The legal status of blockchain technology and cryptocurrencies in India.

Sukrit Gaur
*

[Abstract:

In India, blockchain technology and cryptocurrencies have gained a lot of attention in

the last 10 years, revolutionizing decentralized networks and digital commerce.
Blockchain is a decentralized ledger technology that may be used in a variety of
businesses since it guarantees data secrecy, immutability, and transparency.
Alternatives to traditional banking systems and fiat money that are decentralized
include cryptocurrencies like Ethereum and Bitcoin. The Reserve Bank of India's (RBI)
2018 ban on cryptocurrencies was one of many regulatory obstacles that India's
journey with cryptocurrencies has encountered. However, the Supreme Court of India
reversed this ban in 2020. The planned 2021 Digital Currency Regulation Bill, which
aims to outlaw private cryptocurrencies while endorsing a Central Bank Digital
Currency (CBDC), is one of the legal frameworks that the government is still
investigating. India's cautious stance is reflected in the changing legislative
environment, which strikes a balance between innovation and worries about security,
investor protection, and financial instability. The future of cryptocurrencies is shaped
by tax laws and regulatory agencies like the RBI and SEBI, while blockchain technology
has the potential to fight cybercrime. However, legalizing cryptocurrencies in India
comes with risks, including those associated with fraud, money laundering, and
manipulating the market. These risks are exacerbated by unclear regulations. Around
the world, India's approach differs from more developed regulatory frameworks in
nations like the US, UK, and EU, which provide guidance on possible regulatory
avenues for India's rapidly expanding bitcoin industry.]

An Overview of Cryptocurrencies and Blockchain Technology in India

Over the past decade, blockchain technology and cryptocurrencies have

attracted considerable attention in India, revolutionizing decentralized
networks and the function of digital transactions. The decentralized ledger
system, known as blockchain, which powers cryptocurrencies, guarantees data
confidentiality, immutability, and transparency, making it useful in a wide
range of industries outside banking. This technology powers cryptocurrencies,
such as Bitcoin and Ethereum, which offer a decentralized substitute for fiat
money and banking institutions. The history of cryptocurrencies in India has

*Student of Fifth Semester, D.A.V. University, Jalandhar. Email:

[email protected]
been turbulent, beginning with investors and tech-savvy people who were
initially enthusiastic; however, there was a wave of regulatory a lack of
confidence in 2018, the Reserve Bank of India (RBI) barred cryptocurrency
transactions in banking, citing issues with financial instability, money
laundering, and a lack of regulatory framework. However, in 2020, the Indian
Supreme Court reversed this prohibition, which was a significant victory in the
sector. Since then, the government has been actively considering regulating
cryptocurrency while also investigating the application of blockchain
technology to digital infrastructure and public governance. India is currently
facing difficult decisions regarding cryptocurrency regulation. The
government is attempting to develop a well-rounded strategy that addresses
monetary policy, investor protection, and security issues, while encouraging
technological innovation. India's place in the global cryptocurrency ecosystem
is still vital, as talks about the possible implementation of a Central Bank
Digital Currency (CBDC) and the regulation of private cryptocurrencies are
vital and ongoing. India's place in the global cryptocurrency ecosystem is still
vital even as it works through the challenges of regulating cryptocurrencies.
India is a major role in the global adoption and regulation of blockchain
technology and digital currencies due to its size, technological prowess, and
expanding digital infrastructure. India's intention to take the lead in
influencing the direction of decentralized finance and digital governance is
evident in the current conversations about CBDCs, the regulation of private
cryptocurrencies, and the use of blockchain technology in public governance.
India's experience with cryptocurrencies has been characterized by both
successes and regulatory setbacks; the nation is currently working to determine
a fair way to regulate this vibrant industry. India's continued attempts to create
a strong legislative framework indicate that the nation is focused on utilizing
the potential of blockchain technology and digital currencies moving forward,
even though worries about security and financial stability still exist. The focus
of the Indian government's current investigation of the best ways to regulate
and potentially incorporate digital currencies into the mainstream economy is
on developing regulations that promote innovation and provide protection
against financial crimes. Regarding the possible abuse of cryptocurrencies for
illicit purposes like money laundering and financing terrorism, there are still
valid worries. The government is attempting to create a comprehensive
regulatory framework that will support accountability, transparency, and
investor protection in order to lessen these risks. India's stance on
cryptocurrencies and blockchain technology will be crucial in influencing how
the world talks about decentralized finance and digital governance in the years
to come. India is at a turning point in its regulatory policy development: the
choices made now will determine whether the nation adopts a more cautious
stance or becomes a centre for bitcoin innovation. Whichever way the country
decides to go, India's involvement with blockchain technology and virtual
currencies will be critical in shaping the direction of decentralized finance both
domestically and internationally.

