Regulating Cryptocurrencies in India

Ed. Note: This post by Tanvi Apte is a part of the TLF Editorial Board Test 2018

Technology is changing the very nature of the world we live in. Currency, not to be left behind, is also adapting to this technology-driven change. As Charles Dixon says, “There are three types of currencies (today): commodity based, politically based and now maths based.[1] This “maths based” currency is called cryptocurrency, which simply means virtual money. Cryptocurrency does not have any tangible existence but is electronically “mined” using complex mathematics and circulated over decentralized peer-to-peer computer networks both as a currency and security.

Cryptocurrency is not recognized as legal tender in India.  In his recent budget speech, the finance minister himself reiterated that the “country does not recognize Bitcoin (the most popular cryptocurrency) as legal tender.[2] This comes against the backdrop of repeated warnings by the Reserve Bank against its use since 2013. That said, cryptocurrency is still not illegal in India, it is just not legal currency. Due to this, it is traded as a security or asset (like shares) and not treated like currency. An intensely speculative trading industry (like the stock market) is now developing in India in the wake of increasing popularity of cryptocurrency driven by an inclination of investor preferences towards storing cash electronically, especially post demonetization. Furthermore, the cryptocurrency market is estimated to touch a staggering $1 trillion towards the end of 2018.[3] This is indeed a testimony of its growing use.

However, with growing use also comes growing misuse. Due to anonymity features and jurisdiction independence and lack of regulation, cryptocurrencies, especially Bitcoin, are being increasingly used in criminal activities like money laundering, terrorist financing, fraud, tax evasion (cryptocurrency exchanges in India grew by 250% post demonetization)[4], Ponzi schemes etc. Bitcoin is also becoming the go-to currency for demanding online ransom in instances of phishing and other cyber-attacks. For example, in the recent WannaCry attack that affected about 150 countries, ransom was demanded in Bitcoin.[5] Furthermore, the online black-marketing industry is entirely based on cryptocurrencies. For example, “Silk Road”, one of the many sites selling everything ranging from drugs to bomb making material on the “dark web”, makes extensive use of cryptocurrencies.[6] Furthermore, crackers are also attacking crypto exchanges for the purpose of stealing. Recently in Japan, crackers managed to steal cryptocurrency worth $530 million from an exchange called Coincheck. This was preceded by an attack on exchange Mt. Gox, where about 6% of all the Bitcoin in circulation at the time was stolen. [7]

Thus, to cut a long story short, the list of illegal purposes involving use of cryptocurrency is unending. Also unending is the list of implications of this illegal use. This is precisely why cryptocurrency should be regulated – to clamp down on the illegal activities it is supporting. In lieu of this, the government has constituted a panel in consultation with SEBI and RBI to suggest regulatory measures, thus inviting anticipation that a new cryptocurrency law will soon be in place. [8]

Those against regulation argue that cryptocurrency should not be made illegal just because it serves as a means for illegal activities, analogically comparing it to the situation of cars and guns being made illegal just because they are used as means for illegal activities. However, there are two flaws in this argument.

Firstly, technological superiority of cryptocurrency and its potential to disrupt cannot simply be equated with other commodities. Countries like Russia are using crypto trade as a means of avoiding international sanctions.[9] If there is a cyber war, cryptocurrency will be an inherent weapon used. Thus, cryptocurrencies are an apt example of exactly how destructive technology can be in the wrong hands. They must be regulated to keep technology in the right hands.

Secondly, regulating cryptocurrency need not extend to making it illegal or out rightly banning it. The government hasn’t made guns and cars illegal but has indeed imposed regulatory controls on them, just as it should do for cryptocurrency. Banning cryptocurrency will have the reverse effect of killing a technological revolution. It may be deemed to be a rejection of blockchain technology itself and project India as technology unfriendly. If India bans cryptocurrency, it will lose out on not only its potential technological benefits but also on the growing industry and commerce supported by it. That said, some regulation for cryptocurrency is essential to curb its misuse and impose much-needed criminal liability for the same. Thus, limited, balanced regulation and not banning is the way ahead.

