A Dilemma on The Legal Enactment of Virtual Currency in The Forthcoming Virtual Business Era in India

by Angela Veronica and Yohanna Amelia Simanjuntak

Introduction

Rapid globalisation has caused a widespread impact on many aspects of human lives. As seen from an economic point of view, the term “cryptocurrencies” has emerged as the digital money for exchange. The existence of cryptocurrencies is evidence of technological advancement in the global economy. Etymologically, cryptocurrency is derived from the word ‘crypto’ or the short word for cryptography. Crypto’ means confidential or cloistered and ‘graphy’ means script, while ‘currency’ is a prevailing medium of a legitimate payment transaction. Thus, it can be said that cryptocurrency is a digital currency that is designed by using algorithm system to embody the secrecy among the users.

In 2008, Satoshi Nakamoto, the pseudonym of an unknown person or group of persons, created an electronic system that would allow the users to make online transactions of digital representations of value without going through a financial institution.[1] Afterwards, in 2009, Bitcoin emerged as the first popular type of cryptocurrencies. Whereas historically, cryptocurrencies have been known since the year of 1998 in a form of B-Money which was discovered by a computer scientist named Wei Dai and the other form is Bit Gold by Nick Szabo. However, both B-Money and Bit Gold are not as popular as Bitcoin.[2]

Meanwhile, there are still ongoing debates about the originator of Bitcoin. Satoshi Nakamoto claimed to be the creator of Bitcoin by stating the avowal on the paper about Bitcoin which was uploaded in a cryptography mailing list. However, there is no proof to validate Nakamoto’s statement as the true creator of Bitcoin. Hence, until now it remains unknown who is the true creator behind the formidable creation of Bitcoin.

Along with the brisk enhancement of technology and the aggrandisement of human intellectuality, the mintage of virtual currencies is getting more innovative day by day and also diminishing its debility. Thus far, countless cryptocurrencies revolve in trading society; tracked or untracked. The popular ones that we can find in the market are Bitcoin (2008), Litecoin (2011), Ripple (2012), Monero (2014), Ethereum (2015), Ethereum Classic, NEM (2015), Dash (2014), IOTA, Augur, Waves and many more.[3] These virtual currencies have similarities and dissimilarities in many aspects. Nevertheless, cryptocurrency appeared in the Peer-to-Peer (P2P) system with a decentralized platform for the untraceable transaction regardless of the differences of modification algorithm programming.

The Benefits and Potential Risks of Cryptocurrencies

Currently, cryptocurrencies are being intensely discussed among the bank entities for its advantages as the cross-border transactions in the future. According to an accounting firm, KPMG, central banks in Asia and Europe are now on their last step to eventually launch their cryptocurrencies. Moreover, the International Monetary Fund (IMF) has endorsed the benefits of cryptocurrencies for the reason that it will reduce the dependence on the government-issued currency. Dong He, the deputy director of the IMF’s Monetary and Capital Markets Department, said on his post for IMF that the current cross-border payments are high-priced, ponderous, and obscure. Thus, Dong He affirmed that the transactions with cryptocurrencies can help to answer the impediments on cross-border payments because the systems and the use of advanced technology can resolve the transactions among them in a short period.[4] Moreover for business, by using cryptocurrencies, it will be easier to conduct the micro-transactions which are below one US Dollar. Therefore, it is clear to see that the efficiency of cryptocurrencies for its advanced system is more eminent than just a paper payment system.

Besides the advantages, there is always a loophole for disadvantages that restrain some bank entities from adopting digital currency in their financial and monetary circulation. Commonly, cryptocurrency is analogized as a bubble that can burst at any time, it is well said because of the speculative value it gains. There are some significant reasons why does it count as a speculative instrument:[5] (i) the limited amount of cryptocurrency supply, e.g Bitcoin was designed only 21 million can exist. Up until now, there are 18,334,050 Bitcoins in the presence, hence there are 2,665,950 remain to be mined.[6] (ii) the value of cryptocurrency is enormously volatile, (iii) the valuation itself is determined by market perception. As the digital currency has gained the interest of many investors (mostly as an individual not under the patronage of an institution), it leaves banks some options either embrace or forbid cryptocurrency. It is widely known that the vacillation is related to risks upon unsecured protection and high rates of volatility.[7] Nonetheless, banks must choose where to stand on eventually and outgrow the risks by regulating some policy toward cryptocurrency in specific yet intricate refers to its functioning, e.g tax policy, preclude cybercrime, and the possibility for the central bank to leads.[8]

