By Laghavi Pahwa
The Reserve Bank of India [“RBI”] in April 2018 issued a Circular[1] banning entities including banks from dealing with individuals or companies that trade in cryptocurrencies which eventually resulted in the virtual currency market in India coming to a standstill. However, it did not per se ban holding or trading in cryptocurrency as it still could be transferred to another person or a barter transaction could have been carried out. Businesses and entities regulated by the RBI were affected by the Circular which eventually led to the shutting down of these entities in the past two years but the verdict of the Supreme Court [“SC”] in March 2020 has given hope to those in the industry to revive their business.
RBI has the Authority to Regulate Cryptocurrency
“Neti, neti” is an ancient Sanskrit expression which means “neither this nor that.” It is like an expression of something inexpressible and applies when there is no specific definition of a particular situation. This saying has been used by the Supreme Court while defining the term virtual currency [“VC”]. There are four features of money – medium of exchange, unit of account, store of value, and whether it is socially accepted as money. VCs have the characteristics of money, but they do not satisfy the legal definition of money. It was contended by one of the petitioners that VCs are not money because they are not socially accepted as money. But the Supreme Court held that even satisfying three of these characteristics is enough to term VC as money. Justice V. Ramasubramanian held that “VCs have not acquired the status of a legal tender as they are not backed by a central authority, but they constitute representations of value and are capable of functioning as a medium of exchange.” This was concluded after considering definitions of VCs in various jurisdictions, definitions given by the government, courts and, other statutory authorities of various countries.
With the fixing of the identity of VCs, it was concluded by the Supreme Court that VCs are accepted as a valid mode of payment to purchase goods and services by some institutions and it can be concluded that the activity carried out by the users of VCs falls under the purview of RBI. “Despite the said activity forms a part of the credit or payment system, RBI has the authority to regulate or prohibit any activity which may impact the financial system of the country negatively.”[2]
RBI’s circular was not reasonable or proportional to the threat
Article 19(1)(g) of the Indian Constitution ensures the fundamental right to practice any profession or to carry any occupation, trade, or business. The petitioners challenged the Circular on the ground that it violated Article 19(1)(g). The SC was of the opinion that any such freedom guaranteed under this article must pass a reasonability test. The petitioners contended that since access to banking is equivalent to the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law is not a reasonable restriction and is also extremely disproportionate. RBI objected on the ground that there is no fundamental right to purchase, sell, transact and/or invest in VCs and therefore Article 19(1)(g) cannot be invoked. However, this contention can be rejected due to two reasons, namely (i) that the petitioners are claiming a right to provide a platform for facilitating the trade of VCs between individuals/entities which is not yet prohibited by law and (ii) the impugned Circular does not per se prohibit the purchase or sale of VCs. Hence, it was held that the Circular of RBI is violative of Article 19(1)(g). However, the drawback to this is that it only covers those persons who are engaged in such an activity as a profession, occupation, trade or business but the person are who engaged in buying and selling virtual currencies just as a matter of hobby (hobbyists) cannot pitch their claim under Article 19(1)(g) or this judgement.
The SC held that the measure taken by RBI should pass the test of proportionality and it must be checked if there were less intrusive measures available and whether RBI considered these alternatives. The SC referred to the Report of the European Union Parliament titled ‘Cryptocurrencies and Blockchain” of July 2018. The report emphasizes that “if a legislator does not want to outright ban these cryptocurrencies, a good argument to support is that cash is also fully anonymous and lawful – the only way to find out who uses them is to require users to register mandatorily.” The ultimate recommendation made by the EU Parliaments is not to go for a total ban as there are less harsh alternatives to regulate the system. There is also no empirical data from the past 5 years to show that this business is causing harm to entities regulated by RBI. The Inter-Ministerial Committee constituted in 2017 was of the opinion to regulate and not ban cryptocurrencies as imposing a ban would be an extreme measure and the same objectives can be achieved through other regulatory measures. It was concluded that alternative measures were not considered by RBI to protect what they said were risks from cryptocurrencies. Therefore, the Circular was held unreasonable and disproportionate.
Regulating Cryptocurrency will lead to a series of undetermined questions
Virtual currency is not regulated in India so one does not need a license to set up a cryptocurrency exchange as there is no authority to give a license. Whereas in the EU, it has been made compulsory to get a license as self-regulation is not allowed. But now that the door is open without any restrictions yet, there are a lot of other factors that need to be considered while regulating cryptocurrency. Under the Income Tax Act, the first question which arises is whether trading in cryptocurrency is a business transaction or a capital gain. If the trading is conducted regularly by the entity then it is classified as a business income but if it’s a one-off transaction it can be said that it’s a capital gain transaction. The second question which can arise is that usually these currencies are earned through mining activities so in such cases, where freshly mined coins are traded, what will the cost of acquisition be in a capital gain transaction.
Under Goods and Service Tax [“GST”] Law, GST is applicable to the supply of movable property which constitutes goods other than money, so the determination of the nature of cryptocurrency is essential. This characterization is important from the GST perspective because if it is characterized as money then GST will not be applicable but if it is a good or an intangible property then 18% GST may apply. But for it to be a taxable supply, it needs to be in furtherance of business but several times casual traders are indulged in these transactions which do not carry these activities out from a business point of view.
Under The Finance Act, 2020, the scope of equalization levy has expanded to include e-commerce supply or services by an e-commerce operator. Equalization levy of 2% tax is now imposed on a non-resident platform owner and any transactions undertaken by them over the internet. So if the entity is a foreign platform and they are facilitating trade between two parties, one of them being an Indian, this levy will have to be paid by the platform owner on the consideration received by them. So these platform owners will be under an obligation to pay a 2% tax on the considerations. Apart from this, a lot of countries have now begun considering to differentiate between cryptocurrency and virtual currency because virtual currencies are also used in gaming and at other platforms.
Conclusion
It is in the light of these points that the petitioners succeed and the impugned Circular of RBI has been set aside. After this judgement, it has given hope to businesses to rejoin the industry in India. It has been observed that since the nationwide lockdown has been imposed in India due to the coronavirus outbreak, there has been an increase in the number of people trading in cryptocurrencies.[3] However, it is important to know that SC has not decided on the legality of cryptocurrency in this judgement but has only decided upon the prohibition imposed by RBI. VCs remain unregulated in India as there is no legislation for the same. This industry still has to overcome certain obstacles as recently a draft titled ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has been submitted by the Government but has not yet been tabled in the Parliament for discussion. The bill prohibits holding, selling, disposal, or use of cryptocurrency in India and the legality of VCs in India depends upon whether or not the bill is passed.
The author is a fourth-year law student pursuing their B.A. LL.B (Hons.) Degree from Manipal University Jaipur.
[1] Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI Notification (Apr 06, 2018), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0.
[2] Internet and Mobile Association of India v. RBI, 2020 SCC Online SC 275.
[3] Kevin Helms, Nationwide Lockdown: Indian Cryptocurrency Exchanges See Signups and Trade Volumes Increase Bitcoin News (Apr 03, 2020), https://news.bitcoin.com/nationwide-lockdown-india/
NUALS Law Journal 