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With the rapid development of information and communication technology, many activities in our daily lives have been integrated into the Internet and become more flexible and effective. The dramatic growth withinside the wide variety of on-line customers has activated the idea of digital phrases and created a brand-new enterprise phenomenon, particularly Cryptocurrency, to facilitate economic activities along with shopping for and promoting and trading. Recently, the use of crypto currency is spreading in many different systems. This paper basically focuses on users’ expectations for the future of Cryptocurrencies. It also explores the user’s confidence in handling Cryptocurrencies when the use of such virtual currencies is not fully controlled and regulated. In addition, this paper aims to measure the spread of cryptocurrency use in order to clearly understand the situation from a practical point of view and also looks at the response of different countries such as the United States, the United Kingdom, and China to the regulations and legislation of Cryptocurrencies to clearly understand their impact on various Indian laws in order to supervise them.
Cryptocurrency, Challenges in cryptocurrency, Cryptocurrency Legislations, Opinion of Governments on Cryptocurrency, Future of Cryptocurrency, Trust of users in Cryptocurrency.
Cryptocurrency is a binary information designed to work as a medium of trade in which person coin ownership data are saved in a ledger current in a shape of automated database using robust cryptography to steady transaction facts, to govern the advent of extra coins and to affirm the switch of coin ownership.
The cryptocurrency was launched for maintaining a product / currency ecosystem based primarily on blockchain technology with a decentralized infrastructure, as opposed to a traditional currency ecosystem in all jurisdictions around the world controlled and monitored by a set of infrastructure by each Central Bank[i].
Given the complexity of cryptocurrency, it is difficult to arrive at a complete definition, but it can be understood through the definition given by the FATF (Financial Action Task Force). The FATF defines virtual currency as a digital representation of value, which can be used for digital transactions and can be used as a medium of exchange; and / or a unit of account and / or a store of value, but does not have the status of legal tender.
According to a Survey Report conducted by the Library of Congress in 130 jurisdictions around the world, it is found that the management and regulation of VC (virtual currency) as legal tender or currency differs in each jurisdiction in the world. Measures taken by most countries include issuing public warnings to citizens about the volatility and unregulated nature of cryptocurrencies. According to the survey, some countries have chosen to restrict or ban Cryptocurrency trading, while some countries have developed their own Cryptocurrency systems. Prior to this decision, the Reserve Bank of India decided to effectively restrict domestic cryptocurrency transactions.
MAJOR TYPES OF CRYPTOCURRENCIES
There are more than 3000 Cryptocurrencies. All major Cryptocurrencies operate independently. There is no Banking system. Distributed Ledger Technology (DLT) is used as a peer-to-peer digital payment system. The most famous and commonly used DLT is blockchain technology:
Bitcoin is the first Cryptocurrency created by its manufacturer Satoshi Nakamoto, and its true identity is still unknown. It is the world’s leading and most popular Cryptocurrency, allowing its users to transfer funds without the need for intermediaries such as Banks.
Since the launch of Bitcoin and its open-source code in 2008, thousands of Cryptocurrencies have been created. Based on market capitalization, the top altcoins are Ethereum, Ripple, Bitcoin Cash, Litecoin, and ESO.IO.
Tokens do not function independently, but must use the underlying technology provided by other Cryptocurrencies. Data from CoinMarketCap shows that more than 1,496 tokens have been deployed on the 24-Cryptocurrency blockchain platform.
CHALLENGES & ISSUES
The form of cryptocurrency is not without some financial and security issues. The main problems and impacts of cryptocurrency are[iii]:
1. Security threats:
Hackers and malicious users can create the virtual currency they want if they destroy the system and know the method to create virtual currency. This will result in the ability to create fake virtual currency or steal virtual currency by changing the account balance.
For example, selling virtual items and virtual currency in games violates World of Warcraft (WoW) in-game policies. Therefore, many users log into the World of Warcraft gold sales website to buy virtual gold and pay for the virtual items they need. Many Worlds of Warcraft gold sales sites are unreliable and vulnerable to hacker attacks. Many users complain about paying real money or buying fake virtual currencies.
