbed all the petitions and heard the matter on 3rd July, 2018 and denied to stay the RBI Notification.

Two Sides of the Coin: What Reserve Bank of India Failed to Address

In the present situation the RBI is acting as an ostrich that thinks that by hiding its head in sand, it can wish away all the inconveniences. The RBI considers that by prohibiting cryptocurrency, nobody would deal in it and all of their inconveniences will go away. Is this the RBI’s way of being naive? Doesn't it understand that this will just impact the genuine users? Does the RBI believe that individuals will stop trading in VCs?

It only implies that trade in the fast developing VCs will shift to overseas. Individuals will purchase and sell on exchanges outside India. There are different ways by which people can transfer cash (even through LRS) outside India which can, at a later point of time, be used to buy VCs. This can lead to its misuse as people can sell these currencies and hide such income by not declaring it which can derive tax authorities of their revenue. How would the tax authority inquire about the transaction details which it recently got for tax purposes from Indian cryptocurrency exchanges? The police and in addition other enforcement authorities obtained the details of suspicious transactions from the exchanges in India when they consistently asked about it. It helped in the solving crime as well. Now, how will they get such information? Additionally, since Indian VCs companies are still allowed to work in cash, some might end in magnifying the previously mentioned risks.

Most of the exchanges working in India attempted to guarantee that associated risks were reasonably reduced and consequently allow people to deal in cryptocurrency in the field of trade and commerce. Presently, many of the cryptocurrency exchanges in India do a comprehensive KYC of its users and don't deal in cash in order to maintain the traceability of transactions. Though, the RBI has failed to appreciate the endeavor of these exchanges. In any case, this move will just obstruct activities of exchanges that desire to do things legitimately with transparency. Rogue users will, in any case, keep on operating through cash or some other covert mode. Besides, the RBI has failed to realize the technological potential of Cryptocurrency in India which is termed by crypto expert Andreas Antonopoulos as the “Internet of Money". Cryptocurrency is an inherent enabler of blockchain technology and it is quite troublesome to isolate VCs from blockchains. After RBI’s move global investors and entrepreneurs would be uncertain if India is an ideal place for innovation. Although some of the developed countries of the world such as U.S.A, Japan has taken a different stand than India by supporting VC for the reason they perceive huge potential in it in terms of innovation. India’s courtesy, the present move has closed the doors on innovation in this area.

Moreover, this move is not only in conflict with the government’s aim to enhance digital payment system in India but also violates the fundamental right of the companies operating in VCs to carry out the trade, business and occupation.

Position in other Countries

With the level of growth that has happened in the cryptocurrency market, great attention is given by the governments and other stakeholders worldwide. For instance, Japan has amended the Payment Services Act (PSA) legalizing transactions involving cryptocurrency. Since there is back up of Japanese government cryptocurrency transactions are thriving in the country. No doubt Japan is coming out as a major player in the Industry as it is taking advantage of the reticence and ambivalence of numerous nations in regard to VCs. In the mid of 2016, the Canadian Central Bank was strongly rejecting the thought of building up its own particular VC. By August 2017, Impak Coin became the first legalized Canadian cryptocurrency. This tells a lot about the change in the attitude of the government of Canada with regard to cryptocurrency. While the Government of their neighbors down South still somewhat uncertain on the status of cryptocurrency, this step just brings Canada as a major power in North America’s crypto scene. In Europe, government policies generally favour cryptocurrency. Germany is one of the countries where Bitcoin is legalized. Tax laws in Germany also favour Bitcoin but there is an exemption of 25% tax on profits for Bitcoin that has been held for a year. However, many of the countries in Europe have not prohibited Bitcoins outright but also have not taken a positive stance pertaining to cryptocurrency. There are countries like Bangladesh who has banned transactions in VCs and imposed 12 years jail imprisonment if anyone violates the law. Though the fact remains VCs continue to be at the forefront of the present day technological advancement and numerous countries continue to take a hard look at blockchain and its possible use.

Analysis

By critical analysis of the circular one can understand that the present move also doesn’t ban cryptocurrency usage in the country but it only means that one can neither perform any transaction on National Electronic Funds Transfer (NEFT), Unified Payment Interface (UPI) nor deposit nor withdraw from VCs exchanges like Zebpay, Unocoin. So no one can withdraw (money) but can buy, sell and receive the VC in Indian exchanges. Thus, post the deadline those who still wish to purchase cryptos with other cryptos can do that but INR to crypto conversion would be difficult.

