The Indian legal framework for cryptocurrency regulation

With the increasing popularity of Bitcoin in 2008, the cryptocurrency market began to take off. Since then, the crypto environment has evolved dramatically, and more than 10,000 cryptocurrencies are now traded globally. The majority of cryptocurrency investors in the world are already concentrated in India.

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The Indian government has taxed cryptocurrencies, making it clear that this will not indicate that they have been made legal. While it is commendable that India is fast embracing digitalization in practically all spheres of life, there is a fundamental issue that needs immediate attention; India currently lacks any legal framework to oversee the market for digital currencies.

Different aspects of cryptocurrency regulation

The Reserve Bank of India (RBI) cautioned that cryptocurrencies and digital money were not accepted as legal in India in 2017. However, there was no digital money restriction. Cryptocurrency trading, processing, owning, exporting, and employment are punishable in India with a monetary fine or/and a term of jail up to 10 years, according to a 2019 RBI statement. The RBI has stated that it could introduce the digital rupee as legal cash in India. In 2020, the Indian Supreme Court lifted the RBI’s prohibition on cryptocurrencies and trading on Bitcoin Digital.

  • Cryptocurrency and the RBI’s Virtual Rupee: The 2022 Bill, which is part of the 2022 Budget, has a definition of a virtual digital asset that will start the regulatory process for all cryptocurrencies and NFTs. Any cryptocurrency and/or NFT that falls outside this definition’s scope may nevertheless be categorized or declassified by the administration. This provision is a possible safeguard against the 2022 Bill’s inclusion of the Reserve Bank of India’s planned Central Bank Digital Currency (“CBDC”), also known as the Digital Rupee of India, as a taxable or regulated item.
  • Variations in technology between cryptocurrency and CBDC: Besides having official support, the planned CBDC fundamentally differs from private cryptocurrencies. The CBDC will be built on a licensed blockchain instead of the permissionless blockchain often utilised by other private digital currencies like Ethereum. Any individual can participate (generate money) in a blockchain using permissionless blockchain technology by connecting new nodes to the network. Therefore, with sufficient technological help, any private individual may mine bitcoins.

However, using licensed blockchain technology and, more particularly, CBDC, only the Central Government and other organizations approved by the Government will have the right to generate, adjust the volume, and/or regulate the availability of the CBDC. In terms of technology, distributed ledgers include an access-control layer integrated into the blockchain nodes that prevents unauthorized access from adding/creating nodes.

  • CBDC will function as a stablecoin: The fact that a CBDC will have a fundamental value or market price maintained by the Administration itself, as opposed to private cryptocurrencies that just have theoretical value bases, seems to be another variation among them.

The currently available information indicates that CBDC Digital Rupee will become a stablecoin with a value linked to the Rupee’s worth. Stablecoins are digital currencies that still have all the functionality and mobility of other cryptocurrencies and whose worth is tied to a piece of security.

  • The legitimacy of cryptocurrency: Different countries have taken various positions on the legality of cryptocurrencies. A few nations have allowed cryptocurrency trade and accept cryptocurrencies as legal cash, even though not many nations have formally recognised the legitimacy of cryptocurrencies.

At the moment, cryptocurrencies are uncontrolled in India. The Reserve Bank of India and the Indian government have traditionally outlawed trading in cryptocurrency trading notification on the ban on trading in virtual currencies, issued on April 6, 2018, forbade all financial institutions from providing their services for cryptocurrency transactions.

The decision to forbid regulated entities from offering services to bitcoin traders drew strong criticism and pushed many Indian cryptocurrency firms to comply. The Supreme Court overturned the Crypto Ban Notification in its decision dated 4 March 2020 in Internet and Mobile Association of India v. Reserve Bank of India, giving cryptocurrency firms, dealers, and platforms a new outlook on life.

Conclusion

The RBI may depend on blockchain technology to establish a regulatory influence in the cryptocurrency market. Additionally, it could think about granting licences to cryptocurrency exchanges, which would only be allowed after proper document and security checks. Additionally, a structure that mandates that transaction records be sent to the RBI within a certain deadline may be implemented, strengthening customer protection while simultaneously ensuring the security of transactions and reducing criminal usage.

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