Rise of Cryptocurrency and Blockchain

The emergence of cryptocurrencies and blockchain technology has been a

major development in the financial and tech sectors over the last ten years.
These developments have completely changed the way that transactions are
carried out, providing decentralized platforms that improve security and
transparency while upending established financial institutions.
‘Cryptocurrencies like Bitcoin and Ethereum are popular due to their decentralized
nature,’1 allowing fast, secure, and borderless transactions without the need for
intermediaries like banks. In particular, ‘blockchain technology, which underpins
these digital currencies, offers transparency and security by recording transactions in
a distributed ledger that cannot be easily altered’.2 ‘In 2023, the blockchain market's
value continued to grow significantly, with projections estimating it will generate over
$3.1 trillion in economic impact globally by 2030.’ 3This technology is finding
applications beyond finance, ‘notably in healthcare, where blockchain adoption is
anticipated to rise by 55% by 2025’3 due to its potential to improve data security
and streamline processes. Moreover, ‘the rise of NFTs (Non-Fungible Tokens) and
Central Bank Digital Currencies (CBDCs) reflects blockchain’s revolution in asset
ownership and national monetary policies’ 3,2 Cryptocurrency regulation remains
a challenge for governments. ‘While countries like the US and the UK have initiated
regulatory frameworks, the decentralized nature of cryptocurrencies makes it difficult
to fully control them’.2 However, effective regulation could foster stability and
trust in the industry, enabling blockchain projects to thrive. Despite risks like
price volatility, blockchain’s potential to reshape industries and provide
innovative financial solutions is undeniable

1
A. S. a. N. Berman, "Council on Foreign Exchange," 17 01 2024. [Online]. Available:
https://www.cfr.org/backgrounder/crypto-question-bitcoin-digital-dollars-and-
future-money. [Accessed 16 09 2024].

2P. Radanliev, "SpringerOpen," 2024. [Online]. Available: https://jfin-

swufe.springeropen.com/articles/10.1186/s40854-023-00537-8. [Accessed 16 09 2024].

3 S. Khawas, "CoinPedia," 26 12 2023. [Online]. Available:

https://coinpedia.org/research-report/blockchain-industry-report-2023-growth-
trends-and-projections/. [Accessed 16 09 2024].
Cryptocurrency regulation remains a challenge for governments. While
countries like the US and the UK have initiated regulatory frameworks, the
decentralized nature of cryptocurrencies makes it difficult to fully control
them. However, effective regulation could foster stability and trust in the
industry, helping blockchain projects thrive in both developed and developing
nations. This growth, while remarkable, comes with risks. Cryptocurrencies
have experienced wild fluctuations in value, leading to concerns over their
viability as stable financial instruments. Yet, despite these challenges,
blockchain's potential to reshape industries and provide innovative financial
solutions is evident.

Bitcoin, launched in 2009 by the pseudonymous Satoshi Nakamoto, not only

pioneered digital currency but also propelled the entire cryptocurrency
ecosystem. The way people view money, finance, and technology has changed
significantly as a result of its rapid rise in value and significance. Because of its
popularity, dozens of additional cryptocurrencies—known as altcoins—were
able to be developed, and blockchain technology was adopted by many
industries, making Bitcoin the industry benchmark.

Early Beginnings: A Revolution in Digital Money

When Bitcoin was first introduced, few anticipated the seismic shift it would
cause in global finance. "Bitcoin was designed as a decentralized digital
currency," meaning no central authority like a bank or government controlled
it. Instead, transactions were verified by a network of computers using
cryptography. This feature was revolutionary; "Bitcoin solved the double-
spending problem that plagued earlier digital currencies," ensuring that each
coin could only be spent once.2 Initially, Bitcoin had little monetary value, and
early adopters used it mostly in niche communities. Famously, in 2010, Laszlo
Hanyecz made the first real-world Bitcoin transaction by buying two pizzas for
10,000 BTC, which at today's prices would be worth millions of dollars.2,3 This
transaction marked Bitcoin's move from a theoretical concept to a functional
currency, but it was just the beginning.

The First Boom: 2013 and Beyond

"Bitcoin's first major price surge occurred in 2013," when it reached $1,000 per
coin for the first time. This price rally was driven by increasing media attention,
growing acceptance of Bitcoin for goods and services, and the rise of early
Bitcoin exchanges. "It was during this time that Bitcoin began attracting the
attention of investors who saw it as a potential store of value akin to gold".2
However, Bitcoin's rise was not without volatility. The collapse of Mt. Gox, one
of the largest early Bitcoin exchanges, in 2014 sent shockwaves through the
market. "Millions of dollars’ worth of Bitcoin were lost, leading to a significant
drop in the coin's value and raising questions about its security".3 Despite these
setbacks, Bitcoin continued to recover, proving resilient to market shocks.

