The history of cryptocurrencies can be traced back to (another)
tumultuous time during the 2008 financial crisis when the trust in
financial participants, such as banks and government institutions,
was sharply waning. Bitcoin1 was
introduced as a currency that had trust as its very foundation,
because of how it functions. Bitcoin is underpinned by a
decentralized and distributed ledger technology called
“Blockchain”. Aptly described by the authors of the book
– The Truth Machine: The Blockchain and the Future of
Everything, blockchain technology produces “an
immutable” ledger that is not controlled by a single,
centralized entity but by a “consensus protocol” thereby
making the ledger a “shared record of the truth”2.
Bitcoin remained relatively unknown in its initial years and did
not have a “price” – not to be confused with
“value” – until 2010-11. Eventually, there was a surge in
its popularity which led to an increase of its traded/exchanged
price. In 2013, when the European Union bailed out Cyprus, Cypriot
citizens bought Bitcoins fearing collapse of their financial
systems, which led to a surge in Bitcoins’ demand and
Anonymity, trustworthiness of the underlying Blockchain
technology and the removal of financial system intermediaries from
the transaction framework are the major factors that contributed to
Bitcoin’s popularity. With the growing popularity of Bitcoin,
other cryptocurrencies also came to be introduced. By 2018, with
the price of Bitcoin peaking at nearly USD 20,000, cryptocurrencies
could no longer be ignored.
As cryptocurrencies gained popularity, they also began to garner
interest, intrigue and suspicion from governments, central banks
and regulators. Studies were conducted, papers were published, and
a general consensus emerged that cryptocurrency cannot be given
the status of legal tender. The range of regulation has varied
significantly, with countries like Japan, Germany and The
Netherlands taking a more lenient regulatory approach, and
countries such as India and China effectively banning
As the regulatory stance in various jurisdictions continues to
evolve, we answer some conceptual questions surrounding
cryptocurrencies and its regulation in India.
What are cryptocurrencies?
Cryptocurrencies are digital representations of value that can
be stored and transferred digitally. As the name suggests,
cryptocurrencies work through the use of cryptography i.e.
mathematical principles and computational practices using which
data is stored and transmitted.
Some of the popular cryptocurrencies are Bitcoin and XRP
How are cryptocurrencies different from fiat currency?
Fiat currency, or what we call “money”, is legal
tender backed by a country, state or government. Cryptocurrencies
are not backed by a country, state or government.
Fiat currency has the following characteristics or
(a) it serves as a medium of exchange;
(b) it acts as a unit of account;
(c) it acts as a store of value; and
(d) it constitutes a final discharge of debt.
Cryptocurrencies can have all or some of the characteristics of
fiat currency. Much of this depends on how a jurisdiction regulates
cryptocurrency. While some countries have gone to the extent of
banning cryptocurrency, others have given it commodity, asset,
deposit or security status.
Cryptocurrencies do not have ‘legal tender’ status in
any country or state.
Are cryptocurrencies the same as digital currencies?
There is no standard definition on digital currency yet. If
digital currency is defined to mean any currency that can be
stored, traded or transferred digitally, then cryptocurrencies can
be regarded as digital currencies. However, the converse would not
be true as not all digital currencies would be cryptocurrencies.
There may be digital currencies that are linked to fiat currency.
For instance, People’s Bank of China is looking to introduce a
digital currency whose value would be pegged to Chinese Yuan3.
Though the exact characteristics and functions of
cryptocurrencies are still largely unsettled, currencies that are
digital, decentralized and implemented through cryptography can be
considered as cryptocurrencies.
What is blockchain?
Blockchain is the technology that underpins Bitcoin. Often
defined as “the distributed ledger technology”,
Blockchain is one way of implementing a distributed ledger.
For centuries now, transactions have been recorded in ledgers
and this practice forms the foundation of financial systems. A
distributed ledger is a shared record of transactions where the
transactions are approved and stored with all participants of the
Blockchain is a distributed ledger technology where each
participant system or “node” connected to the Bitcoin
network operates on a cryptographic protocol to validate
transactions and store an identical copy of the record of
Blockchain networks, or for that matter, distributed ledger
networks can be public (can be accessed and inspected by anyone) or
private (limited access).
