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Central banks around the globe have had a busy pandemic. From injecting large amount of money into the financial system to clearing large amount of potentially contaminated notes, they have regulated the flow of market in the last few weeks efficiently. With this hassle, the emerging of a digital currency is sure to make them more interested as it can potentially change how the central banks manage both liquidity and physical cash.
Amidst the coronavirus outbreak came the news of the testing of China’s official cryptocurrency. In the month of May, China’s central bank started testing the official digital currency in China with a design of rolling out the virtual money payment system. In a statement by the Digital Currency Research Institute of the People’s Republic of China, it has been reported that the research and development work of China’s digital currency is proceeding steadily. China’s cryptocurrency is called the DC/EP (Digital Currency/Economic Payment) and is being tested in four cities. Amongst the few banks which are testing China’s cryptocurrency and determining its fate of whether it can be combined with 5G and sim cards in the near future is the Agricultural Bank of China. The ABC is one of the biggest of the four state-owned banks in China.
While much deliberation goes on about which domains of the market would this currency function in, it has been recorded that the two most potential market players for China’s cryptocurrency would be the banks and the telecommunication companies. Researches by the Citi Securities, China suggest that DC/EP would be made official by the end of the year 2020.
Significance of the development
The very concept of issuing of crypto-currency in a country holds the potential of bringing about a massive change in the monetary framework of its economy and the PRC isn’t expected to be any different. The introduction of the crypto-currency in the Chinese economy is expected to subsume all M0 money (i.e. the cash in-transaction) while leaving the M2 forms of money untouched.
After the push made by Facebook.Inc with the creation of its patent crypto-currency which goes by the name of ‘Libra’ many economies, all over the world, have displayed great concerns towards the same and the PBOC was no different from the lot. Mimicking ‘Libra’ the PRC also went on to patent its crypto-currency but unlike all the other decentralized block-chain offerings the one made by the PRC seems to be centralized as its whole jurisdiction lies in the hands of Beijing.
According to the patents registered by the PBOC, the individuals in China will be in possession of a mobile wallet wherein they can exchange their Yuan for the digital money. In addition to this, the PBOC will be able to have a direct surveillance over all sorts of monetary transactions made by the individuals.
The issuing of the crypto-currency does give the Chinese government an upper-hand in foreign trade as it prevents any and every kind of malpractice which exists in the ambit of the same. Alongside that, the crypto-currency also aims to protect the Forex reserves of the country thus making the economic stature of the PRC: protected and yet, massive.
What is Cryptocurrency?
“Cryptocurrency is money for the digital age” is what many scholars who have studied the cryptocurrency across the world say. It is an internet-based medium of exchange which uses cryptographical functions to establish networks to conduct financial transactions. These are irreversible and pseudonymous transactions that follow the online medium.
In the year 2009, a group of people who o by the of Satoshi Nakamoto invented cryptocurrency in the wake of the 2008 global financial crisis. The main object behind cryptocurrency was to enable people to control their money themselves and not rely on companies, banks, and government. Cryptocurrency has come to be known as digital gold; a form of money which is secured of any political influence and promises to increase its value over time. These are high comfortable and fast means of payment with a worldwide scope. While these make our daily transactions easy, what comes as a drawback of cryptocurrency is its anonymous nature which also enables people to involve in prohibitory transactions such as payment for black markets or any other outlawed economic activity.
With the emergence of the concept of cryptocurrency, in 2008, Satoshi Nakamoto also published a paper titled “Bitcoin – a peer to peer electronic cash system.” Since, then Bitcoin is the first and the most popular cryptocurrency which attracted many to invest in bitcoins, soon making them a part of the bandwagon. In the subsequent years, many other cryptocurrencies have been trying to replicate the success of bitcoin, however, they have failed. In the recent years came the altcoins in the market which do not seem to be slowing down. Thus, giving a competition to the bitcoins.
Law regarding Cryptocurrency in India
In India, cryptocurrency is not a legal tender, however, exchanges are legal while they are monitored by the government, making it difficult to operate. Taxes in our country are regulated by the Income Tax Department and while ascertaining the tax status of cryptocurrency is still difficult, the Income Tax Department says that anyone who makes profit by means of cryptocurrency is liable to pay tax for it, making them capital gains.
The various laws which regulate cryptocurrency in India are enlisted below:
- Securities Contract (Regulation) Act, 1956
The Securities Contract (Regulation) Act of 1956 regulate those cryptocurrencies which fall under the ambit of securities.
