The emergence of crypto-currencies has transformed the global financial landscape, and India is no exception to the rapid increase in crypto currency investors entering the market. With a growing market there is a dire need for clear regulations. However, despite, the rapid growth in the cryptocurrency market in India the Government’s ambivalence towards cryptocurrencies has resulted in a regulatory vacuum, leaving exchanges to operate in a grey area.
India’s regulatory approach to crypto-currencies has been cautious yet unclear, reflecting concerns about security, money laundering, and financial stability. In 2013, the Reserve Bank of India (“RBI”) issued a warning about the risks associated with virtual currencies, highlighting the potential for volatility, fraud, and illicit activities. The sui-generis nature of crypto-currencies makes it fall out of the conventional definition and ambit of a financial instrument and asset.
The RBI has already expressed its concern and suspicion on the feasibility of crypto-currencies published a Circular bearing No. RBI/2017-18/154 dated 06th April 2018 (“RBI Circular”) which banned banks from dealing with crypto exchanges in any manner. However, the Hon’ble Supreme Court in 2020 was pleased to set aside the RBI Circular in the judgement dated 04.03.2020 passed in Writ Petition (Civil) No. 528 of 2018. Despite, the Ruling of the Hon’ble Supreme Court in Writ Petition (Civil) No. 528 of 2018, the RBI Circular has continued to have an impact on the future of the crypto-currencies and resulted in various crypto-exchanges to shut their operations in India, leaving the investors in a state of confusion and uncertainty.
Pursuant to the Hon’ble Supreme Court quashing and setting aside the RBI Circular, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Crypto Bill’) aimed to prohibit mining, holding, selling and dealing in private crypto-currencies and issuing/trading in crypto-currencies related in derivatives and aimed to create an official digital currency issued by the RBI and vesting the powers to regulate, issue, supply and manage crypto-currency. This was introduced as a measure to protect consumer interests, prevent money laundering and promote financial stability in crypto-currencies. The Bill was introduced in the 2021 winter session, however, the Bill has not come into operation making its current status uncertain.
Due to the lack of regulations and the fluctuations in the status of cryptocurrencies in India, certain alarming revelations have unfolded in India regarding cryptocurrency, which have resulted in hardships for the investors and the exchanges, such as destressed closures of operations and investors forced to divest funds in grave paucity of time, Coinome, a Billdesk backed cryptocurrency Exchange, suspended its operations in India in 2019 due to the prevailing uncertainty on cryptocurrency guidelines and regulations in India. In another instance, Zebpay, one of the leading Cryptocurrency Exchanges in India, was constrained to shut down its operation in India in 2018, pursuant to the RBI ban on banks dealing with cryptocurrency.
Currently, crypto-currencies are not recognized as legal tender in India, the treatment of crypto-currencies in India for the purposes of taxation are also ambiguous as there is no law and/or regulation, which is regulating the taxation for crypto-currencies. there is no specific law governing taxation of cryptocurrency or definition of ‘income’ from cryptocurrency, the Indian Government vide the Finance Bill, 2022 has introduced 30% Income tax on Cryptocurrencies and subjected cryptocurrency to the grasp of GST as well. Furthermore, crypto currency is subject to income tax and Goods and Services Tax (“GST”). Crypto-currency exchanges must also comply with Anti-Money Laundering (“AML”) and Know-Your-Customer (“KYC”) norms, ensuring that transactions are transparent. These regulations demonstrate the government’s willingness to acknowledge the existence of crypto-currencies while ensuring they operate within established financial frameworks however, the government’s approach may be counterproductive, driving crypto activity underground and making it even harder to regulate. A more nuanced approach, recognizing the sui generis nature of crypto assets, is needed. The lack of clarity surrounding crypto-currency legality has led to confusion among investors, traders, and financial institutions. Furthermore, the absence of clear guidelines has created regulatory ambiguity. A clear regulatory framework would enable businesses to operate with confidence, attract foreign investment, and drive economic growth. Public awareness campaigns would educate users about the risks and benefits associated with crypto-currencies, promoting responsible trading and investment.
In conclusion, the crypto industry in India is navigating a complex regulatory landscape, the government and regulatory bodies in India must address the regulatory ambiguity surrounding Exchanges, the lack of specific regulations leaves the industry in a state of uncertainty. By doing so, India can establish a robust framework for the growth of crypto-currency. The Indian government and regulatory bodies must address the regulatory ambiguity surrounding crypto-currency and the impact it has on the investor’s mindset, protection and confidence as well as the survival of the crypto-currency exchanges operating within India. Indian investors have displayed their interest and intrigue, which is growing stronger each year with more and more investors investing in crypto currencies, the Govt. ought to realize the growing trend and the need to provide certain safeguards to many investors investing in the crypto markets. Moreover, the Indian government should consider establishing a specialized regulatory body to oversee the crypto-currency market and maintain vigilance, much like how Securities and Exchange Board of India (“SEBI”) maintains vigilance over the stock market. This entity would provide dedicated expertise, monitor market trends, and respond to emerging challenges. Ultimately, the future of crypto-currency regulation in India will depend on the government’s ability to strike a balance between regulatory oversight and innovation. By embracing this challenge, India can unlock the potential of crypto-currencies, enhance its financial landscape, and cement its position as a hub for technological innovation.