Commerce on the Internet has become almost exclusively on all sectors serving as trustable source for electronic payment and much easier than live transaction. In 2008, an unknown computer programmer or group of programmers using the pseudonym name Satoshi Nakamoto created a computer platform that would allow users to make valid transfers of digital representations of value in the name of Bitcon[i]. Cryptocurrency is a digital asset created through an electronic system in which payments are validated by a decentralized network with a cryptography background.

It secures every transaction through cryptography and verifies the transfer of digital-assets transmitted from one user to another. Within a decade the crypto-currency was adopted by many countries by making proper legislation to regulate the transactions. Henceforth, this article is going to discuss the legal position of cryptocurrency in India along with the interpretation made by the apex court on the usage of crypto-currencies.

Cryptocurrency Mechanism

Before going deeper, it's better to understand what is Crypto-currency is and how does it works. Crypto-currency is defined as a form of unregulated digital money, usually issued and controlled by its developers, and used and accepted among the members of a specific virtual community [ii]. These crypto-currency transactions are made through (Blockchain) [iii] technology that governs each and every transaction made under it. These Blockchains are worked on the basis of two methods known as Distributed Data Base and Digital Signature using Private Key. These two mechanisms lead the crypto-currency more secure and durable.

Cryptocurrency In India

Crypto-currency faced many criticisms when it was introduced; previously the access was made only through “dark web” particularly on websites such as (Silk Road) which means payment for illegal transactions. Over the past five years, cryptocurrencies gradually gained its attraction in markets and increased the number of transactions. Even the prices of Bitcoin have also started to face up and battles demand in the world market. From 2012, a ride on the wave's popularity across the world, many cryptocurrency exchanges were started its business in India by providing much-needed depth and increased volume to the crypto market. A boom in the market made new startups for cryptocurrency exchanges in India such as Zebpay, Coinsecure, Unocoin, Koinex, Pocket Bits and Bitxoxo. Whereas, the total number of verified virtual currency users stands at 1.7 million in India and is contacting with the above-mentioned exchange of crypto-currency.

Committee For Analyzing Cryptocurrency

A rapid growth in the cryptocurrency market creates a need for proper legislation to regulate the transactions taking place in a virtual platform. An Inter-ministerial committee under the Chairmanship of Subhash Chandra Garg has been constituted to draft a regulatory framework for Crypto-currencies Trade in India. Even the Committee also included representatives from the Reserve Bank of India (RBI), Ministry of Electronics and Information Technology, the Securities and Exchange Board of India (SEBI), and the Central Board of Direct Taxes. Eventually, the committee has submitted its report in February 2019. Recommends ban on all forms of private crypto-currencies exchanges, investors and other financial intermediaries are also backed the use of Blockchain in selected areas[iv].

The Committee also recommended the Reserve Bank of India to regulate the Digital Currency transaction by virtue of its powers under section 23 of Reserve Bank of India Act[v]. Finally, the committee has drafted a bill on Banning of Crypto-currency and Regulation of Official Digital Currency Bill, 2019 and also insisted the government to form an advisory committee to get an opinion on the Bill.

Special Provisions In Draft Bill, 2019

The Draft Bill has put forth in certain provisions on prohibiting mining, holding, selling, trade, issuance, transferring and use of crypto-currency in the country is punishable with imprisonment of up to 10 years or fine, or both. The next key provision is that the person must declare and dispose of any crypto-currency within 90 days from the commencement of the Act. The Bill allows the use of processes or technology for crypto-currency mainly for experiments, teaching or research. The Bill empowers the police officer not below the rank of Deputy Superintendent of Police as an investigation authority to investigate the offenses under the Act[vi].

RBI Circular On Banning Cryptocurrency Transactions

The boom on crypto-currencies and its adoption by huge numbers of Indian users made the Reserve Bank of India and Ministry of Finance to issue notifications by cautioning the general public about the risks associated with crypto-currencies. At first, the RBI issued Press Release dated 05- 12-2017 reiterating the concerns expressed in an earlier press releases in 2013[vii]. Thereafter, the Finance Ministry on 29.12.2017 issued Press Releases on crypto-currencies cautioning users, holders and traders of VCs that they are not recognized as legal tender and that the investors should avoid participating in them[viii].

At extent, the RBI issued a circular (by invoking section 35A of The Banking Regulation Act 1949) dated April 6, 2018 whereby, the RBI prevented Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and all Payment System Providers not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with Virtual Currencies[ix]. Therefore, the step was taken by the RBI for restricting the crypto-currency exchanges which affected the users who relied on banking channels in sending and receiving money. This approach adversely affected the business operations of converting cash to crypto-currencies and vice versa which clearly halted the crypto-currency market in India.

Matter Stood Before Apex Court

As the operation made by the RBI and finance ministry have seriously affected crypto-currency exchanges and the number of users began to reduce substantially. And People who had bought crypto-currencies were not able to sell and cash out before that they lost access to banking facilities.

To handle such an existential threat, a number of exchange companies who were members of the Internet and Mobile Association of India filed a Writ Petition before the Hon'ble Supreme Court of India. The petition was challenging the circular dated 6 March, 2019 issued by the RBI which restricted the Banks not to entertain the transactions on crypto-currency.

The court, in responding to the contentions, analyzed the role and the power of the RBI under these statutes and sought to determine whether it falls within the scope of that power or not and concluded beyond power.

Secondly, the circular issued in Malice in-law/ Colorable exercise was questioned, the impugned Circular is with respect to the provision of services for facilitating any person or entity in dealing with or settling cryptocurrencies. This prohibition does not extend either to the closing or the freezing of the accounts of the petitioners, hence it shows as colorable exercise/malice in law done by RBI.

Thirdly, the argument based on public interest was also put forth by RBI and it was rejected on the ground that the sufferance of users and holders are not foreseen while passing a circular. Fourth, the circular offended the doctrine of proportionately and it's a violation of Article 19(1)(g) as there is no proper legislation for restricting the use of crypto-currency and no empirical data has been submitted relating to the financial loss or harm caused to the bank due to practice of crypto-currencies. Finally, under the grounds of proportionality, the circular issued by the RBI was set-aside by lifting the ban on crypto/virtual currency transaction and unfreeze the bank account involved in crypto-assets.

Conclusion
Crypto-currencies are not holding legal tender in India, while the exchanges are legal. As there is no proper legislation for crypto-currency in India, which makes complex over the tax imposition on crypto-assets and to regulate the funds for terrorism, money laundering, shell companies, and black money holdings which are done through crypto-currencies. Therefore, the regime can make a better legislation to regulate the crypto-assets after considering all the technical and practical challenges in restricting the shady dealings and better utilization of crypto-assets.

End-Notes:

1. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, January 2009, p. 1, at https://bitcoin.org/ bitcoin.pdf
2. European Central Bank, “Virtual Currency Schemes”, October 2012, https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf.page 13
3. Blockchain is a mechanism that employs an encryption method known as cryptography10 and uses (a set of) specific mathematical algorithms to create and verify a continuously growing data structure – to which data can only be added and from which existing data cannot be removed – that takes the form of a chain of “transaction blocks”
4. Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies” https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf (Page 56)
5. Ibid (page 45)
6. Ibid (page 61)
7. https://www.rbi.org.in/Scripts//FS_PressRelease.aspx?prid=42462&fn=2745
8. Internet and mobile association of India&ors Vs. Reserve Bank of India Writ Petition (Civil) No.528 of 2018 ( para 2.19 & page.17)
9. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243