It is correct to say that the vast majority of the community has already invested in the digital currency sector and this will develop in the distant future. Driving the whole business out of the legal sphere and not recognizing its existence may even prompt bigger law and other problems than initially predicted. The abrupt way, in which this sweeping step has been taken, depicts that there seems to be a breakdown in the consultative procedure that is normally opted by the government. It was at first guaranteed that directions would be issued in March that would provide clarity on the status of VC. Rather, RBI’s circular has rather put an end before it went to regulating the services. This move makes one wonder what is truly being proposed by the RBI and the government, at large. RBI’s step to cut all the legitimate ways of transacting business i.e. banking has forced VCs exchanges to depend on cash for trading which can drive money into the black market than if the services were regulated. This circular might have a far more impact than what was anticipated.

It is also not clear whether the rule is applicable to cryptocurrency exchanges outside India as well. If it is not permitted, investors will have to find other conservative ways to use their money. The aforementioned circular opens a lot a scope for scrutiny before the appropriate judicial forum. The bigger question that ought to be asked is whether RBI had adequate or compelling reason to come down so heavy on VC exchanges. It is not denied that media reports claim that such transactions involve frauds, thefts from electronic wallets but the banking system has seen some of the major frauds in the past too and the method adopted is to bring in more stern regulations. Moreover, the RBI would be liable to answer to any challenge consisting of violation of any fundamental right to conduct business for the reason that circular is equivalent to prohibiting any service involving VC.

The term VC is a wide term and still remains undefined. Anyone would think that travel and reward points like ‘Miles’ earned on transactions through credit or debit cards may likewise be incorporated within the scope of VC. From this, it becomes evident that it is the time that a comprehensive and a consultative approach ought to be taken by the government to safeguard the interest of users/customers and trade to meet the demands of a developing economy.

Conclusion

With the Apex Court, on 6th July 2018, refusing to provide any relief to the business entities operating in cryptocurrency the banks in India has ceased to provide their banking services to such entities. On one hand, many entities have ceased their operations while on the other hand some companies and investors decided to fight back by filing petitions in the Apex court and High Court as they consider that RBI’s notification is arbitrary and unconstitutional. Some have also asked the apex court to decide the legality of cryptocurrency. While there is still ambiguity over the regulatory framework pertaining to the cryptocurrency in India. With the passing of the RBI circular, a lot of business entities suffered a huge loss. Though RBI’s move is still in consonance with the government’s stand on cryptocurrency as Ministry of Finance in the press release on 29, December 2017 stated that cryptocurrency is not a legal tender. Thus, by cutting off any expectation of ever legitimizing exchange consisting of cryptocurrency, the government is pushing business away from India just to guarantee India's misfortune turns into other's advantage.

It is correct to say that Bitcoin and other forms of cryptocurrency are an exceptional technological invention of the decade. The use of blockchain makes decentralized transactions secured. But there arise difficulties in regulating such transactions which refute the use of cryptocurrencies. Though in my opinion, government should try to balance. There is a requirement for the government and RBI to study and comprehend the working of VC. RBI should realize that cryptocurrencies will not go anywhere. Though RBI has warned users of the related risks, there is clearly lack of regulations from the RBI and side of the government. RBI also failed to provide compelling reasons behind such a huge step. The RBI or the government should rather provide clear a legal framework or guidelines which would help in mitigating the risks illustrated by the RBI instead of taking short sighted steps such as withdrawing banking facility. It is evident that RBI doesn't understand transactions involving cryptocurrency are more traceable than the transactions involving cash.

As of now with the kind of ambiguity that looms around, it can’t be said what the outcome will be. Deputy Governor of RBI, BP Kanungo by making the statement that it would consider to introduce a fiat digital currency soon has extended an olive branch to the users of cryptocurrency. This could be a relief to the people who dream about virtual currencies unseating traditional ones in the near future. Though looking at the current scenario the legitimate use of cryptocurrency is uncertain in India in near future but in this digital age, cryptocurrency has still a long way to go.