Legality of cryptocurrency

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Abstract

The revolution in the digital field has been quite significant in the past decade with the introduction of the digitalization process in every field and the field of currency has been no exception. In the era where everything is going virtual, a form of currency that is virtual has come into existence famously known as cryptocurrency. In the past few years, the growth of cryptocurrency has been astonishing, not only public but also big corporations and even  countries have shown their interest in this field. The new currency may be very revolutionary but with this comes a question about how safe it is and it has been seen in the past that cryptocurrencies such as bitcoin, Ethereum, and others have been particularly been used for illegal  work and also been used in availing illegal  services,  as the blockchain technology makes it difficult or nearly impossible for investigative agencies to track it which has been exploited by the people and also using crypto as a source of exchange and currency poses as a threat for people as it is not issued by the government which makes it even more necessary to look into the legality of these currencies without any adverse effect on people who trade in it as without working on the legal framework of how cryptocurrency would work or be accepted legally it is always going to be a risky and non-trustworthy form of currency and people might get cheated because of how vulnerable they will be without any clear answer on the legality of these currencies

Introduction

The concept of cryptocurrency was first introduced to the world in the year 2009 with the introduction of bitcoin by a group of anonymous people or an individual by the name of Satoshi Nakamoto it indented to make this currency out of government in the year 2009 with the introduction of bitcoin by a group of anonymous people or an individual by the name of Satoshi Nakamoto it indented to make this currency out of government control and to make it convenient for people to make them exchange it across the countries without any problem.

Cryptography is used in this which makes it impossible for people to counterfeit the currency which is one of the biggest problems that is faced by people as they might end up having counterfeit currency. The use of cryptocurrencies has been more in demand because it had made online transaction very easy and hassle free, also no third party is involved which makes its trade possible without any additional fees. It has been using the blockchain technology for trading on various crypto exchanges. Crypto exchanges are not the only way to acquire these currencies but it can be obtained by using Mining technique too which makes it possible for people to obtain it by mining at their own homes on their mining rig with just the cost of electricity with so much hype around the cryptocurrencies in the past few years comes a question about its trustworthiness is always there as there is no agency that regulates and also it lacks any kind of redressal system which can make traders vulnerable to theft and other kinds of frauds. Looking at the current situation of crypto market and its high boom it can be noted that it is necessary to provide clarity on the legality of virtual currency and governments all around the world need to discuss the legality of crypto as a lot of money has been invested in virtual currency in past few years and without any legal framework it is not very safe for people to invest in it. Particularly in India in the past few years a lot of intermediaries have been seen which help people easily trade in cryptos like coin DCX, Wazir X and people have been really unaware of the legality of virtual currencies and government has a very unclear stand on cryptocurrencies. In the past many such instances have happened in which people were cheated but due to lack of legal framework a solution is still to be found

Legal History of cryptocurrency in India

After the introduction of cryptocurrencies in 2009, the concept of virtual currency was not acknowledged by the government of India or the Reserve Bank of India for 4 years, and for the first time in 2013 a comment by the Reserve Bank of India was made in a press release where it was told that Virtual currency as a mode of transaction or payment was not authorized by the central bank or any other monetary authority The entities in question are said to have secured no regulatory approvals, registrations, or authorizations in order to conduct such activities. In 2017 again the Reserve Bank of India further told and cautioned people about the legal, financial and operational threats that they might be exposing themselves to and further said that Reserve Bank of India has not provided any entity with a license to trade in cryptocurrency or any existing virtual currency and people who might be dealing in them are doing it at their at own risk

Till 2017 it can be said that the dealings in virtual currency was not advised by the government but it was still legal to deal in cryptocurrencies as till this point it was never mentioned that it is illegal to deal with cryptocurrencies by any authority, so it can be said that till 2017 dealing in crypto was legal in India and just the potential risks were addressed by the government and government did not put any barrier to trade in cryptos and never mentioned that it is illegal to trade in cryptos like bitcoin or any other virtual currency.

