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CRYPTOCURRENCIES IN INDIA: A LEGAL FRAME OF REFERENCE.

INTRODUCTION

Cryptocurrencies are a subject of utmost discussion nowadays which has been obtaining certain scrutiny not just in India but all over the world. With time, abundant people around the world were enthralled by the idea of a decentralized currency whose value was not determined by a legal authority or statute, instead, it was regulated via demand and supply. In the prelude, only developers and people with certain expertise and knowledge in the field of computer science were aware of cryptocurrencies and it was around April 2011 when the buying and selling of cryptocurrencies were accessible to everyone. It didn’t take any expert to infer that cryptocurrencies weren’t exactly legal, as a plethora of illegal acts i.e illegal arms deals, trafficking, smuggling, money laundering and even buying and selling of products via the dark web were at their peak just after 1.5 years later after the commencement of cryptocurrencies. However, it is imperative to note that they were not introduced with the intention of being used by criminals, but it couldn’t have been taken out of proportion that a decentralized form of money with no legal framework or regulations could be used for illegal activities. In India, back in 2013 the buying and selling of cryptocurrencies began and swiftly became a trend whilst the legal stance for it was dicey, it didn’t stop citizens from investing their money in it. To possess a fair knowledge about the legality of cryptocurrencies, one must first and foremost be aware of what exactly is a cryptocurrency and what is technological aspect behind it.

WHAT ARE CRYPTOCURRENCIES?

Cryptocurrencies often referred to as Crypto for the sake of brevity are a decentralized form of digital currency which is established upon blockchain technology. In order to fully grasp the concept of cryptocurrencies, there are certain coherent terminologies that must be understood, these terminologies are Blockchain, Cryptography, and Decentralised Currency.

BLOCKCHAIN

Under the pretense of cryptocurrencies, Blockchain can be considered as a digital ledger that can be only accessed by authoized users. It can consider a ledger that contains transactions embroiling an assortment of assets, including cash, real estate, and even intellectual property[1]. The information about these transactions can be stored anywhere, the reason for blockchain to exist is that it’s accessible from anywhere across the network in its decentralized nature and this blockchain is typically used for transactions of digital assets.

CRYPTOGRAPHY

While the transaction of a digital asset preferably cryptocurrency is imminent, cryptography is a tool that ensures that the transaction details can be only visible to those to whom it’s intended (Buyer and Seller). It does so by transferring data in such an encrypted manner so that the only person who can decrypt that data is the one for whom it’s intended for. Cryptography is used for authentication in addition to safeguarding data against theft and modification.[2]

DECENTRALISED CURRENCY

 concern in the context of cryptocurrencies is its decentralized nature which implies that it’s not controlled by a single administrator which is usually the case in centralized. The government or even a single administrator has no control over the crypto network. When a crypto transaction takes place it doesn’t transfer the assets instantly rather it is much slower in comparison to transferring a centralized asset that is because in order to validate a decentralized transaction plethora of actors across the global network which is unidentified perform the required prerequisites and labor to validate that transaction.

LEGAL FRAME OF REFERENCE

In India, the legal stance on cryptocurrencies has always been questionable and apocryphal since 2018. However, as cryptocurrencies became increasingly mainstream, the government had to present its stance on it and so they did. In 2020 the Supreme Court in the case of Internet & Mobile Association of India v. Reserve Bank of India[3] struck down an order issued by the Reserve Bank of India (RBI) stating an absolute ban on transactions involving digital currencies among its banks. The circular issued by the Reserve Bank of India (RBI) was published on April 6, 2018, it restricted the banks and other organizations dealing in virtual currencies. Furthermore, the circular forbade banks from offering any form of services to anybody who deals in or sets up virtual currencies. However, when the matter ended up in the apex court they held that even though the Reserve Bank of India has extensive authority and contributes imperatively to the development of the Indian economy, it has been unable to demonstrate any harm to the businesses it regulates. The Reserve Bank of India’s directives for banks to avoid doing business with or provide services to organizations trading in virtual currencies are thus invalid and unlawful. The most imperative turning point for cryptocurrencies in India could be considered in the month of February 2022 when taxes on digital assets was announced by finance minister Nirmala Sitharaman. It was articulated that if any citizen earns an income from digital assets, it will be taxed at 30 percent and furthermore they will also be taxed at the source (TAX.DEDUCTED.AT.SOURCE). Gifts will be taxed by the receiver, and payments made for the transfer of digital assets will have a 1% tax deducted at source (TDS) applied. The finance minister further declared that any loss incurred in connection with the exchange of such digital assets cannot be offset against any other benefits. With this Union Budget 2022 made an announcement about introducing a digital currency by RBI which is imminent in the next financial year and will be using blockchain and relevant technologies. The finance minister was of the opinion that this step will be imparted in order to elevate the digital economy in India[4].

CONCLUSION

The digital currency system is no doubt the most efficient and cheaper, however, it has a certain disadvantage in terms of energy savings. As the world is moving towards sustainability, a plethora of electricity is consumed in the mining of cryptocurrencies unless there is a more renewable mining source. The issue of parallel economy is also there as you can’t actually track the money, it may be used for illegal purposes, and perhaps one of the most widespread illegal use of cryptocurrencies has been done to launder money. No doubt blockchain is one of the most innovative technologies available but its pros still don’t outweigh its cons, so if theirs is indeed a certain way around that digital currency will surely be one of the best things yet in a digital economy. To counter this, certain coherent sets of rules and regulations are indeed obligatory to provide a legal safeguard over the transactions to prevent illegal activities via cryptocurrencies.

Author(s) Name: Syed Suhaib (U.I.L.S, Chandigarh University)

References:

[1] Jaya Vaidhyanathan, Aashika Jain, ‘What Is Cryptocurrency And How Does It Work?’ (The Forbes, 05 September 2022) < https://www.forbes.com/advisor/in/investing/cryptocurrency/what-is-cryptocurrency-and-how-does-it-work/> accessed 11 October 2022

[2] ‘What is ‘Cryptography’ (Economics Times) <https://economictimes.indiatimes.com/definition/cryptography> accessed 11 October 2022

[3] Internet & Mobile Association of India v Reserve Bank of India (2020) Writ Petition (Civil) No. 528/2018

[4] Joydeep Bose, ‘Crypto tax’ is here. India imposes 30% Tax on proceeds of Digital Assets’ (Hindustan Times,  01 Feb 2022) <https://www.hindustantimes.com/business/crypto-tax-is-here-india-imposes-30-tax-on-proceeds-of-digital-assets-101643698281541.html> accessed 11 October 2022