While the jury is still out on the legality of Bitcoin and other
cryptocurrencies, blockchain is considered to be the next
ground-breaking innovation that could transform how businesses
Are cryptocurrencies regulated in India?
Currently, cryptocurrencies are not regulated in India.
In 2018, the Reserve Bank of India (RBI),
India’s central bank and monetary regulator, had issued a circular (2018 Circular)
prohibiting banks and financial institutions from dealing in and
from providing services that facilitate dealing in virtual
In March 2020, the 2018 Circular was struck down by a
three-judge bench of the Supreme Court of India (Supreme
Court). The decision is discussed in detail below. With
that, a vacuum was created and currently, there is no law
regulating cryptocurrencies in India. There is a draft bill in the
works which is discussed later in this article.
On what grounds did the Supreme Court strike down the 2018
In 2017, the RBI had issued press releases (see here and here) clarifying that it has not given any
licence or authorization to any entity to deal in cryptocurrencies
in India and consumers must exercise caution while trading in or
On 6 April 2018, the RBI issued the 2018 Circular which
effectively cut-off access to banking channels by cryptocurrency
traders and exchanges.
The 2018 Circular provided for an inclusive list of services
that would be covered under prohibited conduct. The list included –
“maintaining accounts, registering, trading, settling,
clearing, giving loans against virtual tokens, accepting them as
collateral, opening accounts of exchanges dealing with them and
transfer / receipt of money in accounts relating to purchase/ sale
of VCs.” Entities that were providing services when the
2018 Circular was issued, were given three (3) months to cease all
such activities. In effect, the 2018 Circular brought trading of
and dealing in cryptocurrencies to a standstill.
The 2018 Circular was challenged before the Supreme Court in
separate writ petitions filed by the Internet and Mobile
Association of India and companies running cryptocurrency exchanges
in India along with their shareholders and promoters.
On 04 March 2020, the Supreme Court in a seminal decision
(Decision) struck down the 2018 Circular for being
The writ petitions had challenged the 2018 Circular as
unconstitutional on various grounds. Some of the grounds of
challenge and corresponding observations of the Supreme Court are
Grounds of challenge
Observations/ conclusions of the Supreme
The RBI does not have the power to regulate or ban virtual
The PSS Act was enacted to enable the RBI to regulate and
Under Section 18 of the PSS Act, the RBI has the power to issue
The RBI did not apply its mind and also failed to take into
Over a period of five (5) years, the RBI took several steps in
The 2018 Circular was a result of colorable exercise of power by
An action can be considered as colorable exercise of power if it
By issuing the 2018 Circular, the RBI acted in good faith and
The 2018 Circular is disproportionate and fails the
The 2018 Circular fails the proportionality test as (i) the RBI
The Supreme Court on application of the ‘doctrine of
The Decision notes that the 2018 Circular was challenged by (i)
hobbyists who purchase and sell cryptocurrencies as a hobby, (ii)
cryptocurrency traders, and (iii) persons who run cryptocurrency
In the Decision, the Supreme Court observed that (i) while
cryptocurrency hobbyists do not have the locus standi to challenge
the 2018 Circular under Article 19(1)(g) of the Constitution,
cryptocurrency traders and persons running cryptocurrency exchanges
do have the locus standi; (ii) cryptocurrency users and traders can
access avenues other than cryptocurrency exchanges, but persons
running cryptocurrency exchanges do not have any other means of
sustenance; and (iii) the RBI by denying access to banking and
payments channels, has effectively shut down cryptocurrency
exchanges, even though there is no evidence that cryptocurrency
exchanges have had any adverse impact on entities regulated by the
The Supreme Court went on to conclude that since
cryptocurrencies are not banned in India, depriving cryptocurrency
exchanges from accessing banking and payments channels would be
disproportionate. With that, the Supreme Court struck down the 2018
Circular issued by the RBI.
What are some concerns surrounding digital currencies /
Digital currencies can be broadly categorised as central bank
digital currencies (CBDCs) and non-CBDCs. CBDCs
are pegged to fiat currencies, while non-CBDCs would include all
forms of digital currencies other than CBDCs. While some
governments are fairly enthused about CBDCs, non-CBDCs have mostly
met with scepticism.