The unlimited emission of virtual currency in the virtual community variety leads to economic problems because its issuance is not based on demand and supply. A provider, such as the second life, issues an unlimited cord and can increase the price of the virtual item to obtain a more real income. On the other hand, there is inflation and economic problems that lead to collapse with a virtual currency system.
3. Impact of the actual currency system:
Some virtual currency systems are connected to the currency system of the real world, so they can affect the demand and supply facilities of Money Real.
For example, the user can reduce the request of real money by allowing users to buy users in virtual currency. Users will not depend on real money to buy what you want, and use virtual gold instead. On the other hand, some platforms allow users to exchange their virtual currencies in the real currency, which improves the demands of the coins of the real world. This variation affects the actual currency system.
4. Risk in gold farming:
Gold farming is very popular in China and other developing countries. Gold farmers are players playing on social games like World of Warcraft, to get gold in the virtual currency of the game. The target buyer is a player who does not have time to play and conflicts to get a virtual currency. In fact, a huge flow of cash is generated from the farming process, which is not controlled and regulated. This will increase the fraud and financial risks exchanged with real money in a reliable environment.
5. Fluctuations in virtual currency:
According to the Chow and Guo Survey, it turned out that the value of the virtual currency decreases as the popularity of the virtual community is reduced.
For example, users who have 1000 virtual currency units can be purchased on several articles. If the virtual currency provider is dropped, the user is deleted, so you can buy from 10 items in a unit 1000. The drops are especially reflected in fewer products and services in a nearby service community.
6. Money laundering:
Money laundering is a risk, which is likely to increase with the use of VC, especially on platforms that allow users to exchange real currencies for virtual currencies. In a case study in South Korea in 2008, the police arrested 14 people who obtained $38 million in money laundering through the sale of virtual currency. The group will convert the 38 million U.S. dollars generated by planting gold from South Korea to a paper company in China as purchase payment.
7. Unknown identity risk:
Since account creation on most virtual currency platforms (such as social games and social media) is not authenticated, financial transactions cannot be well monitored. Players and users can create multiple unidentified accounts and use them for illegal transactions. There is no way to identify the origin of the creation or exchange of virtual currencies. This makes it impossible to track transactions in the event of suspicion of money laundering. In addition, the unknown identity will allow criminals to obtain virtual currency payments for their crimes.
8. Black market for cryptocurrencies:
Some social games, such as Second Life and WoW are economically mature enough to create a black market for buying and selling virtual currencies. The increasing popularity of virtual currencies in the online environment has led to the flourishing of the black market in which virtual currencies are traded with real currencies. By looking at various social gaming forums, some cases of fraud among users have been raised and discussed. For example, when a player decides to exit the game, they may want to sell the virtual currency they own by providing it in the game forum. The payment method is risky because many malicious users may not be able to complete the payment or have disputes after payment. In this case, they will get their money and virtual currency back.
Law relating to CRYPTOCURRENCY
In addition to the concerns and challenges faced by today’s virtual currency systems, I discussed the legal issues that are likely to affect the use of Cryptocurrencies, as well as several real-world lawsuits and laws that are involved in this analysis that can be triggered with the virtual Currency industry[iv].
- Global ASPECT[v]:
- United STATES –
The U.S. has been taking a method to foster innovation and increase of blockchain and Cryptocurrency even as protective traders from excessive dangers and fraud. On February 6, 2018, the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), took the location that – we owe it to this new technology to admire their enthusiasm for digital currencies, with a considerate and balanced response, and now no longer a dismissive one. A couple months earlier, in December 2017, the SEC took the location that Initial Coin Offerings (ICOs) are challenge to U.S. Securities regulations, which means most effective accepted traders might also additionally take part in ICOs which can be now no longer (and nearly by no means are) registered with the SEC. The SEC’s coverage is supposed to mitigate hazard to traders, defend traders from fraud, and keep cryptocurrency tasks probably answerable for promoting non-registered securities to U.S. traders. Also in February 2018, the Arizona Senate surpassed an invoice that could permit citizens to pay profits taxes with Bitcoin and different state-diagnosed cryptocurrencies. Currently, The Internal Revenue Service (IRS) treats cryptocurrency as property, which topics it to many taxable buying and selling activities. Trading cryptocurrency to fiat, buying and selling cryptocurrency to cryptocurrency, and spending cryptocurrency are all taxable activities which could reasonably burden cryptocurrency buying and selling.