Further in 2017 it was stated by the Reserve Bank of India said that it reiterates the statement it made in 2013 and after in the wake of growing interest of people in the virtual currency market as the valuation of a lot of virtual currencies and a huge growth initial coin offerings to public

Even after this statement, it can be assumed that no such official barrier or restriction was put on the trading of the cryptocurrency only the threats it imposed were established and addressed by the government of India. In 2018 the finance minister of India said that India does not accept cryptocurrency as a legal tender and will make sure it eliminates all the wrong practices that happen through cryptocurrencies, people misinterpreted this statement and thought that that crypto currency is illegal in India but in reality, it only talked about controlling and eliminating the illegitimate activities that were being carried out nowhere it was mentioned that it is illegal to trade in cryptocurrency.

On 5th April 2018 a circular was released by the reserve bank of India where it acknowledges the rapid change in the payment industry as printing of metallic money was getting costly and it made central banks around the world talk on the topic of cryptocurrency as if it is a viable option but with this came a concern of consumer protection, and also it increased the chances of money laundering. Citing the security risk it poses RBI said that entities that are associated with RBI shall not entertain nor provide any services to any individual or entity that deals in cryptocurrencies or any virtual currency and for the entities who are already involved in providing services of this kind should exit this within a specified period of time. From this again it can be said that no comment on its legality has been made only caution has been stated till now although RBI put a restriction on banks and other institution to trade or deal in cryptocurrencies. On January of 2020 RBI said that it has not banned the trade of cryptocurrencies but only cautioned and banned entities like banks from dealing in cryptocurrencies.

Supreme court of India in march of 2020 in its judgement turned the ban on crypto by RBI and said banning it was unconstitutional which meant that supreme court had legalized the usage of cryptocurrencies and its dealings in India.

Legal risks associated with crypto

  • Since cryptocurrencies are regulated by a blockchain technology and cryptography it is not possible to track or trace the people who are doing transactions it keeps their identity anonymous which leads to a lot of illegal activities like purchase of drugs, weapons and other contrabands and since no one can trace the people who are using it to purchase such commodities, drug dealers have been using crypto as an exchange medium for selling drugs and a huge increase in buying of drugs such as fentanyl, cocaine etc. Has been seen in past few years in US and other countries.
  • Financial frauds and data theft gas been one of the biggest risks associated with cryptocurrencies it is estimated that over 14 billion  dollars were stolen in cryptocurrencies in 2021 alone and since laws don’t address cryptocurrency and failure to have any redressal mechanism makes it impossible for people to do anything about it.

Since the world has gone virtual data theft has been one of the biggest problems even though cryptocurrencies claim to keep your data safe and keep anonymity but data pf over a million people including emails and their ledgers have been stolen which puts privacy of people and safety of their data in question

  • Money laundering has been a serious concern for the law enforcement agencies as in

2021 8.6 billion dollars were laundered which was also 30 percent more than in 2020 since it is difficult to track owners of the crypto it provides a blanket on the criminals who do these things

Current scenario in India

While presenting the budget for the financial year 2022-23 finance minister Nirmala Sitaraman said that any income that is made from trade of cryptocurrencies or exchange of any digital assets will be taxed at 30 percent. Further it was mentioned that consultation on what is legal in regards with crypto are underway. It was specified by finance secretary T.V Somnathan that it will never become a legal tender however, government of India and reserve bank has proposed and planned to launch its own digital currency by the year 2024 which will use the block chain technology and would also be a legal tender and regulated by the Reserve Bank of India and it will be considered as a legal tender and other virtual currency like Ethereum, bitcoin will not be considered legal tender however it was also said by Somnathan that people can by digital assets such as cryptocurrency but it would not be authorized or considered legal tender by government of India or RBI. In present times it is not illegal to trade in cryptocurrencies but at the same time it is also not a legal tender further he said that if people who are investing in these currencies

may face loss and government would not be responsible for such things as it is already stated that it is not authorized by the government and people investing in it might do it at their own risk.

Somnathan said that it is not illegal to trade in cryptocurrencies.

From 1st of April 2022, it is decided that a tax of 30 percent on trade of cryptocurrencies or on exchange of any digital assets it was mentioned that it is the sovereign right to charge tax on it also the finance secretary gave reasoning behind the imposition of 30 percent tax by saying that

there already was a tax of 30 percent on speculative transaction and crypto is considered as a speculative transaction hence 30 percent tax on trading of crypto is justified.