Keeping this in mind, there is no harm in allowing cryptocurrency as legal tender as long as it is subject to reasonable regulation. Like Japan and to an extent Germany, India should also recognize it as legal tender but at the same time introduce compulsory registration and licensing measures for trading in it. Furthermore, imposition of stringent taxation rules on its trade is very important as lack of the same will be construed as the government politically choosing to favour rich crypto users who evade tax. Thus, this policy of balanced regulation will help the crypto industry thrive under greater legal security which will in turn reduce investor risk and promote cryptocurrency itself.

Even though cryptocurrency is regulated, due to jurisdiction and implementation issues, a global body having transnational authority will probably serve to be a much more effective regulator of cryptocurrency than any one country.  However, consensus for the creation of such a body is currently not in sight because of different stances towards cryptocurrency globally. Till such a consensus happens, if at all it happens, the government cannot wait and watch while cryptocurrency goes out of hand.

Thus, some regulation for cryptocurrency is imperative. However, it should be limited to preventing its misuse and not extend to killing its revolutionary technological potential. The balance between allowing technology to thrive while at the same time not allowing it to be misused is what the law should aim to achieve. Hopefully, the upcoming Indian law will do just that.

[1] Chris Dixon, Top 10 Bitcoin Quotes – The Best Quotations About the New Cryptocurrency, Oct 29, 2013. (https://www.slideshare.net/BitcoinChaser/top-10-bitcoin-quotes-the-best-quotations-about-the-new-cryptocurrency)

[2] Sindhuja Balaji, India Is Not Banning Cryptocurrency, Here’s What It Is Doing Instead, Forbes, Feb 6, 2018. (https://www.forbes.com/sites/sindhujabalaji/2018/02/06/india-is-not-banning-cryptocurrency-heres-what-it-is-doing-instead/#304160477c6f)

[3] Arjun Kharpal, Cryptocurrency market could hit $1 trillion this year with bitcoin surging to $50,000, experts say, CNBC, Feb 7, 2018. (https://www.cnbc.com/2018/02/07/bitcoin-price-could-hit-50000-this-year-experts-say.html)

[4] Karan Dhar, How to buy and sell bitcoins? Are bitcoins legal in India?, Business Times, Dec 19, 2017. (http://www.businesstoday.in/current/economy-politics/how-to-buy-bitcoins-in-india-sell-legal-in-india-price/story/253734.html)

[5] Anonymous, WannaCry: hackers withdraw £108,000 of bitcoin ransom, The Guardian, Aug 3, 2017. (https://www.theguardian.com/technology/2017/aug/03/wannacry-hackers-withdraw-108000-pounds-bitcoin-ransom)

[6] Marco Santori, Silk Road Goes Dark: Bitcoin Survives Its Biggest Market’s Demise, Coindesk, May 5, 2017.

[7] Anonymous, New raids on Japan cryptocurrency exchanges after Coincheck hack, The Straits Times, Feb 9, 2018. (http://www.straitstimes.com/asia/east-asia/new-raids-on-japan-cryptocurrency-exchanges-after-coincheck-hack)

[8] P Suchetana Ray, Govt plans to bring in law to regulate cryptocurrency trade, forms panel, Hindustan Times, Jan 13, 2018. (http://www.hindustantimes.com/india-news/government-plans-to-bring-in-law-to-regulate-cryptocurrency-trade/story-SpAO63DDfk6Gg7lo5yNKCJ.html)

[9] Rebecca Pinnington, Bitcoin SHOCK: Russia backs cryptocurrency in bid to DODGE US sanctions, Sunday Express, Dec 17, 2017. (https://www.express.co.uk/news/world/890506/bitcoin-Russia-cryptocurrency-greenback-dollar-oil-petrol-US-sanctions)

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