Institutional Interest and the 2017 Boom

The next major turning point for Bitcoin came in 2017 when its price
skyrocketed from around $1,000 in January to nearly $20,000 by December.
Several factors contributed to this massive price increase. "First, there was
growing institutional interest in Bitcoin, with companies and hedge funds
beginning to invest in the cryptocurrency as a speculative asset." Second, the
proliferation of Initial Coin Offerings (ICOs) in 2017, which raised capital for
new blockchain projects using Bitcoin and Ethereum, also spurred demand for
Bitcoin.2,3 Additionally, "the introduction of Bitcoin futures trading by the
Chicago Board Options Exchange (CBOE) and CME Group in late 2017 gave
institutional investors a way to speculate on Bitcoin's future price movements,"
further legitimizing the asset. 3 This wave of institutional involvement played
a key role in driving Bitcoin's price upward.

The Crypto Winter: 2018–2020

Bitcoin’s rapid rise in 2017 was followed by a steep decline in 2018, a period
often referred to as the "crypto winter." "The price of Bitcoin fell from nearly
$20,000 to around $3,000, a drop of over 80%." This sharp decline was partly
attributed to regulatory crackdowns in countries like China, where
cryptocurrency exchanges were banned, and the bursting of the ICO bubble,
which left many investors disillusioned. 2

Despite this downturn, Bitcoin maintained a core group of supporters, often

referred to as "HODLers" (a term derived from a typo of 'hold' that has since
become a mantra in the crypto community). "These long-term investors
believed in Bitcoin's fundamental value and viewed the 2018–2020 period as a
time for accumulation rather than panic selling".3

The Post-Pandemic Surge: 2020–2021

Bitcoin's next major rally began in 2020, during the COVID-19 pandemic. As
governments around the world introduced unprecedented monetary stimulus
to combat the economic effects of the pandemic, concerns about inflation grew.
"Many investors flocked to Bitcoin, viewing it as a hedge against inflation,"
similar to gold.2,3

Another major driver of Bitcoin’s price surge was the growing institutional
adoption of the cryptocurrency. In 2020, major companies like MicroStrategy,
Square, and Tesla made headlines by investing large sums of their treasury into
Bitcoin. "Tesla’s $1.5 billion investment in Bitcoin, in particular, was seen as a
watershed moment for institutional adoption of cryptocurrencies".2

"Additionally, the launch of PayPal's cryptocurrency services in late 2020

allowed millions of users to buy, sell, and hold Bitcoin directly within their
PayPal accounts,"2 providing unprecedented access to the cryptocurrency for
retail investors. By early 2021, Bitcoin had reached new all-time highs, crossing
$60,000 per coin.

The Environmental Debate and Regulatory Scrutiny

As Bitcoin’s value and popularity skyrocketed, so too did scrutiny. One of the
major criticisms levied against Bitcoin is its environmental impact. "Bitcoin
mining, the process by which new coins are created and transactions are
verified, consumes enormous amounts of electricity." In fact, by 2021, the
Bitcoin network was estimated to consume more energy annually than
countries like Argentina.2 This has led to growing calls for more
environmentally friendly alternatives to Bitcoin, such as proof-of-stake
cryptocurrencies.

At the same time, "regulatory scrutiny of Bitcoin has intensified." Governments

around the world have begun crafting legislation to regulate Bitcoin and other
cryptocurrencies, focusing on issues like anti-money laundering (AML)
compliance and investor protection. "In the U.S., the Securities and Exchange
Commission (SEC) has been particularly active in pursuing unregistered
securities offerings in the cryptocurrency space," while countries like China
have moved to outright ban cryptocurrency mining and trading.3

The Future of Bitcoin: Digital Gold or Obsolete Technology?

