• Abhinav Goyal

FAQs on Blockchain & Cryptocurrency

Position as on- 21 December 2020


FAQs Regarding Cryptocurrency


1. Is the use of cryptocurrency legal in India?

Yes, the use of cryptocurrency has been held to be legal in India since the verdict was given by the Supreme Court in March 2020, in the case of Internet and Mobile Association of India v. Reserve Bank of India [W.P (C) No. 373/2018]. According to the Supreme Court, the financial institutions regulated by RBI are free to provide services to corporate entities as well as individuals which deal in exchange/trade of cryptocurrencies.


2. Is there any specific law regulating cryptocurrency in India?

As of now, there is no specific legislation in force which regulates the functioning of cryptocurrency in India. However, there have been two Bills introduced recently. They are: -

  • Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018;

  • Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.

While the fate of the 2018 Bill is unknown, the 2019 Bill is still in consideration.


3. How is cryptocurrency regulated if there is no specific law in India?

Though there is no specific legislation in force to regulate cryptocurrency in India, certain statutory authorities have started to recognise various aspects of cryptocurrency which they have the power to regulate. Some of these aspects are:

  • Banking/Financial Institutions: Banks/Financial Institutions regulated by RBI have to comply with the directions given by RBI regarding the treatment of virtual currencies.

  • Income Tax/Tax Evasion: Income from cryptocurrency is deemed to be a ‘Capital Gain’, and has to be disclosed while filing returns.

  • Money-Laundering and Fraud: The Prevention of Money-Laundering Act 2002 along with the RBI KYC/AML Master Circular 2020 have to be complied with to avoid any transaction related to cryptocurrency being deemed as a money-laundering activity.

  • Initial Coin Offering/Securities/Funds: SEBI has considered to recognise ICO as “Securities” for the purpose of raising funds.


4. How are authorities regulating cryptocurrency in India?

While there is no specific authority established for regulating cryptocurrency, authorities established under different statutes have been actively keeping tabs on all the activities related to cryptocurrency in India. These authorities include:

  • Reserve Bank of India (RBI): RBI has been regulating the functioning of financial institutions regarding cryptocurrency and is also actively spreading awareness among bank-users about the potential risks involved while dealing in cryptocurrency.

  • Central Board of Direct Tax (CBDT): CBDT has been monitoring all the “unusual/abnormal” transactions related to cryptocurrency, and conducting raids where such transactions by entities or individuals have not been disclosed, or where they have been used for money-laundering.

  • Enforcement Directorate (ED): ED along with the Income Tax Department has been conducting raids wherever the individuals or entities have been suspected of money-laundering, tax evasion, and/or fraud.

  • Securities and Exchange Board of India (SEBI): As the number of entities looking to raise funds through Initial Coin Offerings (ICO) has been increasing exponentially, SEBI is considering the option of bringing the ICOs as instruments to be deemed as ‘securities’, which can then be regulated under the Securities Contract (Regulation) Act 1956.


5. Is cryptocurrency different from Prepaid Instruments?

Prepaid instruments and payment systems are regulated by the Payments and Settlement Act, 2007 (“PSSA”) and RBI Master Directions on Issuance and Operation of Prepaid Payment Instruments dated October 11, 2017 (“Master Directions”). The intent of the PSSA is to regulate prepaid instruments, i.e., payment systems that affect electronic transfers. The Master Directions define prepaid instruments as “payment instruments that facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments”. The regulations further specify that these instruments may be loaded/reloaded with cash, by debit to a bank account, by credit and debit cards, and other PPIs (as permitted from time to time). The electronic loading/reloading of PPIs shall be through payment instruments issued only by regulated entities in India and shall be in INR only. Based on this, we can say that the instrument is merely acting as a mode to transfer regulated currency, similar to a bank transfer. Example: Paytm, Amazon Pay, Mobikwik etc.

The anonymous nature and lack of intrinsic value of cryptocurrency are the primary distinguishing factors from “prepaid instruments”, the latter being completely legal and regulated today. Therefore, unlike cryptocurrency, whose value (if any) may be contingent upon its demand/supply, pre-paid instruments do have an intrinsic value associated with them as well as their holder being clearly identifiable.


6. Can cryptocurrency be considered as a deposit or security?

Before we delve into this issue, let us first understand what the term “Deposit” and “Security” mean regarding regulation in India.

  • “Security” has been defined to include “shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature in an incorporated company or body corporate”.

  • On the other hand, “Debt/Deposits” in India are associated with the repayment of money.

From the definitions mentioned above, it is important to understand that while cryptocurrency may be arguably marketable, it is not in the nature of shares, scrips, stocks, debentures, etc. issued in relation to a body corporate. However, should the regulator see scope in regulating cryptocurrency and initial coin offerings akin to securities and initial public offerings, similar to other overseas jurisdictions, the definition of a “security” may see a revision.

Similarly, it is arguable that the issuance of cryptocurrency could create a debt on the part of the issuer to the extent that the consideration for the issuance is treated as a debt until cryptocurrency is transferred to the purchaser.

While the aforementioned regulations may be introduced, the anonymity of the parties involved in the transaction may continue to pose a hurdle to the regulation of cryptocurrency even as a deposit or security.


7. Can I liquidate my cryptocurrency?

With the ban of RBI on Financial Institutions from providing services to corporate entities as well as individuals which deal in exchange/trade of cryptocurrencies being set aside by the Supreme Court on March 4, 2020; it is now possible to liquidate the cryptocurrency. While doing so, keep in mind that it is mandatory to fully disclose the nature of transactions (for taxation purposes) where cryptocurrency is involved to avoid prosecution by any concerned Government Authority.