- CHINA –
China is infamous for a number of the world’s biggest bitcoin mines. In 2017, China banned cryptocurrency buying and selling on Chinese exchanges. Many Chinese citizens became to the use of overseas exchanges to change cryptocurrency instead. Now, information is circulating from the People’s Bank of China (PBC) that China may also block all get right of entry to home and overseas cryptocurrency exchanges and ICO websites. It is uncertain how a great deal of an impact similarly Chinese cryptocurrency bans might have; however, it may probably keep to gas negativity withinside the marketplace. The People’s Republic of China seems to be the maximum stringent cryptocurrency regulator of the primary economies concerning cryptocurrencies. This is a peculiar truth given that, in 2017, Chinese bitcoin miners made up over 50 percentage of the global mining populace and that cryptocurrency adoption in China elevated at a fee better than another country. Despite China’s harsh stance closer to non-public cryptocurrency buying and selling, the PBC has been engaging in studies into issuing its very own state-run cryptocurrency.
- BRITAIN –
On February 22, 2018, the U.K. Treasury introduced that it’s going to start searching into problems surrounding cryptocurrency and blockchain technology. The research will investigate the function of cryptocurrencies in Britain, consisting of each possibility and dangers for consumers, businesses, and government. The Treasury Committee will have a take a observe the capability dangers that cryptocurrency ought to pose, which include charge volatility, cash laundering, and cybercrimes. The Treasury Committee may even have a take a observe the capability technological and financial benefits, and the way cryptocurrency can create modern possibilities and disrupt conventional economies.
B. Indian ASPECT:
India, with a population of over a billion, has experienced an economic upswing in recent years; The country’s growth rate has reached the point where the IMF ranked it as the fastest growing emerging economy. The population of the country has access to telecommunications and Internet services. A country full of secrets, history and culture; It is also not something that lags behind when it comes to technical progress. Bitcoin and other Cryptocurrencies have been operating in the country for several years now.
Back in 2012, small bitcoin transactions were taking place in the country. These were the early days of Bitcoin’s evolution, when only cryptocurrency fans were interested in Bitcoin. By 2013, Bitcoin began to gain widespread popularity in many countries[vi]. In the same year, a number of companies began accepting payments in Bitcoin. Kolonial, an open pizza in the Worli district of Mumbai was the first restaurant service in India to accept Bitcoin payments. Shortly thereafter, cryptocurrency exchanges began to appear in the country. Btcx India, Unocoin and Coinsecure have started offering cryptocurrency exchange and trading services in India; Over time, others have been added to the list, such as Zebpay, Koinex, and BitcoinIndia. In India, it has declined from a modest level in 2013 to its current level[vii].
On November 8, 2016, Prime Minister Narendra Modi announced the start of a de-monetization policy. The government’s decision to phase out about 86% of the country’s banknotes has sent shockwaves across the Indian subcontinent. It means maintaining this wealth without significant tax burdens and varied government controls. Some people often buy large orders for bitcoins or other cryptocurrencies and then sell them later. Huge taxes if they try to move their fortune through the banking system. The demonetization policy has also drawn widespread criticism from the country’s dominant financial authorities, with 86% of the country’s banknotes in circulation depreciating within 24 hours, according to the government. Not really “real” money, since it is not backed by anything, the Indians began to look for alternative currency models. Many Indians, especially those in the 40% with Internet access, have started investing in bitcoins and other cryptocurrencies.