- Companies Act, 2013
In scenarios wherein the cryptocurrency is in type of tokens, the regulation is done through means of Companies Act, 2013 along with which the regulations issues by the Reserve Bank of India are to be followed. The applicability of the Companies Act is further assisted by the Companies (Acceptance of Deposits) Rule, 2014 which specify when the receipt of money, by way of deposit or loan or in any other form, by a company would be termed as a deposit.
- Payment and Settlements Systems Act, 2007
Payment tokens under cryptocurrency are regulated by the PSSA. This act suggests that there is nothing in this act “to exclude virtual currency, since only the term payment is referred to, as opposed to currency, legal tender or money. This also suggests that the constitution of a payment system for the functioning of the cryptocurrency activity would require the issuer to need an authorization from the RBI under the PSSA and compliance with KYC norms. A day to day example of this is a widely used payment method in India, Paytm.
- Prevention of Money Laundering Act, 2002
Under this act, the use of cryptocurrency is regulated. This act has statutory penalties which include a prison term for up to 10 years in cases of money laundering. However, the applicability of this act to wallet operators or third-party bitcoin services is still uncertain due to the fact that these platforms of crypto asset trading are self-regulatory in nature and comply with the KYC norms.
On the touchstone of these events the businesses fueled by crypto-currencies took a backseat until 2017 and in addition to that, RBI issued a circular (dated 06 April 2018) which substantially blocked the usage of crypto-currencies in India. It ordered all the RBI regulated entities to withdraw all trading done by crypto-currencies and gave a three-month window to these entities in order to clear the clutter.
The incumbent government, on the other hand, seems to have turned a blind eye towards defining the ‘legality of crypto-currency’ and seems to uphold the concept of “pre-paid” instruments. However, the government set up a committee (pursuant to Late Shri Arun Jaitley’s budget speech of 2018) which included representation from the RBI and the committee aimed to ponder upon issues like:
- Domestic and international status of crypto-currencies.
- Legal framework surrounding crypto-currencies.
- Issues to be incorporated in order to prevent money laundering.
The probable reason which led RBI to put a wholesale ban on the crypto-currencies in India was that the inclusivity of anonymity in the ambit of crypto-currencies. The aspect of anonymity and decentralization can led to several severe trade malpractices like: money laundering and can also endanger the consumer protection. Thus, in that regard the RBI seems to be overtly suspicious towards crypto-currencies. Several stakeholders in this case went for judicial help and filed certain petitions in the Supreme Court of India in order to churn out clarity from the government over the issue of crypto-currencies.
In the year 2009, the emergence of bitcoin as the first cryptocurrency also sparked a debate questioning its future. The future of cryptocurrency as seen by the economic analysts is its emergence as an institutional money that would enter the market. It is also seen that some of the limitations faced by the cryptocurrency – such as the losing and erasing of data due to a computer crash or a vault being ransacked by a hacker may come to an end in the near future. With increasing number of merchants accepting cryptocurrencies these days, the fact that growing popularity would in turn result into more regulation and government scrutiny.
With cryptocurrency aspiring to become a part of the mainstream economy and financial system in the near future, there is a wide range of criteria which it needs to satisfy. It would need to be both mathematically complex as well as easy to understand at the same time for its growing success.
The probable future of cryptocurrency in India has also been largely dependent on the recent Hon’ble Supreme Court judgement which lifted the ban which came in force in April 2018. This ban had crippled the Indian cryptocurrency industry and was challenged by the Internet & Mobile Association of India in the Hon’ble Supreme Court. The way forward is seen in a way which suggests than the need of the hour is not to impose bans on cryptocurrency, but to be more pragmatic to spread awareness to alert the potential investors of specific allied risks, and to monitor trade for fraud and scams.
Cryptocurrency market is a fast and wild place with a new cryptocurrency emerging every day. With this emergence, the old cryptocurrency dies which means that the investors lose their money in this process. The cryptocurrency will gain legitimacy in the coming years as a means of transaction for businesses, micropayments, etc. It is seen that despite all risks, cryptocurrency is perhaps the most exciting asset we have in the 21st century.
It is pertinent to understand that a vibrant cryptocurrency segment is also a way to add value to our financial sector which as of today is facing a major downfall. Thus, in the face of growing technological advancement in the financial sector, it is critical to strengthen the regulatory frameworks that deal with cryptocurrency in India.
Authors: Yashassvi Periwal from Symbiosis Law School, NOIDA and Kalhan Safaya from Hidayatullah National Law University, Atal Nagar, Naya Raipur.
Editor: Anmol Mathur from Symbiosis Law School, NOIDA.