The Legal Framework for Digital Currencies in Indias

Electronic currency and particularly virtual money has received swift attention and controversy around the globe. Currently, the context of both digital currencies and digital tokens is rapidly developing in India, RBI and government are working on the legal recognition of this type of assets. The purpose of this article is to detect the current legal position of the cryptocurrencies in India as well as discuss the possibility of regulations proposed by the RBI, in other words, the reader will get a clear vision of the proposed regulation in India as well as the current status

The Emergence of Cryptocurrencies
Some of the cryptocurrencies that have gained popularity include bitcoins, Ethereum, among others as a result of their standing on decentralized system, secure forms of investment with high returns. While old-style currencies that are issued and regulated by the central banks, cryptocurrencies have been based on Blockchain technology making the possibility of fake currencies very unlikely.

 Early Regulatory Stance in India
In the first few years of cryptocurrencies, Indian government and regulatory agencies were quite passive towards the cryptocurrencies. The RBI over a period of time released various cautions to the public on the dangers of participating in trading and investing in cryptocurrencies. When in the year 2013, RBI made its recommendation, such risks as hacking, fraud, and volatility was identified.

The RBI first tried to regulate the cryptocurrencies in June 2016 but in April 2018, it issued a circular that banned regulated entities from directly dealing in cryptocurrencies or providing services for facilitating any person or entity in dealing with or settling them. This step logically excludes banks and financial companies from dealing with cryptocurrencies and take a heavy toll on cryptocurrency scenario of India.

Legal Challenges and Supreme Court Verdict
The act of RBI to ban came under legal scrutiny from various players that engage in the use of cryptocurrencies such as the exchanges and traders. The Internet and Mobile Association of India (IAMAI) challenged the RBI’s circular more so the ban on cryptocurrencies, on the grounds of being unconstitutional and the infringement on the rights to trade and profession.

In March 2020, an order was passed by the Supreme Court of India to recall the circular passed by the RBI as the apex bank got unreasonable and unestablished the risks associated with cryptocurrencies. The verdict was hailed as a huge win for cryptocurrencies in India thus sparking a revival of operations within the sector.

Proposed Regulations by the Reserve Bank of India

After the apex court’s ruling, the RBI and the Indian government are in the process of drafting an elaborate legal structure for virtual currencies. The key focus areas for the proposed regulations include:The key focus areas for the proposed regulations include:

1. Defining Cryptocurrencies: The regulations seeks to categorize cryptocurrency by using a set out framework that distinguish between virtual assets vis-a-vis security tokens, utility tokens or even stable coins.
2. Consumer Protection: Maintaining consumers’ welfare and shield is the main responsibility. The regulations are believed to provide mechanisms of safeguarding investors from injustice, probably cyber attack and other factors that are likely to affect the cryptocurrencies.
3. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF): Cryptocurrencies have faced some challenges because of their anonymity; making them suitable for use in unlawful activities. Drafts for regulations will probably incorporate strict provisions concerning AML and CTF to curb the use of digital currencies.
4. Licensing and Registration: The use of the digital currency may be regulated by issuing licenses and making sure those involved in the business of buying and selling are registered with the responsible authorities. This change is You Tube for a purpose of increasing more transparency and accountability in this particular sector.
5. Taxation: Starting in the following year, the government is also expected to announce its policy stances on taxes on cryptocurrencies on capital gains taxes and goods and services tax (GST) respectively.
6. Central Bank Digital Currency (CBDC): Specifically, the creation of a concept that implies the emergence of an RBI CBDC has been discussed by the RBI. Thus, CBDC would be a digital version of the Indian Rupee with central authority belonging to the RBI as an opposite to the risky adventurous private cryptocurrencies.
   

 Current Legal Status of Cryptocurrencies
Today, cryptocurrencies are not banned in India though they do not fall under the official legal category that regulates its use. Due to the lack of legal guidelines, there is legal vagueness and cryptocurrency exchanges and traders work in legal ambiguity.

The Indian government has tabled a bill called The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 to prohibit all privately issued cryptocurrencies, but allow the RBI to issue an official digital currency. The bill also provides measures for non-compliance which is in form of imprisonment and fines. However, the bill has not been passed into law and there is no telling as to whether it ever will be.

Industry Response and Developments
The cryptocurrency industry in India and their way of functioning has also proved to be very flexible and persistent in face of regulation threats. After the Supreme Court passed the verdict, several of the exchanged shut down but a few reopened and several new exchange platforms came into operation. The industry has also grown in as far as the number of users as well as the trading activities are concerned.

The companies dealing with cryptocurrencies and using them for their operations continued to lobby the policymakers and the regulators for the right stakeholder-friendly policies. Trade bodies such as the IAMAI have played an active role in such campaigning with the assertion that the regulating mechanisms should consider consumer protection while promoting the Sector’s growth and expansion.

Global Perspective on Cryptocurrency Regulation
India is not the only country facing such problems or issues with cryptocurrencies and their regulation. Nowadays, governments of countries across the globe are implementing different strategies to govern the operation of digital currencies. For instance:

• United States: The regulations for crowdfunding in the U. S. varies across the states making the general approach quite incongruous. On the federal level special attention should be paid to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
• European Union: The EU plans on MiCA, its regulation dealing with Markets in Crypto-Assets, it is still in the process of creating its regulations with consumer protection in mind.
• China: However, China has considered this grave by putting a complete ban on trading in cryptocurrencies and ICOs. However, it is working on actively on developing its own central bank digital currency, also known as Digital Yuan.
• Japan: Japan has thus followed a liberal approach by legalizing of cryptocurrencies as property and the operation of the cryptocurrency trading platforms under the Payment Services Act.

Future Outlook and Challenges
Like in all innovational goods, the process of regulation will be under the control of the Indian Government regarding the factors of risks and innovation. Key challenges that need to be addressed include:Some of the challenges that should be worked on are as follows;

1. Regulatory Clarity: The rules have to be rather sensible and comprehensible so that there are no loops created when they are established and so that the cryptocurrency businesses and the investors stick to them.
2. Technological Advancements: Therefore, it is necessary to create revolutions related to the modern world of blockchain and currencies.
3. International Coordination: Cryptocurrencies are the cross border system and thus international cooperation continues to be very relevant in the area of regulation. India is also needs to built relations with other countries and international organizations to deal with cross border problems.
4. Public Awareness and Education: Apart from that, it is also important to increase people’s awareness of the necessity to acquire proper knowledge concerning the non-harmful and useful aspects of using cryptocurrencies; It was also mentioned that the two part-teaser also stresses upon the need to rise consumer consciousness on the topic.

 Conclusion
The legal framework for digital currencies in India is at a critical juncture as the government and the RBI work to create a comprehensive regulatory regime. The proposed regulations aim to address key issues such as consumer protection, AML and CTF compliance and the potential launch of a CBDC. While challenges remain, a balanced and progressive regulatory approach can pave the way for the growth and development of the cryptocurrency industry in India, ensuring that it contributes positively to the economy while mitigating the associated risks. As the landscape continues to evolve, it will be crucial for all stakeholders in the cryptocurrency ecosystem to stay informed and engaged with regulatory developments.

-by Raj Kumar(Intern)
OP JINDAL GLOBAL UNIVERSITY