CRYPTOCURRENCY AND LAWS REGULATING IT IN INDIA

INTRODUCTION:

Cryptocurrency, a virtual or digital currency is a digital asset used as digital medium of exchange, using encryption algorithms and such transactions are recorded in digital ledger. It uses a technology called Blockchain, a decentralized network, meaning, it does not have any regulatory or centralized body which controls it. This eliminates the involvement of any intermediaries or third parties during transactions. Under the blockchain which is a distributed ledger, every data entered, or transaction recorded are hard to change or tamper.

HOW IT WORKS:

One needs to have a cryptocurrency wallet to use and make transactions in cryptocurrency. It is a program that stores cryptocurrency keys which allows one to access their coins. Each cryptocurrency users have two keys, a public key, and a private key. A public key is an account or wallet address, which can be shared, for people to receive payments, whereas a private key is like a password needed to sign and authorize while making a payment. Losing one’s private key means losing the access to one’s cryptocurrencies, so one must be careful and backup securely, their private key as it will be hard to retrieve the same or regenerate due to its decentralized nature, whereas losing a public key does not have a greater impact as it can be regenerated trough one’s private key. Each transaction made is recorded into a block and added to the chain. A block contains the details of the sender, receiver, the amount transferred, also details to the previous block. The act of verifying or validating such transaction by solving complex mathematical problems and in exchange for completing the same the person earns cryptocurrency; this process is called mining (Proof of Work/ Proof of Stake). 

CRYPTOCURRENCY REGULATIONS:

It is to be noted that Cryptocurrency is neither illegal nor recognized as legal tender in India. One of the reasons for India’s Government not making cryptocurrency a legal tender is its volatile nature. Individuals and other entities can take part in the activities which involve cryptocurrency, like holding, investing, and making transactions as long as they abide by the law. Regulations in relation to cryptocurrency in India has gone through a significant evolution and a brief of the same is explained in the following paragraph.

The Indian Government proposed “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019,” with the aim of banning the usage and activities involving Cryptocurrency in India, including provisions for punishments and introducing digital Indian rupee, this became challenging when the Supreme Court in 2020 set aside the circular introduced by RBI in the year 2018, which restricted all the banks and entities who dealt with cryptocurrency under it, thus resuming the activities of businesses involving cryptocurrency .

Later after a lot of discussions and debates it became clear that imposing a complete ban on the same would be impossible and the focus shifted on how to regulate the same. In the year 2021 another bill was introduced “Cryptocurrency and Regulation of Official Digital Currency Bill”, though it did not have much difference to that of 2019 Bill, comparatively the stringent stance on banning the cryptocurrency completely was relaxed. The bill intended to regulate the cryptocurrency market, ban private cryptocurrency but with certain exceptions and to form a framework for the issue of Central Bank Digital Currency (CBDC) by the RBI.

In 2022 Union Budget, tax was imposed on the gains and income earned from the activities involved with cryptocurrency as such activities were seen as a form of tax evasion by hiding their digital assets due to its decentralised nature and anonymity.  A 30% of tax on Cryptocurrency income, additionally 1% TDS is applied to all transaction exceeding Rupees 50,0000/- by the Government of India. 

In March 2023, The Finance Ministry brought the Virtual Digital Assets which includes the activities covered by cryptocurrency under the ambit of Prevention of Money Laundering Act 2002, making business relating with cryptocurrency, to follow and comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements. The Crypto Platforms are required to inform the Financial Intelligence Unit (FIU) when Suspicious transactions and activities are found. This inclusion was mainly done to avoid any illicit transaction and use of such digital assets for money laundering, terrorist financing and other illegal activities.

CONCLUSION

Cryptocurrency brought in an evolution in the traditional financial environment, by introducing a decentrailsed system and other creative ways to make transaction and store value. Even though it brought a significant change in the financial system, it also presents various challenges in relation to its regulation, security, and volatility. As of 2024, there is no Bill that has been passed for regulating crypto currency and the status of cryptocurrency regulation in India still continues to evolve. But from various actions and steps taken by the government to regulate the cryptocurrency market, such as providing for a tax framework and making it comply with the norms of Prevention of Money Laundering Act, 2002, it is understood that the cryptocurrency is being acknowledged as a form of an asset without fully legalising or banning them. These inclusions were made to ensure that the cryptocurrency ecosystem is conducted in a more transparent and regulated framework and to prevent manipulation in the market which leads to price change and high volatility. The Governments across the world including India are trying to find an appropriate approach to maintain a balance between encouraging innovation and preventing potential risks.