International scenario

  • Recently EL Salvador became one of the first country to declare cryptocurrency as legal tender and leaglised the use of cryptocurrency in all ways just like any normal currency besides dollar government of Salvador has introduced Chivo wallet which can convert crypto in dollars if a vendor doesn’t accept crypto payments. To increase  the public use of cryptocurrency it is also planning to incentivize the people who use cryptocurrency as a payment method by giving them an incentive of equivalent to 30 dollars in their wallets
  • Switzerland has also  shown a progressive stance towards adopting virtual currency and it

is legal to trade in crypto in Switzerland and also in some situations it is also accepted as mode of payment. Swiss consider cryptocurrencies to be assets and charges tax on it.in 2020 blockchain act was passed by Swiss parliament which defined the legalities of crypto exchanges in the country and the country provides license to operate crypto exchange in the country. Switzerland has made it clear that it would keep working in adapting regulations for cryptocurrencies while controlling the illegal use of cryptocurrency

  • United states do not consider cryptocurrencies to be a legal tender but at the same time trading in cryptocurrency is not illegal in USA even the crypto exchanges are legal in the country and they have to register with Financial Crimes Enforcement Network and it is under regulation of Bank Secrecy Act it is also taxed by the authorities and considered to be securities by US SEC and all securities laws are applied to the crypto wallets and the exchanges
  • China banned the use of cryptocurrencies in its region and also banned the crypto exchanges that had existed in the country in June 2021 China put a ban on domestic crypto mining and exchanges. Exchanges are illegal in the country and it is uncertain that in future if it will undo its ban on cryptocurrency
  • Australia declared that cryptocurrencies will be illegal in the country from 2017 onwards and specifically mentioned that bitcoins and other currencies with similar  nature would be treated as a property under capital gains tax further it also legalized crypto exchanges which requires it to be registered with the concerned authorities
  • Japan is also one of the countries where trade in cryptocurrencies is considered to be legal and crypto exchanges are considered to be legal while virtual assets are counted as property it is considered as most progressive in terms with crypto regulations. The exchanges need to be registered with its financial services agencies and it is also taxed by the government of Japan

Conclusion

There is still a very long way to go in the field of virtual assets and currencies. It can be said that cryptocurrencies in India are currently operating in a legal grey area. While the government continues to discourage people to invest in such type of currencies by highlighting the risk it poses but also at the same time it is not illegal to invest in virtual currencies and no such ban has been issued by the government of India and any future regulation is awaited, currently it is taxed at 30 percent rate of interest which further explains that it is not illegal to trade in crypto at this moment. As the environment around the world is changing the Reserve Bank of India is planning to bring its own digital currency by 2023 which will be one step further in the field of digital currencies. It is expected by the government to look at the scenario all around the world and also bring laws to regulate the currency as it would keep the illegal activities that happen from these currencies also in check. In conclusion it is observed that cryptocurrencies are not illegal and it is not a crime to have or trade in it even the agencies have just cautioned the users by telling the risks and not done anything that criminalizes it. There is still a lot unclear in regards with future its legality until government clears its stand on this issue and make relevant laws for it or regulations for it, currently it is not illegal to invest in crypto is what can be said but at the same time it is not a legal tender

Literature review

1 https://www.livemint.com/news/india/is-cryptocurrency-legal-tender-in-india-what-we-know-so-far-10-points-11643806115501.html                                                                                                                                     2 Turpin, J. B. (2014). Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework. Indiana Journal of Global Legal Studies, 21(1), 335–368. https://doi.org/10.2979/indjglolegstu.21.1.335 3 https://freemanlaw.com/legal-issues-surrounding-cryptocurrency/

4 https://www.tookitaki.ai/news-views/moneylaundering-via-cryptocurrencies/ 5 https://complyadvantage.com/insights/cryptocurrency-

regulations-around-world/ 6 https://www.livemint.com/news/world/el-salvador-becomes-first-country-to-use-bitcoin-as-legal-tender- 11631144769412.html 8 https://coinsutra.com/future-of-bitcoin-cryptocurrency-india/ 9

https://www.investopedia.com/terms/c/cryptocurrency.asp

Author: Anand Priy Singh, NMIMS Hyderabad

Editor: Kanishka VaishSenior Editor, LexLife India

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