By Vedangini Bisht and Shubham Chaudhary
On March 4, 2020, the Supreme Court of India, in the case of Internet And Mobile Association Of India v Reserve Bank Of India, overturned the April 2018 circular of Reserve Bank of India. The 2018 RBI circular had banned all the RBI regulated entities from trading in cryptocurrency or virtual currency (VC). While there was no per se ban on VCs, it led to a shutdown of VC start-ups in the country and a massive decline in its trading volumes. The 180-page judgment of the Supreme Court held the circular to be in violation of Article 19(1)(g), recognising trading in VCs as a fundamental right. The decision was primarily based on the principle of proportionality and the fact that RBI had been unable to prove any adverse effect of VCs on the operations of financial institutions and banks.
This article first looks into why a legislation regulating VCs ought to be enacted. Then the various factors that need to be kept in mind while formulating such a legislation are elucidated, including a) the issues with definition, b) judicial precedents and c) approach of foreign jurisdictions on the subject.
NEED FOR A LEGISLATION
Before the “ban” on VCs in India, entities that dealt in VCs operated in a regulatory vacuum. The ban was introduced to address multiple concerns that the government and the RBI had with VCs. These concerns included consumer protection, market integrity and money laundering. The government had also previously warned users of “economic, financial, operational, legal, consumer protection and security-related risks” associated with VCs. Several proponents of VC are also against their regularisation by the central government, given the decentralised nature of technology. These are the some of the concerns surrounding the regularisation.
However, the VCs require an amalgamation of exchange, marketing, issue of new tokens etc for their effective working. All of these are highly centralised aspects, requiring standardized oversight to prevent illegality and impropriety.
The primary reason for the need of a legislation arises from the Supreme Court’s judgment itself. One of the rationales used by the Supreme Court to give a decision in the favour of the VC industry was the absence of any law prohibiting VCs yet. This implies that the verdict would lose its effect if such a law is put in place. It should be noted that the petitions were filed against the RBI, not the Ministry of Finance. The verdict of the Supreme Court only addresses the regulatory concerns of RBI. It refrains from issuing any directive to the policymakers about the treatment of VCs.
Further, the inclusion of trading in VCs under Article 19(1)(g) can be nullified by a legislation affirming the contrary. Hence, in the absence of a statute which clearly states the legality of cryptos and their regulation, they remain constantly vulnerable to negative legislative actions.
The fate of Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 (Cryptocurrency Bill, 2019), which prohibits the use of VCs as a legal tender or currency, is yet to be decided. It ought to be noted that the text of the bill was leaked and hence, has not been formally endorsed by the Government. Even though it has not been introduced in the parliament as of now, it is hoped that the judgment would reset the discourse on VCs and sway government thinking. Given below are some of the specific indices the legislature shall have to keep in mind while formulating a legislation on VCs.
ISSUES TO BE ADDRESSED BY THE LEGISLATION
Any issues related to VCs that a legislation would want to address will depend on the concerns that the government has with regards to the operation of VCs. As mentioned earlier, the concerns were related to protecting the interests of both, the formal financial sector and the persons dealing in VCs. The question that arises here is whether a total prohibition on operation of VCs in India is the only way to address these concerns. After the preliminary issue of definition, this article will proceed to analyse this question from two perspectives: Supreme Court precedents on restriction of activities under Article 19(1)(g) and the approach of foreign jurisdictions on the subject.
A formidable task is to define a cryptocurrency or VC. The Supreme Court also noted this difficulty. VCs are defined by different names such as crypto assets, electronic currency, digital assets etc, making it difficult to compartmentalise them into legal tenders solely or goods/commodities. The difficulty with defining them as a legal tender is the absence of a sovereign guarantee, backed by a central authority. In India, a legal tender is maintained by the RBI, but a VC is recorded and shared with users over a network.
