Legal Status of Cryptocurrency in India

Introduction: 

Cryptocurrency has gained a lot of popularity in recent years. These have been used for investment and transactions virtually all over the world. Cryptocurrency works on blockchain technology which provides transparency and authenticity. However multiple countries are trying to understand their working and are still framing rules regarding the trading of cryptocurrencies.

What is Cryptocurrency?

In India, cryptocurrency occupies a unique position that is both captivating and mysterious. While not officially recognized as legal tender, it has caught the interest of numerous individuals and businesses.
Cryptocurrency is fundamentally a digital medium of exchange. However, unlike traditional fiat currencies issued by central banks such as the RBI, it is based on a decentralized system known as Blockchain.
This network distributes, verifies, and secures transactions without requiring a central authority. The name "cryptocurrency" is derived from the cryptography used to safeguard transactions. Complex algorithms encrypt data, assuring its immutability and preventing fraud.

Cryptocurrency Regulation Bill, 2021.

The Cryptocurrency and Regulation of Official Digital Currency Bill of 2021 was introduced in the Lok Sabha. The law aims to establish a favorable framework for the introduction of digital money issued by the Reserve Bank of India (RBI).

The Indian government planned to adopt new cryptocurrency laws during Parliament's Winter Session. This was the second time the Cryptocurrency law was published but then deferred. The first time it happened was during Parliament's Budget Session in 2021.

Evolution of cryptocurrency in India

The evolution may be traced back to 2009, when it was introduced as Bitcoin, followed by the first commercial transaction in 2010, and the establishment of the first cryptocurrency exchange in 2013.
In 2018, the Reserve Bank of India (RBI), the country's central bank, dealt a huge blow to the cryptocurrency industry by prohibiting cryptocurrency transactions. This judgement sent shockwaves across the Indian crypto community, raising concerns about the future of digital assets in the country.

On April 6, 2018, the RBI issued a circular urging all of its regulated companies, including banks, financial institutions, and payment gateways, to refrain from trading in or offering cryptocurrency-related services. This decision effectively prevented banks from assisting cryptocurrency transactions, making it extremely impossible for individuals and corporations to purchase, sell, or keep crypto assets.

The RBI's rationale for the prohibition was primarily based on concerns about financial stability, consumer safety, and the possible use of cryptocurrencies for criminal purposes. The central bank emphasized the inherent volatility and speculative nature of cryptocurrencies, as well as the dangers connected with their investment. The RBI also raised concerns about the possible impact of cryptocurrencies on the stability of the Indian rupee and the country's financial system.
The prohibition shook the Indian bitcoin community, resulting in a significant drop in trading volumes and investor confidence. Many bitcoin exchanges and businesses were forced to close or migrate overseas since they couldn't operate inside the regulatory environment.
However, the restriction did not fully dampen interest in cryptocurrencies in India. Many people and corporations continued to trade cryptocurrency on peer-to-peer networks and offshore exchanges. The underlying technology behind cryptocurrencies, blockchain, has also received attention, with multiple companies and enterprises investigating its possible applications in a variety of industries.

This resulted in a significant loss of sentiment in the Indian crypto market; however, in March 2020, in the landmark case of Internet and Mobile Association of India vs. Reserve Bank of India (2020), the Supreme Court of India unanimously overturned the RBI's circular banning cryptocurrency, ruling it unconstitutional and infringing on the right to freely trade and do business under Article 19(1)(g) of the Indian Constitution.

Is Cryptocurrency Legal In India?

In India, no central authority regulates the use of cryptocurrency as a payment mechanism. There are no rules, regulations, or procedures in place to settle conflicts involving cryptocurrencies. So, bitcoin trading is done at the risk of the investors.
Nirmala Sitharaman, India's Finance Minister, has proposed taxing digital assets, fueling discussion over the legality of cryptocurrencies in the country. While many have welcomed the decision to tax virtual money as the first step towards recognizing it, the government has yet to issue an official clarification on whether currencies such as Bitcoin are legal in India.

Based on the several major statements made by the Governor of the Reserve Bank of India and different government spokespersons, including the country's Finance Minister, it is possible to assume that cryptocurrency is unlawful, but there is no specific prohibition on it in India. They are unregulated, however the Indian government promised in the recent Union Budget 2022 a 30% tax on cryptocurrency gains and a 1% tax deducted at source.

Legal Status of Cryptocurrency in India:

Regulatory Developments:

1. Supreme Court Ruling (2020): The Supreme Court of India has overturned the Reserve Bank of India's (RBI) restriction on cryptocurrency transactions. The RBI first set limitations prohibiting banks and financial institutions from providing cryptocurrency-related services. The Supreme Court decision was viewed as a huge success for the Indian cryptocurrency industry.

2. Taxation: The Indian government has announced a 30% tax on cryptocurrency transactions, as well as a 1% tax deducted at the source. This move was regarded as a step towards recognizing and regulating the cryptocurrency market, despite the fact that cryptocurrencies have not been designated as legal cash.