RBI v. Cryptocurrencies

The virtual currency has entered the alliance of electronic transactions in global society without concerning countries’ boundaries. India is one of the developing countries affected by these, the admittance of cryptocurrency considered as a benefit to embark on the virtual business era. But instead, it gives fissures for a cybercriminal to smooth their actions in cybercrime such as money-laundering and financing of terrorism, et cetera. Earlier in 2013 when cryptocurrency takes its first step in India, it’s visible to see that the Reserve Bank of India (RBI) has already aware of the risks by cautioning people about the peril of purchasing and exchanging using cryptocurrency. Subsequently, in 2017, the government reaffirmed the caution also making it public that RBI itself hasn’t authorized any entity or enterprise to implicate the use of virtual currency in trading. Whilst the use of cryptocurrencies have been escalated, there is a conceivable determination the government has to undertake, either leave these currencies mushroomed and control the market without any intervention, construct regulations to minimize the risks or prohibit without any demurrer. In policy designation, the government needs to consider the liable to a tax of each transaction, ensure the users’ data protection, and forbidden the use for illegal trade or other cyber criminality.[9]

Throughout 2018, the feasibility of cryptocurrencies in India continues to be discussed by the government and financial entities. It is not an easy task for the government to adjust the use of cryptocurrencies in transactions at that time because there are not enough studies to elaborate on the use and the potential impedance of these coins. The lack of regulations and the ambiguity among the current regulations on this problem have made RBI unilaterally announces the blanket ban against cryptocurrencies without many considerations. Therefore, the policy that is made by RBI has invoked the manifold reactions from the users of cryptocurrencies and for that, the injustice in the blanket ban of using cryptocurrencies has escorted the bank central to the court on April 2018.[10] RBI argued that the decision is solely done because they concern about the anonymity of transactions, the protection of the investors and banks from frauds, and the disproportion of cryptocurrencies’ value. However, the exchanges assume RBI’s decision to solve this issue by banning all the transactions using cryptocurrencies is considered as an imprudent judgment. The exchanges also add their arguments by saying whenever money is involved, there are always loopholes for scams, including frauds in the current bank systems.[11]

In 2018, the disputation regarding cryptocurrencies as legal currency in India poised with a disappointing outcome. Unfortunately, it lasts until 2020, there is still no profound alteration on regulating the expediency of cryptocurrencies. However, the Supreme Court of India has lifted RBI’s blanket ban and refused to acknowledge the blanket ban by RBI as the legislation of cryptocurrencies deals in India.[12] Although the verdict sounds rather invigorated for the exchanges or people who deal with cryptocurrencies, however, it still doesn’t concede cryptocurrencies as legal tender nor commodity. This matter delineates the legal vacuum in terms of regulating the enforceability for cryptocurrencies in India. On the other hand, the law exists to fill the legal vacuum in society. Therefore, this issue cannot be condoned by the government and shall be regulated right away while considering all the pros and cons of cryptocurrencies regarding its impact over the society.

The Inclination of the Binding Regulations

RBI as the centralised potentate to the economy of India should not be blindfolded by these alterations in the era of virtual business. The government should be discreet in taking steps. One of the effective steps is to establish a regulation to confine the scope of its tendency. There are two possibilities to regulate cryptocurrencies either concede it as a legal tender or as a commodity just like other assets, i.e. gold.

