What’s Up with Bitcoin?
Cryptocurrencies have been a subject of immense regulatory debate. What is the present legal position?
At the time of writing this, one bitcoin is worth ₹16,90,239 (or $22,990). Pundits believe that the price may go as high as ₹50 lakh – ₹1 crore in 2021. For an idea started in 2009 by a person whose identity remains a mystery, this is incredible.
The growth hasn’t been without complexities. Many people still don’t understand how cryptocurrencies work and whether they should be trusted. Take the year 2017. The price of one bitcoin fluctuated between $930 to nearly $20,000 within a few months.
This volatility was scary. Many labelled it as bubble waiting to burst.
To an extent, the fears were confirmed. By November 2018, the price of a bitcoin had crashed to under $3,500. This downfall was, in part, triggered by regulatory changes that eroded the trust in cryptocurrencies.
But the boom has returned stronger than ever. Today’s story explains what the current law says.
The Dark Days
Between 2013 and 2017, the Reserve Bank of India (‘RBI’) had dropped several hints that it wasn’t happy with virtual currencies (‘VCs’) like bitcoin. It issued press releases (here, here, and here) cautioning users about the financial, operational, and legal risks of such currencies.
Come 2018, the RBI took a firm stand. It released a notification (‘Notification’) that prohibited dealing in VCs. The Notification stated – “…entities regulated by the [RBI] shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.”
This sent shockwaves through the industry. Cryptocurrencies had grown on the bulwark of trust. But with the country’s financial regulator adopting this position, no one knew whether they would continue to rise.
Supreme Court to the Rescue
The Internet and Mobile Association of India (‘IMAI’) filed a petition before the Supreme Court challenging the Notification.
The organization’s primary argument was that VCs were merely tradeable commodities or digital goods; not a legal tender, credit system, or payment system falling with the purview of the RBI. Hence, the RBI had no power to regulate such currencies.
Interestingly, the Supreme Court rejected this contention.
It held that anything that can impact the financial system of the country can be regulated by the RBI. The power isn’t limited to credit systems or payment systems. The RBI is responsible for “management of the currency” which includes anything that can play the role of currency, whether recognized (like the Indian Rupee) or not (like VCs).
However, the court struck down the Notification on a different ground.
It ruled that the prohibition disproportionately infringed on the right to carry on trade or business under Article 19(1)(g) of the Constitution. In one fell swoop, the RBI had affected this right of lakhs of VC users. All cryptocurrency exchanges were virtually wiped out by the Notification.
At the same time, the RBI was unable to show that any damage was being caused by VCs. The Notification, therefore, was disproportionate and unconstitutional.
What Next?
While bitcoin and other VCs are flourishing, this saga is far from over.
The government is working on a draft bill for Banning of Cryptocurrency and Regulation of Official Digital Currency. The draft regulation prohibits mining, generating, holding, selling, issuing, and transferring cryptocurrency in India.
Reports also suggest that the RBI is considering filing a review petition against the Supreme Court’s judgement. And given the regulatory vacuum, a legal risk continues to exist.
Some of you may be wondering whether it’s a good idea to invest in one of these currencies. In true lawyer fashion, we’ll plead ignorance on that.
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