3. Regulatory Proposals: The Indian government is considering enacting a cryptocurrency-specific legislative framework. There have been discussions regarding a measure aimed at regulating digital currencies, which may contain provisions for the development of an official digital currency issued by the RBI, as well as the regulation or prohibition of certain private cryptocurrency. However, as of my last update, this bill has not yet passed into law.

4. RBI’s Stance: The Reserve Bank of India has taken a cautious approach to cryptocurrencies, citing worries about financial stability, investor safety, and the possibility of misuse for illegal purposes. The RBI has also been looking into the potential of launching an official digital currency (Central Bank Digital Currency, CBDC).

Current Status:

The legal environment for cryptocurrencies in India is characterized by cautious regulatory monitoring and developing policies. While trading and keeping cryptocurrencies is now permitted, the government and RBI's worries indicate that future laws could have a big impact on how cryptocurrencies operate in the country.

Investors and dealers in the cryptocurrency field should be aware of legislative developments in India, as legal and tax ramifications may change. It is also recommended that you engage with legal and financial specialists to help you negotiate the complexities of Indian cryptocurrency rules.

Challenges of Cryptocurrency Adoption in India

Cryptocurrency, the digital frontier of finance, has enormous potential but is not without obstacles. As we navigate the journey from regulation to mainstream adoption in the Indian market, various issues emerge, requiring our attention and prudence.

Understanding and avoiding these risks is critical as India moves forward with cryptocurrency adoption. Navigating the digital landscape necessitates informed decisions and a proactive strategy to protecting your financial interests.

1.      Security Threats: In the world of cryptocurrency, security is paramount. Hackers lurk, waiting to steal your valuable virtual currency or create counterfeit ones, leaving you with nothing but remorse. Caution is urged; avoid untrustworthy websites that may jeopardize your digital fortune.

2.      Crash Risk: The Unlimited creation of virtual currency may sound appealing, but it involves hazards similar to those in real-world economies. Unchecked issuance might result in inflation and possibly a crash. Before investing in lesser-known coins, consider the potential risks vs the promise of quick profits

3.      Real Money Impact: The surge in bitcoin usage for everyday transactions begs a delicate question: how does it affect established monetary systems? Striking a balance between the virtual and real economies is critical to ensuring the integrity of both financial systems.

4.      Gold Farming: Beware the appeal of gold farming, a technique in which gamers collect virtual cash in games and sell it for real money. This unregulated process adds fraud dangers, so exercise caution when considering purchasing virtual products with your hard-earned money.

5.      Unstable Value: In the unpredictable world of virtual communities, the value of their currency corresponds to their popularity. A decrease of user interest leads to depreciation. Diversification becomes a sensible idea; avoid putting all of your financial hopes in one dwindling virtual basket.

6.      Money Laundering: Cryptocurrency, with its pseudo-anonymous character, can be a haven for crooks. Platforms that enable virtual-to-real money conversions increase the risk of money laundering. Choosing reliable platforms is critical to securing your digital assets.

7.      Unknown Identities: Fake accounts complicate cryptocurrency transactions. The lack of verification makes tracking unlawful activity difficult. When trading online, exercise prudence and thorough diligence.

8.      Black Market: As gaming platforms matured, illegal markets for virtual currency trade emerged. Stick to secure and legal sites to avoid the risks associated with shady transactions in these dark corners.

Cryptocurrency Bill: The Road Ahead

The Cryptocurrency Bill 2021 is a legislative measure introduced in Lok Sabha by the government to regulate India's booming cryptocurrency business. The business has seen a surge in investment in recent years, particularly during the Covid period, both domestically and internationally.

Crypto trading platforms in India, like as WazirX, CoinDCX, and Zebpay, are seeing a significant increase in activity. Even when the government wishes to protect young entrepreneurs and investors, an unregulated cryptocurrency market is unfavorable and risky. By introducing the Cryptocurrency Bill in 2021, the government took an official step towards regulating cryptocurrency. The bill proposes to establish a favorable framework for the formation of an official digital currency to be issued by the Reserve Bank of India. It also outlaws all other private cryptocurrencies, with some exceptions to support the underlying technology of cryptocurrency. The government has previously announced in the 2022 Union Budget that gains from virtual digital assets or cryptocurrencies will be taxed at 30% and subject to 1% TDS.

Conclusion:

In India, cryptocurrency is getting popular, but there are challenges like unclear rules and security issues. While there are opportunities for financial inclusion and easier investments, India needs to create clear rules, educate people, and improve technology. The government is exploring Web3 and blockchain for innovation. Balancing new ideas with proper rules is key to the safe and successful use of cryptocurrency in India. The Cryptocurrency Bill 2021, is still in process and might even take a while to be open for consultation. The Government of India already took a step when they introduced taxation on virtual assets in the Union Budget 2022. However, the introduction of the Cryptocurrency Bill is an important milestone.