As of 2023, Bitcoin remains the most valuable cryptocurrency by market

capitalization, but its future is hotly debated. "Some view Bitcoin as 'digital
gold'—a long-term store of value that will continue to appreciate as more
investors and institutions recognize its scarcity and resilience." This view is
bolstered by Bitcoin’s fixed supply of 21 million coins, which contrasts with fiat
currencies that can be printed in unlimited amounts by central banks. 3

Others, however, argue that Bitcoin’s slow transaction speeds and energy
inefficiency make it obsolete in comparison to newer blockchain technologies.
"Cryptocurrencies like Ethereum, Solana, and Cardano offer faster, more
flexible platforms for decentralized applications, and they may eventually
surpass Bitcoin in utility and value".3

Regardless of which view proves correct, there is no denying that "Bitcoin has
already had an outsized impact on the world of finance and technology." From
its humble beginnings as a niche experiment in digital cash, Bitcoin has grown
into a global phenomenon that has paved the way for the entire cryptocurrency
and blockchain industry.2,3

Bitcoin's rise has been nothing short of spectacular. "From being worth mere
pennies in 2009 to reaching over $60,000 in 2021, it has proven itself as a force
to be reckoned with in the financial world." While its journey has been marked
by extreme volatility, regulatory challenges, and environmental concerns,
Bitcoin continues to lead the cryptocurrency market as the first and most
valuable digital asset. Whether it will retain its dominance in the face of newer
technologies remains to be seen, but its legacy as the catalyst for the rise of the
crypto world is already firmly established.2,3

Limitations and the Eventual The drop of Blockchain and Cryptocurrency: A

Critical Inspection

One of the biggest revolutions occurring in modern finance and technology is

the explosive growth of cryptocurrencies and blockchain technology. But along
with this growth, there is growing doubt about these technologies' future.
When we analyse this scenario, there are a number of important elements that
can be attributed to the " drop" of cryptocurrencies and blockchain. Using
critical arguments and a balanced viewpoint on both their advantages and
disadvantages, I will examine the possible demise of these technologies in this
article and place them within the larger framework of finance, regulation, and
technology.