As an agent of the government, RBI has a role to control all the managements regarding the nation’s currency. Thus, under the Reserve Bank of India Act of 1934, to exteriorize cryptocurrency as legal tender in India must be issued through RBI. If it acknowledges as a legal tender, restrictions have to be enacted unequivocally for instance in license tightening, it has to implicate the elements of -anti-money-laundering, anti-fraud, and also financing terrorism. As a reflection, other countries who have legalised the use of cryptocurrency with some restrictions included are mostly the countries in which domestic currency defined as a safe-haven currency. Therefore, RBI ought to ruminate the performing of Indian Rupee and prevent the feasibility of nose-diving itself concerning the virtual currency. Furthermore, in cryptocurrency exchanges, it is best for bank entities to not afford an opportunity in providing access for exchange directly to domestic currency. Hence, it has to be converted to foreign currency in act of evading the speculation. The government needs to be circumspect on this because the currency is crucially important in predisposing markets and economic stability also vulnerable to cause economic turmoil. Hereafter, authorizing cryptocurrency as a legal tender is a rash move, considering the culture of the people in India still refers to the use of conventional money and merely few people using digital money. The second possibility is to regulate as a commodity just like stocks in the capital market, ergo, there will be curtailment in the use of cryptocurrency only for investment. Accordingly, cryptocurrency will be regulated under capital market law with some adjustments including taxation. The context of taxations means any kind of activity that can be interpreted as obtaining money which comes into revenue.

To actualize the aforementioned points for future regulations, RBI will need collaboration with other entities, like the Securities and Exchange Board of India (SEBI) and the Ministry of Finance. Along with the binding regulations, RBI also obligates to reinforce it’s Financial Technology (FinTech) system and conduct stringent surveillance on the activity of cryptocurrency. If it is necessary, RBI can launch a new entity as a center to actively monitor the progression of cryptocurrencies in India. Regardless of the government’s preference, essentially consumer protection and risk management principle must be maintained. Therefore, it will degrade the probability of turmoil in monetary and financial.

Opinion expressed by the authors are personal.


[1] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin, https://bitcoin.org/ bitcoin.pdf (last visited May 3, 2020). 

[2]  Bernard Marr, A Short History Of Bitcoin And Crypto Currency Everyone Should Read, Bernard Marr & Co., https://www.bernardmarr.com/default.asp?contentID=1237 (last visited May 3, 2020).

[3] Monia Milutinović, Cryptocurrency, 64, EKONOMIKA, 105, 112-114 (2018).

[4] Lucas Mearian, The race to integrate crypto into global banking is real, COMPUTERWORLD (Jan.10, 2020, 3:00 AM), ·     https://www.computerworld.com/article/3512650/the-race-to-integrate-crypto-into-global-banking-is-real.html.

[5]   Mohamed Damak, The Future of Banking: Cryptocurrencies Will Need Some Rules to Change the Game, S&P Global (Feb.19, 2018), https://www.spglobal.com/en/research-insights/articles/the-future-of-banking-cryptocurrencies-will-need-some-rules-to-change-the-game.

[6] Buy Bitcoin Worldwide, How Many Bitcoins Are There?, www.buybitcoinworldwide.com, https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/ (last visited Apr. 20, 2020).

[7] Vishal Marria, Should Banks Be More Open To Cryptocurrencies?, FORBES (Oct. 5, 2018), https://www.forbes.com/sites/vishalmarria/2018/10/05/should-banks-be-more-open-to-cryptocurrencies/#3597cb0e3855.

[8]  Mohamed Damak, supra note 4.

[9] Munish Sharma, Cryptocurrencies and The Regulators Dilemma, IDSA (Aug. 1, 2017), https://idsa.in/system/files/comments/sf_cryptocurrencies_msharma.pdf.

[10]  Nupur Anand, How India Choked Its Cryptocurrency Ecosystem To Near-Death, QuartzIndia (Jul. 5, 2018), https://qz.com/india/1321076/bitcoin-ban-how-rbi-choked-indias-cryptocurrency-ecosystem/.

[11]  Nupur Anand, Why India’s Central Bank Doesn’t Trust Cryptocurrencies, QuartzIndia (Jul. 12, 2018), https://qz.com/india/1326385/the-reasons-why-rbi-doesnt-trust-cryptocurrencies/.

[12] Tax Guru,SC lifts Ban Imposed by RBI on Cryptocurrency, Tax Guru (Jul. 12, 2018), https://taxguru.in/rbi/sc-lifts-ban-imposed-rbi-cryptocurrency.html.  

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