The Cryptocurrency Bill, 2019 has been too wide in its approach to the definition. It includes tokens such as information, code or token which has a digital representation of value and is generated through cryptographic means, that neither function at all like VCs, nor pose the same risk.
The Supreme Court also stated that the VCs are a by-product of blockchain technology and the government could consider segregating the two. The draft Blockchain policy of the State of Telangana, released in 2019, also sought to make this distinction, clearly stating that given the novelty of the technology, both of them tend to be confused. At the same time, it refrained from giving a definition of VCs. But most of the federal polices in the world have conspicuously refrained from differentiating the two.
There are other jurisdictions the legislature can look to, in order to define cryptocurrencies, such as the EU. Quite a precise definition has been used by the Financial Action Task Force, (an intergovernmental organisation to combat money laundering) which defines it as “a math-based decentralised, convertible virtual currency which is protected by cryptography.”
Precedents set by the Supreme Court
Whether a prohibition is the only method addressing the concerns related to VCs will need to be evaluated in light of the Supreme Court’s judgments on restriction on Article 19(1)(g).
In Modern Dental College and Research Centre v. State of Madhya Pradesh, the Supreme Court had held that any restriction on Article 19(1)(g) must meet the test of proportionality, meaning that a limitation on a constitutionally protected right must be must be constitutionally permissible. Sub-components of proportionality include, inter alia, that a measure which restricts a constitutionally protected right must not have an alternative that may achieve the same purpose as the measure with a lesser degree of limitation. Hence, while imposing a prohibition on operation of VCs, the government must ensure that no other measure, including regulation of VCs, would achieve the aimed purpose of the government.
Additionally, the state should prohibit an activity only if it can demonstrate that the activity is inherently pernicious or tends to be harmful to the general public, as was laid down by the Supreme Court in Mohd. Faruk v. State of Madhya Pradesh. Therefore, any decision taken by the state regarding the operation of VCs should be based on empirical data regarding the harm caused by such operation, whether the harm be to the formal financial sector or to the persons dealing in VCs. This test of justification by acceptable evidence of a restriction on Article 19(1)(g) has been applied by the Supreme Court in other cases as well, such as M/s. Laxmi Khandsari v. State of Uttar Pradesh and State of Maharashtra v. Indian Hotel and Restaurants Association.
Foreign jurisdictions on Virtual Currencies
The Indian state could also analyse the measures adopted by foreign countries in dealing with VCs. For instance, South Korea recently passed a legislation which legalizes VCs in the country, albeit with heavy regulations. Briefly, all VC related service providers must register with a regulator and partner with a bank to be able to operate. Further, any person registering with a VC service provider must use their real name while registering and link their VC wallet with their real-world bank account. The first measure gives credibility and accountability to the service providers, while the latter ensures that the government can track the movement of funds via VCs. Hence, South Korea is an example of how prohibition is not the only answer to allaying the concerns associated with VCs.
Even the Supreme Court in its judgment uplifting the prohibition on VCs remarked, after relying on a report by the EU Parliament which recommended against a total prohibition on VCs, that the RBI had failed to consider alternatives before issuing the circular which had effectively prohibited the operation of VCs in India.
Today, cryptocurrencies have a market capitalisation of over $200 billion. The Indian market has already suffered serious setbacks due to shut down in the VC industries for two years. Any continuity with the uncertainty regarding the regulation of VCs will only deprive the economy of potential benefits. The proposed centralised ‘digital rupee’ in the Cryptocurrency Bill, 2019 goes against the very idea of a non-centralised cryptocurrency, since the former would be issued and regulated by a central agency.
Hence, a new statute, giving the VCs their legality as well as regulation, should be pioneered. The need for the same arises out of the regulatory void in the current legal regime. This should be brought about keeping in mind the applicable precedent on the freedom of trade and occupations as well as approaches to regulation of VCs adopted in foreign jurisdictions. All of this will ensure that VCs in India remain a reliable source of trade.