1. Regulatory Crackdowns: Regulating scrutiny is one of the biggest

immediate dangers to the future of blockchain technology and
cryptocurrencies. Given that cryptocurrencies are decentralized,
governments all over the world have found it difficult to control them.
The regulatory frameworks that guarantee consumer protection, anti-
money laundering (AML), and know-your-customer (KYC) compliance
are intricately entwined with traditional financial systems. However,
because cryptocurrencies offer a way around these restrictions, there
are worries that they could be used for illicit purposes like tax evasion,
money laundering, or financing terrorism. As a result, some countries,
like China, have openly banned the trading of cryptocurrencies, while
other countries, like the United States and the European Union, have
adopted a more restrictive approach. Initial coin offerings (ICOs) are
being aggressively pursued by the Securities and Exchange
Commission (SEC) for firms and individuals who have launched ICOs
without properly registering with the commission. The difficulties that
cryptocurrencies have when attempting to function inside pre-existing
legal frameworks are best shown by the story of Ripple, which has been
engaged in a legal dispute with the SEC on whether or not its XRP token
 qualifies as a security. The expansion of the entire bitcoin ecosystem
may be severely stifled if additional nations adopt strict laws.
2. Energy Utilization and Environmentalism: Another urgent concern is
the effect that bitcoin mining is having on the environment. The original
and most well-known cryptocurrency, Bitcoin, relies heavily on
electricity and processing power to function through its proof-of-work
(PoW) consensus method. According to estimates, the energy
consumption of Bitcoin mining in 2021 surpassed that of several
nations, including Argentina and the Netherlands. Environmental
activists and politicians are outraged by this, arguing that the carbon
footprint of mining cryptocurrencies is unsustainable given the
worldwide efforts being made to battle climate change. Coin mining is
getting more and more restricted or outright prohibited in nations that
place a high priority on environmental sustainability. For example,
China's aggressive carbon neutrality targets had a role in the country's
decision to outlaw cryptocurrency mining. More nations may decide to
prohibit or restrict mining activities if the environmental cost of
cryptocurrencies keeps rising, which would further contribute to their
decline.
3. Scalability Issues: Blockchain technology has always struggled with
scalability, especially with regard to cryptocurrencies like Ethereum
and Bitcoin. The burden on the blockchain network increases with the
number of users, which results in longer transaction times and higher
costs. Since every node in the network must execute every transaction
in order to maintain a decentralized ledger, most cryptocurrencies have
an inherent scalability issue. Though they are still in their infancy and
have not yet undergone extensive testing, systems like Ethereum's
proof-of-stake (PoS) consensus mechanism or Bitcoin's Lightning
Network seek to address these problems. In the event that these
scalability issues continue, consumers and companies may find that
cryptocurrencies are less useful as a means of exchange and instead
turn to more established financial institutions or even more innovative,
scalable technologies that may surface in the future.
4. Volatility and Investor Confidence: It is well known that
cryptocurrencies are wildly volatile. While the value of conventional
financial assets like equities and bonds fluctuates, the level of volatility
observed in cryptocurrency is unmatched. For example, the price of
Bitcoin has fluctuated greatly; it went from an all-time high of around
$69,000 in November 2021 to less than $20,000 in less than a year.
Because of their high volatility, cryptocurrencies are an unappealing
alternative for regular trade and cause investors who prefer more stable
assets to have concerns. The speculative character of cryptocurrencies
appeals to most traditional investors, who want to "buy low and sell
high." Nonetheless, these speculative chances will disappear as the
market gets older and more crowded. Furthermore, if the volatility
keeps endangering their portfolios, big institutional investors—who
 were previously thought to be the key to legitimizing
cryptocurrencies—may start to pull out of the market. These big firms
pulling out might have a domino effect that lowers prices even further
and erodes investor trust in the system.
5. Risks of Fraud and Security: The widespread prevalence of fraud,
scams, and security vulnerabilities in the cryptocurrency space is a
major contributing cause to its possible decline. Numerous high-profile
hacking instances have occurred since the advent of Bitcoin, including
the infamous Mt. Gox attack in 2014, which resulted in the theft of
approximately 850,000 bitcoins. In recent times, hacking operations
have targeted decentralized finance (DeFi) services, leading to the loss
of cryptocurrencies valued at millions of dollars. The security flaws in
blockchain technology and the platforms that use it are brought to light
by these instances. Furthermore, since bitcoin marketplaces are
unregulated, scammers and fraudulent schemes thrive there. A
Chainalysis analysis from 2021 states that crimes involving
cryptocurrencies totalled almost $14 billion that year, a sharp rise over
prior years. Ponzi schemes, phishing scams, and rug pulls—project
abandonment by developers after investor monies are collected—are
some examples of these crimes. In addition to causing monetary losses,
these kinds of events also damage public confidence in the bitcoin
ecosystem.
6. The depreciation of technology: While blockchain technology is
frequently described as revolutionary, it is not without problems. One
of the key critiques levelled against blockchain is its inefficiency in
terms of speed and scalability, especially when compared to more
traditional database solutions. For example, Visa can process around
24,000 transactions per second, whereas Bitcoin can only handle about
seven transactions per second. Although solutions such as sharding
and off-chain transactions are being developed to overcome these
difficulties, blockchain technology may eventually be outperformed by
more advanced technologies that provide higher performance without
the constraints of decentralization. One such technology that might
make cryptocurrencies and blockchain outdated is quantum
computing. The cryptographic algorithms that underpin blockchain
technology could be broken by quantum computers, jeopardizing the
system's overall security. Although quantum computing is still in its
infancy, its quick development could seriously jeopardize blockchain
technology's long-term viability.
7. Competition from Central Bank Digital Currencies (CBDCs): Central
banks and governments are starting to investigate the idea of central
bank digital currencies (CBDCs) as they become more conscious of the
cryptocurrencies' expanding impact. The central bank issues and
controls digital equivalents of a country's fiat currency, known as
CBDCs. CBDCs would function under a centralized framework as
opposed to decentralized cryptocurrencies, providing the advantages
of digital currencies without the concerns of fraud, volatility, or
 regulatory uncertainty. China has already made substantial progress in
this area with the establishment of the digital yuan, and other countries,
like the United States, United Kingdom, and the European Union, are
investigating the viability of creating their own CBDCs. If CBDCs gain
widespread use, they might serve as a safer and more reliable
alternative to cryptocurrencies, reducing demand for decentralized
digital assets.
8. Public Perception and Trust Issues: The success of cryptocurrencies
and blockchain is ultimately dependent on public perception and trust.
While early adopters and tech enthusiasts have embraced these
technologies, the broader public is still suspicious. High-profile cases of
fraud, market manipulation, and hacking have harmed the
cryptocurrency industry's reputation, making it difficult for many
people to believe it is a real financial system. Furthermore, the link of
cryptocurrencies with illegal activities like drug trafficking and money
laundering tarnishes their public image. The absence of a defined
regulatory framework, as well as consumer rights, erodes trust. In
traditional financial systems, users have recourse in the event of fraud
or theft, but the decentralized nature of cryptocurrencies typically
means that lost cash cannot be recovered. Due to the lack of security
and safety, many people are hesitant to invest in or utilize
cryptocurrencies for regular transactions.

Is it the inevitable fall or a transitional phase?

While the obstacles facing bitcoin and blockchain technology are daunting, it
is critical to remember that these technologies' "fall" is not inevitable. The
current challenges of cryptocurrencies may be a transitional phase rather than
an outright catastrophe, just as the dot-com boom of the late 1990s caused the
bankruptcy of numerous internet enterprises but eventually opened the way
for the growth of giants such as Amazon and Google.