A major concern over non-CBDCs is that they could destabilise
monetary systems that central banks and governments have worked so
hard to establish. This concern assumes that non-CBDCs are volatile
in nature and such volatility cannot be fixed or controlled. The
assumption may not be entirely accurate.
Digital currencies, when they are treated as commodities, can
act as vouchers or coupons that we often use, like Sodexo vouchers.
In fact, local currencies recently introduced in small towns to
deal with the COVID-19 pandemic have met with reasonable success4. Non-CBDCs could accomplish what
these local fiat currencies were able to achieve.
Another major concern over non-CBDCs is its potential to fund
unlawful activities. While the concern is a valid one, it ignores
the fact that fiat currencies have been and continue to be used for
the very same purpose. This risk can be mitigated by having an
appropriate regulatory framework on anti-money laundering (AMT) and
combating the financing of terrorism (CFT).
Aside from these, there are also concerns relating to fraud,
security and consumer protection.
Fraud-related concerns have gained momentum in view of several
crypto-related fraudulent incidents across the globe including
fraudulent initial coin offerings5 and ponzi
schemes6. These concerns can be allayed by
having a legal framework on the supervision of entry and exit
points along with strict KYC checks.
Security-related concerns including hacking and theft can be
addressed by having guidelines on minimum security standards to be
followed by operators and exchanges.
Consumer protection concerns can be addressed through
record-keeping, grievance redressal and dispute resolution
mechanisms. These mechanisms could either be market-driven or
Thus, while several concerns have been raised with regard to
digital currencies/ assets, these can be adequately addressed by a
robust regulatory framework.
It also needs to be highlighted here that CBDCs, non-CBDCs and
even digital assets could raise privacy concerns depending on
factors such as the extent of anonymity offered. Balancing the need
for anonymity with other concerns, is likely to be a tricky
What lies ahead for digital currencies/ assets in India?
The Decision may have brought momentary relief to cryptocurrency
users, traders and exchanges in India, but it remains to be seen
how the legislative framework for regulating cryptocurrencies in
India would play out. There have been news reports suggesting that the Government of
India may be looking to ban cryptocurrencies.
A draft bill titled as the ‘Banning of Cryptocurrency and Regulation of
Official Digital Currency Bill, 2019‘ (Draft
Bill) was prepared by the Inter-Ministerial Committee
constituted on 2 November 2017 to propose specific action on
cryptocurrencies. The Draft Bill has been under consideration and
is yet to be introduced in the Parliament.
The Draft Bill gives a wide definition7 to “cryptocurrency” and
effectively prohibits the use of and dealing in all forms of
digital assets, not just digital currencies. This is in sharp
contrast to several jurisdictions across the world that are
structuring their regulatory map to let digital assets evolve.
In a recently published policy paper, Ripple makes several proposals
for policy measures to develop digital assets, and its underlying
technologies, in India. One proposal is to include digital assets
under the regulatory sandbox framework of the Reserve Bank of India
(RBI). If implemented, this would allow testing of
innovative business models and products around digital assets.
Outcome of this testing can go a long way in providing valuable
inputs for framing necessary policies and regulations on digital
As the Indian Government mulls over future policy measures
regarding digital assets and digital currencies, it may consider
adopting a phased approach on permissible activities. Banning
digital assets/ currencies even as tradable assets or securities
would be premature as we are yet to see the sector dynamics play
out. A ban could also lead to offshore trading and a grey market in
India, which may not be desirable.
1 The genesis of cryptocurrency
is a white paper published by Satoshi Nakamoto
proposing “a system for electronic transactions”
based on a peer-to-peer network, where transactions would be
verified and recorded by nodes, or computing systems, that are part
of the network, thereby making such transactions decentralized.
Soon after, in 2009, Satoshi Nakamoto implemented the first
cryptocurrency – Bitcoin.
7 Clause 2(1)(a) of the Draft
Bill defines cryptocurrencies to mean “any information or
code or number or token not being part of any Official Digital
Currency, generated through cryptographic means or otherwise,
providing a digital representation of value which is exchanged with
or without consideration, with the promise or representation of
having inherent value in any business activity which may involve
risk of loss or an expectation of profits or income, or functions
as a store of value or a unit of account and includes its use in
any financial transaction or investment, but not limited to,
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