• UGI USER
  • May 22, 2023
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In light of the recent Supreme Court order, comment on the challenges in the regulation of cryptocurrencies in India.

Cryptocurrencies based on Block chain technology have gained global attention in recent years, after the US agencies cracked on Silk Road, an organization using Bitcoin and dealing with  RBI banned the RBI regulated entities (which includes Scheduled Commercial Bank after  from  dealing with any business entities dealing with Cryptocurrencies. In a recent Supreme Court, this prohibition was set aside. The major outcomes of the Supreme Court order are-

  • RBI has the authority to regulate cryptocurrencies: This is crucial as power. SC asserted that even though cryptocurrencies are not legal clarifies the regulatory functions of currency. Thus, RBI has the power to regulate them.
  • RBI did not meet the standards of proportionality: RBI failed to show that public interest was hurt or its regulated entities were hurt due to the operation of these entities. RBI also failed to prove that there was no alternative to the banning of any dealing with such business entities. Moreover, RBI did nothing to halt trading of these cryptocurrencies.
  • While the Supreme Court gave much needed clarity on the regulatory jurisdiction of RBI, the challenges of the regulation of the cryptocurrencies remain huge and diverse. Some major challenges are as follows- Anonymity and use for criminal proceeds: Cryptocurrencies offer anonymity to the parties transacting. This anonymity has been used by terrorist groups, trafficking gangs, organized crime syndicates, etc. for global transfer of crime proceeds. Since all the transactions are encrypted, it becomes a challenge to crackdown
  • the illegal trade by cutting off the financial channels. Jurisdictional differences and location: Since cryptocurrencies are in the nature of global currencies, it is difficult to pinpoint any specific jurisdiction to hold any party accountable. Person A in country 1 may be transacting with person B in country 2 through an exchange in country 3. All may have different regulations and thus, it becomes difficult to hold them accountable even if the location is known (which is a challenge too).

Moreover, the location of computers verifying the transactions has also come under scanner. At one point, more than 50% of computers on bitcoin were located in China, a major worry of manipulation for other  states.

  • Capacity of policing agencies: The blockchain technology used is a recent innovation and continuously evolving. The capabilities of our law enforcement agencies related to technology need to be constantly upgraded to deal with the crimes. In absence of such capabilities, even the best regulation may fall flat.
  • Consumer protection: Conventional currencies are backed by the guarantee of Central Banks of respective countries. However, no such guarantee is inbuilt in these cryptocurrencies. In case of fraud or hacking, there is no institutional mechanism to be approached for grievance redressal. In fact, cyber security and account safety are major issues involved in the use of these cryptocurrencies. Taxation issues: Cryptocurrencies have seen major appreciation in their exchange value. These changes have been volatile and people have taken to “investing” in these currencies. For example, within 2 weeks, Bitcoin value fluctuated from USD 20000 to USD 7000. Revenue authorities in the USA and South Korea have taken the proceeds from cryptocurrencies as capital gains and tax them accordingly. However, in light of the Supreme Court order, RBI will have to relook on the matter, given that the cryptocurrency realizations cannot be ignored now.
  • Thus, by giving the explicit authority to RBI in matters of regulation of cryptocurrencies, the Supreme Court has prepared the ground for more comprehensive, much needed and balanced guidelines for cryptocurrencies. There is, no doubt, cryptocurrencies and Blockchain technology bring in multiple advantages like ease of global transactions, distributed ledger, safety, uses in governance, transparency, contract management, etc.
  • A light touch approach as in South Korea and Canada might be well suited for the evolution of the ecosystem fostering new innovations in the sphere. Focus on KYC norms enforcement by the business entities and institutions to keep a tab on the evolving technological landscape are much needed at this stage.