The 2016 demonetization coverage may also have spurred the adoption of cryptocurrencies amongst a large part of the populace however realities quickly started out to emerge which have stifled the boom of the marketplace withinside the country. Despite its extensive populace, India handiest contributes 2 percentage of the full worldwide cryptocurrency marketplace capitalization. The small position being performed through any such huge economic system may be attributed to the excessive cryptocurrency expenses & the RBI-led authorities’ crackdown. The well-known degree of expenses of cryptocurrencies in India is at the excessive side. Market costs are exceedingly better through as lots as five to ten percentage as compared to the worldwide average. This method that Indians can handiest get worried in peripheral participation in crypto buying and selling as a ways as global crypto change systems are concerned.
The lack of large-scale mining enterprises and strict government restrictions on international cash flows also make it much harder for Indians to deal with many of the major foreign cryptocurrency exchanges. Although the country’s government did not ban cryptocurrencies, it did not support them. The next few months will show in which direction the cryptocurrency market will move; how much India take concern on it.
ANALYSING THE JUDGEMENT OF SUPREME COURT
The controversial circular contains two writ petitions: the first lawsuit was filed by various cryptocurrency exchanges (Rajdeep Singh and Ors v. Union of India) on April 17, 2018; The second petition was filed by IAMAI (Internet and Mobile Communications Association of India)[viii], an organization that acts as a self-regulatory body for OTT content providers.
1. What is the character of Cryptocurrencies/VCs and RBI’s function in regulating Cryptocurrencies?
2. Whether Cryptocurrencies shape a part of the credit score gadget of the country?
3. Whether RBI had the strength to restrict Cryptocurrencies as res greater commercium and whether or not the round become certainly a prohibition at the buying and selling of Crypto or not?
4. Can RBI adjust Cryptocurrency exchanges and banks worried in cryptocurrency exchanges as “Payment’s system” under section 18 of the Payments and Settlement Systems Act, 2007?
5. Did RBI attain pleasure even as issuing the impugned round? Was there software of thoughts through RBI? [ix]
Analysis of the JUDGMENT:
- The Apex Court has resolved a longstanding debate about the nature of cryptocurrencies. Analysing the definitions and regime of venture capital investments in various jurisdictions and regulatory bodies around the world, the court ruled that although cryptocurrencies cannot be considered legal tender, they can be considered as a currency, and if intangible assets, under certain circumstances, could have the potential to be used as a legal tender. The authority scheme is assigned by the RBI under the RBI Act 1934, which allows the RBI to administer it.
- The court ruled that the RBI, under section 3, was the sole regulator of the currency, including the right to issue u/s 22 (1) under the RBI Act 1934, and also played an important role. when developing a country’s monetary policy, and therefore anything that threatens or affects a country’s financial system can be regulated or prohibited by the RBI, regardless of the activity that is part of the credit or payment system. Money Management, which appears in Section 3 (1), also includes a number of things that can imitate or play the role of money.
- The court did not rule that the RBI’s right to regulate, as set out in Section 45JA of the RBI Act, does not include the right to regulate and that the right to regulate is broad and would also include the right to prohibit. The court ruled that while the right to prohibit something like res extra commercium(which cannot be part of commercial activity) is a legislative function and cannot be exercised by executive order, the RBI’s special role in the country’s economic sector cannot be ignored and is well known that RBI has the power to both formulate the policy and issue guidelines for its implementation, as well as to govern. This becomes a supplement to the Law.
In addition, the court rejected the view that the effect of the circular was an outright ban on the use or sale of venture capital, affecting only RBI-controlled entities, and instructed them not to provide any services that facilitate venture capital transactions, a right granted to RBI pursuant to with section 36 (1) of the Banking Rules Act 1949, which states that RBI may warn or prohibit customers of banking firms from performing certain types or types of transactions. those who wish to use banking services to trade or convert cryptocurrencies and online platforms that have provided such services in lieu of service fees or commissions for such services, in fact, peer-to-peer transactions continue.