8. Do I need to disclose the transaction involving cryptocurrency?

As already stated, it is mandatory to fully disclose the nature of transactions where cryptocurrency (we can mention the source of this mandate) is involved to avoid prosecution by any concerned Government Authority. The ED and Income Tax Department has been conducting raids wherever they have a suspicion of fraud, money-laundering, or tax evasion involving cryptocurrency. As various laws have recognised several aspects of cryptocurrency, it is advised not to hide such transactions and information from concerned authorities.


9. Will my cryptocurrency be considered as an income? How will it affect the evaluation of my total income?

The ambiguity in the Indian legislation that defines taxation of crypto assets has led to the interpretation of the taxation rules that already exist in terms of crypto assets. Instead of being treated as a normal income, income earned by trading cryptocurrency is treated as a ‘Capital Gain’. Apparently, cryptocurrency is being treated as an asset much like gold or real estate that can be sold for a profit rather than as a currency. So for all purposes, capital gains tax is applied to crypto-related income earned by an Indian in the country. In the case of someone who has mined their cryptocurrency, it might not be treated as a capital asset. Hence, the capital gain tax will not be levied. The income earned from the sale of such cryptocurrency will be considered as ‘income from other sources’ and taxed accordingly.

Capital Gain tax rates are subject to the holding period of the asset, which implies that the period for which a person holds the cryptocurrency will determine the rate of taxation applicable.


10. Is cryptocurrency mining legal in India?

In the verdict given by the Supreme Court on March 04, 2020, in the case of Internet and Mobile Association of India vs RBI, the court has lifted the ban on the use of banking services by those engaged in crypto assets. After this verdict, the trading of crypto to Indian Rupee currency is made possible and the crypto exchanges can now have bank accounts to allow traders to sell their cryptocurrency for Indian Rupee. However, the legality of mining cryptocurrency in India is still in question as there has been no clarity given by any authorities or the judiciary.




FAQs Regarding Blockchain


1. Is the use of Blockchain legal in India?

Unlike cryptocurrency, the use of Blockchain-related services is completely legal in India. In fact, many authorities established by the virtue of various Indian Statutes have started to adopt and integrate Blockchain services in their system in order to provide a more efficient way to address the needs of people while lowering the possibilities of administerial errors.


2. Have any strides been taken towards initiating a Blockchain Regime in India?

Government authorities have taken up various initiatives with the intention to curb the issue of effectiveness by transforming the system into a digital-based platform Some examples are:

  • In August 2019, RBI finalized the setting up of a regulatory sandbox for banks, lending institutions, and fintech by releasing the final “Enabling Framework for Regulatory Sandbox" (“Framework”).

  • On July 26, 2019, IRDAI issued the IRDAI (Regulatory Sandbox) Regulations 2019 (Regulatory Sandbox Regulations), which aims to facilitate the creation of a regulatory sandbox environment to test new business models, processes, proposals, and applications in order to strike a balance between the orderly development of the insurance sector and the protection of interests of policy-holders. The authority is soon going to run the Second Cohort of the Regulatory Sandbox.

  • During the Confederation of Indian Industry (CII) ‘Connect 2020’ conference Chief Minister Edapaddi K. Palaniswami released Tamil Nadu Blockchain Policy 2020 along with 2 other Policies. Palaniswami also announced that the government intends to launch a project to provide Knowledge Proof Identity-based services delivery, which will be implemented by establishing and leveraging the State Family Database (SFDB) and Blockchain Backbone infrastructure.


3. What is the take of government authorities on the use of Blockchain in India?

Government authorities have mostly given a positive response when it comes to Blockchain, and are even suggesting to implement the technology in various sectors within government regulations. Below are some examples:

  • Institute for Development and Research in Banking Technology (IDRBT) published a Report wherein it recognised the use of Blockchain and considered it to be a “disruptive technology”

  • National Institute for Smart Government (NISG) published a Draft National Strategy on Blockchain wherein it made ambitious suggestions, including both a Central Bank Digital Currency (CBDC) and a National Blockchain.

  • Niti Aayog published a draft discussion paper which made a case for using blockchain technology to resolve business and governance process inefficiencies. The paper suggested that regulatory infrastructure should be put in place for evolving a vibrant Blockchain ecosystem.


4. What are the privacy laws that need to be adhered to by a person providing Blockchain-related services in India?

After the landmark judgment of K.S. Puttaswamy by the Supreme Court, protection of privacy of an individual has been declared to be a fundamental right under Right to Life, which cannot be violated unless according to the due procedure of law. Thus, it is now more important than ever for the business entities to protect the privacy of their consumers by ensuring adequate measures (both online and offline) to avoid any breach. Because Blockchain is a completely online infrastructure and involves the use of computer machines, it is governed by the provisions of Information Technology Act, 2000 along with Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (‘SPDI Rules'). It is also necessary to comply with the provisions of Consumer Protection Act 2019 which, unlike its 1986 counterpart, covers online businesses and entities providing online services. It is better to consult someone who has knowledge about these laws to avoid any future impediments.


This post was authored by Abhinav Goyal, Rishabh Shukla & Pratiksha Rawat


The authors may be contacted at abhinav@sigmachambers.in.


DISCLAIMER. THIS CONTENT HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ALONE AND IS NOT A SUBSTITUTE FOR LEGAL ADVICE. PLEASE OBTAIN LEGAL ADVICE PRIOR TO ACTING ON OR RELYING ON THE CONTENTS OF THIS PAGE.

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