Cryptocurrency regulation in India has been a rollercoaster ride since 2017. When cryptocurrency gained popularity in the 2010s, its adoption in India rose and led to the establishment of several exchanges. Between 2012 and 2017, crypto exchanges such as Bitxoxo, PocketBits, Koiex, Unocoin, Coinsecure, and Zebpay were instrumental in popularizing crypto in the country.
The exchanges made it possible for cryptocurrency adoption outside of the traditional cult adopters. The government, through the RBI, has always adopted a cautionary approach to cryptocurrency. The first RBI statement was in 2013 where the central bank warned the public against digital currencies.
Public Interest Litigation
The demonetization efforts in 2016, where ₹500 and ₹1,000 notes were pulled from circulation, led to cash shortages, and negatively impacted the economy. Cryptocurrency rose as an alternative not subject to traditional banking and regulatory rules. Adoption increased dramatically, and at this point, the RBI spoke up and reminded the public of the concerns it had raised five years prior.
Regulation of cryptocurrency in India started with filling two public interest cases in the Supreme Court. In one of the cases, the applicant sought orders from the highest court in the country to restrict the trading of cryptocurrencies with the country’s borders. The other applicant wanted orders regarding the regulation of the crypto industry. The court is yet to hear these cases.
SC Garg Committee Recommendations
The government moved to form a high-level committee to study the general issues regarding virtual currencies and recommend actions the Indian government could take. After 2 years, the committee finalized its report and proposed enacting a crypto regulation law that would ban the use of digital coins as currency. The committee went ahead to propose fines and custodial sentences of up to 10 years.
The committee’s report also laid the foundation for an RBI-issued digital currency that is set to be released on a pilot basis later this year. A close look at the report reveals recommendations regarding adopting many blockchain technologies such as distributed ledger technology. The appeal of the technology was highlighted as a cost reduction option when meeting KYC requirements.
Government Press Releases
When talking about cryptocurrency regulation India, the recurrent theme is caution. Having issued a warning to the public in 2013, the Finance Ministry and the RBI issued statements in December 2017 warning about the risky nature of crypto.
The Finance Ministry went further and likened cryptos to Ponzi schemes and disputed their classification as currencies.
Action Against Cryptocurrencies
In April 2018, the RBI finally acted and banned financial services providers from dealing in virtual currencies and denying services to individuals and corporations that dealt with virtual currencies.
The ban crippled crypto exchanges since they could not access banking services and execute fiat transactions on behalf of their customers. The exchanges that did not carry out fiat transactions as part of their core business activities were also affected. They could not pay for services or employee salaries since they had no banking services. 95% of the people with jobs in the crypto industry became unemployed, and transactions fell by 99% within months.
The ban was lifted following a Supreme Court ruling in March 2020. The Court noted that while the industry was unregulated, it was not illegal. The market began flourishing again but fears of an impending ban remained.
Government Issuance of a CBDC
In January 2021, the government expressed an interest in creating a sovereign digital currency through a bill prohibiting all private cryptocurrencies. The CBDC is set to be issued later this year, but the legislation regarding banning crypto is far from ready, with a lack of consensus on many pertinent issues.
The Road Ahead
Currently, cryptocurrency in India remains unregulated, and no law explicitly makes it illegal. The government has expressed an interest in regulating the industry instead of issuing a ban, but the RBI stance remains. The RBI’s reservations about cryptocurrency are centered around the anonymous nature of transactions. Experts have expressed their concerns about the practical nature of a ban given the decentralization of cryptocurrencies. The implementation of the ban in 2018 was possible because of the limited size of the industry. The Indian crypto industry has since registered huge growth and become more complex to control.