Many of the difficulties raised above could be addressed by blockchain

technology innovations such as layer-2 solutions, proof-of-stake systems, and
quantum-resistant cryptography. Furthermore, if regulatory frameworks
improve and become more receptive of cryptocurrencies, the industry may
gain credibility and stability.

While the collapse of cryptocurrencies and blockchain is a possibility, it is not

guaranteed. These technologies' future success will be determined by their
capacity to adapt to regulatory, environmental, and technological obstacles.
Whether cryptocurrencies fail or succeed, one thing is certain: they have
already had a significant impact on the worlds of finance and technology, and
their legacy will continue to define the future of digital assets for many years
to come.
Historical Legal Framework Governing Blockchain and Cryptocurrencies in
India

Over time, increased enthusiasm for the potential of digital assets and
regulatory caution has altered India's legal landscape for cryptocurrencies and
blockchains.

Early Years (2013-2017): Bitcoin was the most well-known cryptocurrency

when it initially attracted notice in India in 2013. However, the government
and banking authorities soon voiced concerns about the dangers of virtual
currencies, including the potential for money laundering and terrorism
funding. In 2013, the Reserve Bank of India (RBI) issued its first cautionary
notice warning users about the potential risks of dealing with virtual
currencies, which it described as unregulated and highly volatile.4

RBI Banking Ban (2018): In April 2018, the RBI published a circular that
essentially forbade banks and other financial organizations from offering
cryptocurrency-related services. This was a turning point in the industry. This
action severely damaged India's budding cryptocurrency market, compelling
exchanges to adjust their business strategies or close their doors. The RBI's
rationale was rooted in concerns over consumer protection, financial
stability5and the potential for cryptocurrencies to be used for illicit activities
like money laundering and fraud.

Supreme Court Ruling (2020): In March 2020, after prolonged legal battles, the
Supreme Court of India overturned the RBI's 2018 ban, declaring it
unconstitutional. The Court stated that while the risks associated with
cryptocurrencies were valid, the blanket ban was disproportionate and
unjustified.6This decision reinvigorated the Indian crypto market, allowing
exchanges and businesses to operate legally once again.

Draft Legislation (2021-present): Despite the Supreme Court ruling, the Indian
government has remained cautious. In 2021, the government introduced The

4
R. B. o. India., "RBI," 01 02 2017. [Online]. Available:
https://www.rbi.org.in/commonman/Upload/English/PressRelease/PDFs/PR2054EN0
10217.PDF. [Accessed 13 09 2024].

5R. B. O. INDIA, "Reserve Bank of India," 18 04 2018. [Online]. Available:

https://www.rbi.org.in/commonman/Upload/English/PressRelease/PDFs/PR26420504
2018.PDF. [Accessed 13 09 13].

6 Internet and Mobile Association of India v. Reserve Bank of India, 2020.

Cryptocurrency and Regulation of Official Digital Currency Bill,7 which
proposed a ban on all private cryptocurrencies while laying the groundwork
for a Central Bank Digital Currency (CBDC). However, the bill has yet to be
passed, and the government continues to deliberate on the best regulatory
approach. Meanwhile, the RBI has started working on its own CBDC, with
plans to launch a digital rupee in the near future.

India's laws governing cryptocurrencies and blockchain technology are still

being developed; the government is trying to strike a balance between
promoting blockchain technology and addressing public concerns about the
risks associated with unregulated cryptocurrencies.

Current Legal Status of Cryptocurrencies in India

The current Legal Status of Cryptocurrencies

In India, the legal status of cryptocurrencies is complex and evolving.

Following provides an extensive overview of the current situation:

Cryptocurrency Classification

There is currently uncertainty around the legal status of cryptocurrencies in

India. Neither the Indian government nor the Reserve Bank of India (RBI)
officially acknowledge them as "currency". For regulatory purposes,
cryptocurrencies are frequently classified as "assets" or "commodities" instead.
Because cryptocurrencies do not cleanly fit into the current regulatory systems,
there is legal ambiguity.

Digital Currency Regulation Bill 2021

The Digital Currency Regulation Bill 2021 proposed by the Indian government
aims to provide a comprehensive regulatory framework for cryptocurrencies
and digital assets. This bill has had a significant impact on the legal landscape:

1. Prohibition of Private Cryptocurrencies: The bill proposed to prohibit

all private cryptocurrencies8 in India. This includes most
cryptocurrencies that are not issued by the central government or
regulatory bodies. The goal was to mitigate risks associated with
speculative trading and financial instability.

7R. Shrivastava, "Cryptocurrency Bill in Parliament: Govt intends to create official

digital currency, prohibit private players," India Today, New Delhi, 2021.

