"With the technologically growing global economy, Cryptocurrency has the potential to rupture the traditional economy. India will have to take a back seat if it nips the flourishing crypto markets in the bud. India must stop being skeptical about crypto world and strive to catch up with the global digital revolution."
SWARNA LATHA R
Despite the government threats of blanket ban on cryptocurrency, Bitcoin, Ethereum, Ripple, Dodgecoin etc. have gained popularity among the masses, particularly the youth in India. Of late, Crypto-exchanges such as WazirX, Unocoin, Beldex, CoinSwitchKuber and CoinDCX pop-up as frequent advertisements establishing themselves as key players in the crypto world with a large number of investors. Devoid of a defined legal framework on the emerging virtual crypto sphere and a proper mechanism to regulate such transactions, complaints on crypto scams and frauds keep mounting.
CRYPTOCURRENCY:
Cryptography is generally the process of converting plain text into unintelligible text and vice-versa. By this method, data is stored and transmitted in a particular form so that only those for whom it is intended may read and process it. A Cryptocurrency is “Any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.”[1]
Thus, it can be deduced that virtual currency is a digital representation of values which was designed to work as a medium of exchange in a decentralized apparatus through distributed ledger technology, typically a blockchain, that serves as a public transaction database.
BITCOINS:
It is believed to have been developed in a 2008 academic paper by a still unknown person using the name Satoshi Nakamoto works based on block-chain technology. A type of cryptocurrency, Bitcoin is a digital currency created in January 2009 following the housing market crash. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a de-centralized authority, unlike government-issued currencies. Since it is not tied to any banks, it can be used anonymously.
LEGALITY OF CRYPTOCURRENCY IN INDIA
The Reserve Bank of India (RBI) had taken an anti-cryptocurrency stance and had cautioned that it runs a high risk of money laundering, crypto scams, terror financing, hacking and frauds. By way of a notification, the RBI had imposed a ban on banks’ dealings with crypto businesses back in April 2018 with effect from July of that year 2018. The RBI notification invoked under Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007 was then challenged before the Supreme Court of India in Internet and Mobile Association of India V. Reserve Bank of India [Writ Petition (Civil) No.528 of 2018].
THE GREEN FLAG:
In March 2020, India’s Supreme Court lifted the ban prompting investors to pile and the crippled crypto markets started booming. At that time, the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 had not been passed and the Court ordered the government to draft a law on the matter. As such, Cryptocurrency is a legal investment but it is not allowed as a legal tender of money. Still, the legal position of cryptocurrency transactions in India is shrouded in mystery while the judiciary permitted it’s usage, a bill to prohibit it altogether is underway on the recommendations of SC Garg Committee.
With Companies playing an active role in crypto markets, the Companies Act, 2013 has been suitably amended such that the companies disclose their investments in cryptocurrencies. According to the amendments to the Schedule III of the Companies Act, 2013, it is mandatory for Companies to disclose profit or loss on transactions involving cryptocurrency, the amount of holding, and details of deposits or advances from any person for the purpose of trading or investing in cryptocurrencies.
Very recently, the RBI has issued another notification by which it clarified those banks and other regulated entities cannot cite its April 2018 order on virtual currencies as it has been set aside by the Supreme Court of India in 2020. And that the banks as well as other entities addressed above, may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances. In other words, banks can’t take action against investors in virtual currencies following the Court and RBI directives.
CRYPTOGRAPHIC VEIL AND SCAMS:
The shielding effect of Cryptographic technology techniques allow for criminal activities, such as tax evasion, money laundering, terrorist financing and kidnapping. Ironically, there is no official data either on the crypto investments or on the crypto scams in India. It is quite common that fake companies in the name of online business entities lure gullible people to invest in bitcoins. Carried away by the assurances of high returns for minimum investments, people give in to Ponzi schemes and end up losing their hard-earned money. One common pattern or modus operandi followed by fake companies selling zero value bitcoins is “start a crypto project, raise money, show a little progress, and disappear.”
Crypto transactions are irreversible and once the website is shut-down, there is no question of retrieving the invested money. Though it is possible to trace down to the IP Address, it is difficult to lift the cryptographic veil and track the person hiding behind it. Some fraudsters operate merely through Whatsapp groups, even without a valid website or e-mail. If crypto investing is like lottery or gambling, these WhatsApp groups are the Las Vegas of bitcoin or dogecoin trading. Just that what happens in these groups, does not stay in these groups.
Even Wazrix that claims to be the world’s largest currency exchange is no exception. Recently, when the Enforcement Directorate was probing into a money laundering case which involved Chinese owned illegal online betting applications after China’s crypto-market crash, Wazrix was issued show-cause notice under the FEMA Act, 1999. During the course of the investigations, it was found out that the laundered proceeds of crime worth approximately 570 million rupees had been converted into cryptocurrencies using the Binance platform. But none of the transactions are available in the blockchain.
REGULATORY VACUUM:
Even after the surge of cryptocurrency transactions in India, still the market is unregulated and untapped. In response to a question in Rajya Sabha, Minister of State for Finance Anurag Singh Thakur had said that the regulatory bodies like the RBI, SEBI, etc., don't have any legal framework to directly regulate cryptocurrencies as they are neither currencies nor assets nor securities nor commodities issued by identifiable users. The existing laws are inadequate to deal with the subject.
India lacks a judicious mechanism to regulate crypto markets and an effective redressal mechanism if investors lose to Ponzi schemes or money-laundering. This regulatory vacuum in India needs to be addressed at the earliest. The Government of India is mulling whether to ban cryptocurrencies for private transactions or regulate the markets. Irrespective of the need for regulatory framework, the RBI is getting ready to launch it’s own private blockchain-supported official digital currency that may exactly resemble cash.
HOW TO LODGE COMPLAINTS
Crypto investments are not illegal per se and hence complaints against crypto scam, crypto-fraud or money- laundering is taken up for investigation. For the time being, cyber complaints with regard to cryptocurrency transactions can be lodged with the nearest cyber cell or registered as an FIR in the jurisdictional police station or by reaching out to the National Cybercrime Reporting Portal of India[13] with a written brief about the offense, address of the bitcoin, amount of bitcoin in question and the address from/to whom the purchase/sale of the bitcoins has been done.
TO BAN OR TO REGULATE
The Centre has plans to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. It is expected to tackle the unresolved problems by banning it altogether but it is likely to face a delay to be tabled and passed. Shashi Tharoor vehemently argues in his article as to why India should not miss the cryptocurrency bus, “In India, as always, the reflex action is to bar what you can’t understand, ban what you can’t control. Law enforcement and taxation agencies have clamoured for a ban, expressing wariness of these being used as instruments for illicit activities, including money laundering and terror funding. Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams. But like all effective regulation, it needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve. Nobody in India has been able to tick these boxes, and we’re in danger of missing out in the global race altogether.”
With the technologically growing global economy, Cryptocurrency has the potential to rupture the traditional economy. India will have to take a back seat if it nips the flourishing crypto markets in the bud. India must stop being skeptical about crypto world and strive to catch up with the global digital revolution. Armed with an effective regulatory framework on crypto currency, no doubt, India would survive and emerge as a fast-growing economy in the world. To recollect Dwarnian theory of survival, it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.
The author, Ms. Swarna Latha R is an associate at Krishnan & Krishnan, advocates & consultants, Chennai.
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