- The court held that, since under section 18 of the Act, RBI is empowered to formulate policies for system providers, system participants, any other person or any person, any other or any other body, and circulars are circulated to the “System Participants” banks, as defined in Section 2 (1) (p), RBI has the power to develop policies and issue guidelines for banks as participants in the system.
- The court ruled that it cannot be argued that RBI did not address the relevant issues and did not adhere to the applicable mentality when issuing the circular, such as:
• Since 2013, RBI has issued circulars and promoted research on the advantages and disadvantages of virtual currency. Publicly issued prospectuses identify the associated risks and volatility of cryptocurrencies for any individual or entity involved in such a venture capital transaction. This series of actions taken by RBI between 2013 and 2018 shows that they have been working on this issue for almost five years and cannot be found guilty of thoughtlessness.
• The court ruled that RBI was not required to write abstracts or rulings while remaining satisfied with the prospectus, as several steps have been taken over the past 5 years.
Impact of the judgement of supreme court of India relating to the Cryptocurrency Ecosystem in India
This judgement is a badly needed short-term measure to ease the plight of Cryptocurrency exchanges in the country as they reopen. consider the benefits of the circulation of Cryptocurrencies in the economy, as well as a ruling not claiming that RBI has no authority to regulate these Cryptocurrencies.
The capability marketplace of Cryptocurrency in India is undisputedly exponential with huge capability. According to the 2017[x] look at through PHD Chamber of Commerce and Industry, the mixed buying and selling volumes of all crypto-exchanges may be in Rs. 200-250 crore consistent with month and more or less Rs. 1200-1500 crores really well worth of Bitcoins are traded in India. As mentioned withinside the judgement itself, India is anticipated to make contributions among 2 and 10% of the worldwide asset industry, and the overall variety of traders withinside the Indian Crypto Market turned into approx. 20 Lakhs and the common each day exchange extent turned into as a minimum Rs. one hundred fifty crores in 2018.
The banks and different monetary establishments might be careful to have interaction withinside the alternate of Cryptocurrency because the technique and mindset of RBI and authorities toward Cryptocurrencies has now no longer been favourable, and there may be no assure as to whether or not such comparable regulations as imposed via the quashed round will now no longer be imposed. India is critically lagging in adopting and selling the Blockchain technology and Cryptocurrencies, and the long-time period effect of the judgement at the Cryptocurrency marketplace shall depend on what paths the lawmakers and regulators choose.
CIRCULAR ISSUED BY RBI REGARDING CRYPTOCURRENCY
Since 2013, the Reserve Bank of India issued multiple announcements on various potential financial, operational, legal, customer protection, and security-related risks that citizens face when trading or investing in cryptocurrencies. A notice prohibiting the processing or settlement of virtual currencies in the country[xi].
The notification order entity regulated by RBI –
• shall not conduct business with VC or provide any service to any individual or entity to facilitate VC transactions; and
• terminate any relationship with the individual or entity within three months from the date of this circular.
The effect of the notice is equivalent to an effective prohibition of cryptocurrency trading and investment, but it does not prohibit the holding or trading of cryptocurrencies.
DEVELOPMENTal AHEAD of the government of India relating to cRYPTOCURRENCY
The Indian Government is now thinking about the advent of a brand new invoice titled “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” (“New Bill”) which is analogous in spirit to its preceding versions, however, intends to prohibit non-public cryptocurrencies in India with sure exceptions to sell the underlying generation and buying and selling of Cryptocurrency and offer a framework for developing an reputable virtual foreign money in an effort to be issued with the aid of using the RBI. The New Bill acknowledges the grey location of Cryptocurrency legal guidelines and proposes to prohibit all of the non-public Cryptocurrencies of their entirety; however, it’s far nevertheless a grey location referring to which all styles of cryptocurrency will fall below the purview of personal cryptocurrency.