8"Lok Sabha Secretariat Intranet," 23 11 2021. [Online]. Available:

https://loksabhadocs.nic.in/bull2mk/2021/23.11.21.pdf. [Accessed 13 09 2024].
 2. Central Bank Digital Currency (CBDC): The bill also places a strong
emphasis on the creation and use of a digital currency that will be
issued by the RBI and be referred to as the Central Bank Digital
Currency (CBDC)9. The Indian Rupee is meant to have a secure and
controlled digital counterpart in the form of the CBDC.
3. Regulatory Oversight and Penalties: The bill proposes stringent
penalties for those who engage in activities related to private
cryptocurrencies,10 such as trading or holding them. This is intended to
dissuade speculative investment and ensure that financial transactions
remain within a regulated framework.

Impact and Current Status

The proposed bill has not yet been enacted into law, and the regulatory
environment remains uncertain. However, the Indian government and RBI
have taken steps to clarify their stance:

• A banking prohibition on cryptocurrency transactions was previously

enforced by the RBI in 2018, however it was lifted by the Supreme Court
in 2020. Although this decision made it possible for cryptocurrency
transactions and trade to continue, regulatory ambiguity remained.
• A tax system for cryptocurrencies was implemented by the Finance Act
2022, which treated them as "virtual digital assets ".11 The legal status of
cryptocurrencies is not made clear by this tax regime, which
nevertheless mandates that people pay tax on gains from
cryptocurrency transactions.

Although cryptocurrencies are subject to legislative limitations and are

not formally accepted as legal cash in India, they are also not
completely prohibited. The Digital Currency Regulation Bill 2021 is a
reflection of the government's intention to tighten regulations on the

9"Press Information Bureau," 01 12 2022. [Online]. Available:

https://static.pib.gov.in/WriteReadData/specificdocs/documents/2022/dec/doc2022121
139201.pdf. [Accessed 14 09 2024].

10R. B. O. INDIA, "RESERVE BANK OF INDIA," 05 02 2021. [Online]. Available:

https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR105160464FA5D1484207801CF6
B4402501C1.PDF. [Accessed 15 09 2024].

11"Sansad," 06 02 2024. [Online]. Available:

https://sansad.in/getFile/annex/263/AU376.pdf?source=pqars#:~:text=(c)%3A%20Secti
on%20115BBH%2C%20incorporated,acquisition)%20permitted%20under%20the%20s
ection.. [Accessed 15 09 2024].
 industry, emphasizing the avoidance of speculative risks and the
promotion of a CBDC.

Role of the Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is an important supervisory body that governs
the Indian financial system, including issues pertaining to blockchain
technology and digital currencies.

1. RBI’s Digital Currency Initiatives (Central Bank Digital Currency—

CBDC): The RBI has been actively involved in the development of the
"Central Bank Digital Currency (CBDC)." The RBI aims to introduce a
digital version of the Indian Rupee, known as the "CBDC," to
complement the physical currency and enhance the efficiency of the
financial system. The RBI’s approach to CBDC includes pilot projects
and consultations to ensure a secure and regulated digital currency
framework. According to the RBI, the CBDC will "reduce the cost of
physical cash management, enhance the efficiency of payment systems,
and provide an alternative to private digital currencies".12
2. Guidelines on Blockchain Technology for Financial Institutions: The
RBI has also issued guidelines concerning the use of blockchain
technology by financial institutions. These guidelines emphasize the
need for "robust security measures" and "regulatory compliance" to
ensure that blockchain applications do not pose risks to financial
stability. According to the RBI, financial institutions must ensure that
their use of blockchain technology is "consistent with regulatory
requirements and does not facilitate illicit activities" (RBI Guidelines on
Blockchain Technology, 2023). The guidelines also stress the
importance of "data privacy, operational resilience, and transparency"
in blockchain implementations.13

Taxation of Cryptocurrencies

12R. B. o. India, "Reserve Bank of India," 10 2022. [Online]. Available:

https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E
0B4DFC9A6E506C2C24FFB6.PDF. [Accessed 15 09 2024].

13"Sansad," 07 02 2023. [Online]. Available:

https://sansad.in/getFile/annex/259/AU619.pdf?source=pqars#:~:text=RBI%20has%20s
tated%20that%20their,tested%20certain%20blockchain%20based%20applications.
[Accessed 15 09 2024].
The taxation of cryptocurrencies in India has specific implications under both
income tax and Goods and Services Tax (GST) regimes. Here’s an overview:

Income Tax Implications on Cryptocurrency Gains

Under the Finance Act 2022, cryptocurrencies are categorized as "virtual digital
assets" (VDAs). According to this act, income derived from the transfer of
VDAs is subject to income tax. Key points include:

