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Cryptocurrency refers to a type of digital currency that relies on encryption techniques to control the creation and transfer of its units. Unlike conventional currencies, it operates autonomously and doesn't require the involvement of central banks or other financial institutions. As a result, users can engage in secure and direct transactions with one another. Although the volatile nature of cryptocurrencies may raise doubts among some individuals, it also presents significant opportunities for businesses to reduce expenses and enhance profits.

Cryptocurrency is characterized by its use of blockchain technology, which has transformed the approach to data storage, transaction management, and security. This decentralized technology offers exceptional transparency and immutability, making a significant impact on the finance, healthcare, and supply chain sectors, among others. By implementing advanced cryptography techniques and smart contracts, blockchain technology provides a dependable and secure platform for conducting digital transactions involving cryptocurrencies and NFTs.

Legal Status of Cryptocurrency in India

India has emerged as an untapped and unregulated market with a potential worth of over a trillion dollars, leading to a significant increase in the number of cryptocurrency exchanges in the country. The widespread popularity of the crypto market and its potential revenue loss prompted the Indian government, regulators, and authorities to take notice. In 2013, the Reserve Bank of India ("RBI") issued a press release warning the public against engaging in virtual currencies, including Bitcoin. In November 2017, the Indian government established a high-level Inter-Ministerial Committee to investigate various issues related to the use of virtual currency. Subsequently, in July 2019, the Committee submitted a report recommending a complete prohibition on private cryptocurrencies in India.

In April 2018, despite the pending report from the Inter-Ministerial Committee, the Reserve Bank of India (RBI) issued a circular prohibiting all commercial and co-operative banks, small finance banks, payment banks, and NBFC from engaging in virtual currencies. The circular also directed these banks to cease providing services to entities involved in virtual currencies. This move had a severe impact on the crypto industry since exchanges relied on banking services to transfer funds for converting into cryptocurrency and for paying expenses such as salaries, vendors, and office space. However, the situation regarding cryptocurrencies underwent a significant change on March 4, 2020, when the Supreme Court of India declared the ban unconstitutional in the case of Internet and Mobile Association of India v. Reserve Bank of India. In a well-reasoned judgment, the Supreme Court primarily evaluated the matter in light of Article 19(1)(g) of the Indian Constitution, which provides for the freedom to practice any profession or carry out any trade or business, and the doctrine of proportionality. As per the United Nations Conference on Trade and Development Report 2021, 7.3% of Indians owned cryptocurrency in 2021.

During the Union Budget 2022, the finance minister announced that "any proceeds generated from the transfer of a virtual digital asset shall be subject to a 30% tax." Additionally, tax deduction at source (TDS) at the rate of 1% has been suggested for transactions involving cryptocurrency. The finance minister clarified that the taxation of virtual digital assets does not indicate legal recognition of cryptocurrencies.

On April 28, 2022, the Indian Computer Emergency Response Team (CERT-In) issued a set of directions under subsection (6) of section 70B of the Information Technology Act, 2000 concerning information security practices, procedures, prevention, response, and reporting of cyber incidents for a safe and trusted internet (Cyber Security Directions of 28.04.2022). The Cyber Security Directions of 28.04.2022 mandate that virtual asset service providers, virtual asset exchange providers, and custodian wallet providers must maintain all information obtained as part of Know Your Customer (KYC) and records of financial transactions for a period of five (5) years. This requirement is aimed at enhancing cybersecurity in the realm of payments and financial markets for citizens while safeguarding their data, fundamental rights, and economic freedom in light of the growth of virtual assets. This move indicates the government's position of allowing the existence of cryptocurrencies and service providers that deal with such assets.

Cryptocurrency Bill in India

The government is currently in the process of developing legislation to regulate cryptocurrencies, but has not yet made any public drafts available. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was included in the government's legislative agenda for the winter session of 2021. The primary objective of this bill is to establish a supportive framework for the creation of an official digital currency to be issued by the Reserve Bank of India. The proposed legislation also includes provisions for limited exemptions to promote the use and underlying technology of cryptocurrencies. Despite being listed for introduction on the Lok Sabha website, the bill was not introduced during the winter session of Parliament. Recently, the Reserve Bank of India launched Central Bank Digital Currency (CBDC) on a pilot project basis that incorporates blockchain technology. The significant decline in the value of several cryptocurrencies and the bankruptcy of prominent players like FTX, BlockFi in recent times highlight the need for regulatory measures to safeguard consumers and investors and maintain the integrity of financial markets.

References:

https://www.mondaq.com/india/fin-tech/1194412/legal-status-of-cryptocurrencies-in-india--government-recognition-and-tacit-de-facto-approval-of-digital-currency

https://www.legal500.com/developments/thought-leadership/the-legality-of-cryptocurrency-in-india/