The RBI has advised the overall public concerning the viable misuse of personal cryptocurrencies in extraordinary viable ways. However, if the New Bill imposes a complete ban on certain cryptocurrencies, it will force crypto traders to invest and trade cryptocurrencies in unregulated markets. Further, the goal of introducing a regulation associated with VCs / cryptocurrency is to simplify the procedure of buying and selling and protecting in a more secure technological environment. However, in spite of the advent of state-owned cryptocurrency which will be regulated through the RBI, the danger component concerned in funding and protecting of cryptocurrency shall continue to be the same.
Further, currently withinside the last week of March 2021, in line with the latest amendments to the Schedule III of the Companies Act, 2013, the Government of India has directed that from the newly began monetary year, the corporations to reveal their investments in Cryptocurrencies. That is to say, the corporations ought to now reveal income or loss on transactions concerning Cryptocurrency and Digital Currency, the quantity of holding, and information of deposits or advances from any individual for the motive of buying and selling or making an investment in Cryptocurrency and Digital Currency. This unique appeal has been welcomed by the processors of the Crypto sector as it is known to open the door for all Indian Corporations to have Crypto on board their stability[xii].
1. Cryptocurrency can function as a wonderful and innovative tool for the economic sector from the monetary point of view.
2. In India, there are a few corporations accepting Bitcoin, the research has begun about the transparency, commercial enterprise module of these corporations and the individuals who address Bitcoin.
3. Legislation of cryptocurrency can take the Indians and India as a country at the platform which guarantees innovative growth.
Based on the information, aforementioned facts and modern-day scenario revolving across the arena of Cryptocurrencies, it’s far glaring that there may be a lack of clarity with understand to Cryptocurrency regulation in India. A well-based Cryptocurrency law with recognize to crypto buying and selling exchanges, blockchain technology, investors, and the human beings hired in such area is the want of the hour and accordingly such law desires greater attention.
It is exciting to notice that the advantages of cryptocurrency have been highlighted withinside the Draft National Strategy on Blockchain, 2021, posted through the Ministry of Electronics and Information Technology. Therefore, banning international digital forex which has created an effect in many nations isn’t the satisfactory viable answer for the improvement of our nation. The authorities are needed to take powerful step in the direction of regulating cryptocurrency as a manner ahead to have the self-belief of traders and the overall public withinside the growing nation. Though it’s been affirmed through the Union Finance Minister Nirmala Sitharaman that there shall now no longer be a whole ban on Cryptocurrency – we are able to permit a positive quantity of window for human beings to test on blockchain, Bitcoins and Cryptocurrency. It will likely be important to take a seat down returned and assessment the Government formulated policies with recognize to Cryptocurrencies earlier than spearing beforehand in that direction.
[ii] Balaji, S. (2017, June 21). On Bitcoin, India’s Government and Tech Companies Find Common Ground. Retrieved from Forbes: https://www.forbes.com/sites/sindhujabalaji/2017/06/21/bitcoin-india-regulation/#353844e87e4a
[v] World of Cryptocurrencies. (2018, February). Retrieved from blogs.thomsonreuters.com.
[vi] “Role of Bitcoin on Economy” by Anu Singhal, Aqila Rafiuddin – World Congress on Engineering and Computer Science. San Francisco, Vol. II Oct 2014.
[vii] Indians see brighter Crypto Future than Americans. (2018, March 21). Retrieved from news.bitcoin.com.
Information Technology (Reasonable security practices and procedures and sensitive personal data or
information) Rules. (2011, April 11). Ministry of Electronics and Information Technology (MEITY).
New Delhi: The Official Gazette of India.
[viii] Internet and Mobile Association of India v RBI
[ix] RBI. (2017-18, December 29). Master Direction on Issuance and Operation of Prepaid Payment Instruments. Fourth Bi-monthly Monetary Policy Statement.
[x] Jani, S. (2017, December). Scope for Bitcoins in India. Retrieved from Research Gate: http://www.researchgate.net/publication/321780780_Scope_for_Bitcoins_in_India
Author: SAPTAK MAJUMDAR, AMITY UNIVERSITY, KOLKATA
Editor: Kanishka Vaish, Senior Editor, LexLife India.