1. Tax on Gains: Gains from the transfer of cryptocurrencies are treated

as "income from other sources" or "capital gains," depending on the
nature of the transaction. The Finance Act 2022 stipulates that "income
from the transfer of virtual digital assets shall be taxed at a flat rate of
30%." This rate applies irrespective of whether the gains are short-term
or long-term.1114
2. Loss Set-Off: Losses incurred from the transfer of cryptocurrencies
cannot be set off against other sources of income. According to the tax
law, "losses from the transfer of virtual digital assets cannot be set off
against any other income and are not eligible for carry forward."11

Goods and Services Tax (GST) on Crypto Transactions

The GST implications for cryptocurrency transactions are less clearly defined
compared to income tax. However, the following aspects are noteworthy:

1. Service Tax: According to a circular by the Central Board of Indirect

Taxes and Customs (CBIC), transactions involving cryptocurrencies can
be classified as "supply of services" under GST. As a result, "GST may
be levied on the transaction value at the applicable rate," which is
generally 18% for services.15
2. GST on Exchange Transactions: When cryptocurrencies are exchanged
for goods or services, the GST treatment depends on the nature of the
transaction. The CBIC has clarified that "GST will be applicable on the
transaction value of the goods or services provided in exchange for
cryptocurrencies."15

Securities and Exchange Board of India (SEBI) Guidelines

14
"Income Tax Department," 02 2024. [Online]. Available:
https://incometaxindia.gov.in/Tutorials/72.TDS-on-payment-for-the-transfer-of-
Virtual-Digital-Assets.pdf. [Accessed 15 09 2024].

15Annapoorna, "Cleartax," 07 06 2024. [Online]. Available: https://cleartax.in/s/gst-on-

supply-of-crypto-digital-assets. [Accessed 15 09 2024].
Cryptocurrency as Investments or Securities
It is not officially recognized by the Securities and Exchange Board of India
(SEBI) that cryptocurrencies are "securities." If cryptocurrencies are
categorized as investment contracts, they might, nevertheless, be governed by
securities laws. Presently, the position is that:

• Classification: As of now, cryptocurrencies are not directly classified as

"securities" under the Securities Contracts (Regulation) Act, 1956
(SCRA). The SEBI has indicated that if any cryptocurrency or digital
asset is found to meet the criteria of a security or investment contract,
it might come under SEBI's regulatory purview. According to SEBI’s
guidelines, "an asset or instrument would qualify as a security if it
fulfils the definition of a security under the SCRA and the Companies
Act."16

SEBI's Role in Regulating Crypto Exchanges

SEBI's role in regulating cryptocurrency exchanges has been cautious but

evolving. Key points include:

• Regulatory Oversight: SEBI has not been directly involved in

regulating cryptocurrency exchanges as it does not currently have a
mandate to oversee cryptocurrencies specifically. However, SEBI has
expressed concerns about the risks associated with trading and
investing in cryptocurrencies. As per SEBI’s stance, "while
cryptocurrencies themselves are not regulated by SEBI, any exchange
offering trading in such assets could fall under regulatory scrutiny if it
impacts investor protection or market integrity."17
• Future Regulations: SEBI has suggested that in the future, regulatory
frameworks might be developed to include digital assets within its
jurisdiction, particularly to address investor protection and market
manipulation concerns. SEBI has stated, "We are watching the
developments in the cryptocurrency space closely and will take
appropriate measures as necessary to safeguard investor interests."17

Cybercrime and Blockchain Technology

16"SEBI," [Online]. Available: https://www.sebi.gov.in/acts/contractact.pdf. [Accessed

15 09 2024].

17"Address at the SEBI-ICI Conference on Sustainable Finance and ESG Investing.","

in SEBI, 2021.
Blockchain Technology's Role in Fighting Cybercrime
The promise of blockchain technology to combat cybercrime is being
acknowledged more and more. Important elements consist of:

• Transparency and Traceability: Blockchain’s "transparent and

immutable ledger" can enhance the traceability of transactions. This
helps in tracking illicit activities and identifying fraudulent
transactions. As per a report by the National Institute of Smart
Governance (NISG), "the transparent nature of blockchain can aid law
enforcement agencies in tracking and investigating cybercrimes."18
• Decentralized Security: Blockchain’s decentralized nature can reduce
the risk of data breaches and centralized attacks. "By distributing data
across multiple nodes, blockchain minimizes single points of failure,
which can improve overall security against cyber threats."19

Legal Actions on Crypto-Related Scams, Money Laundering, and Fraud

India has been taking legal actions against crypto-related crimes, including
scams, money laundering, and fraud. Key aspects include:

• Regulatory Framework: The Prevention of Money Laundering Act

(PMLA) has been used to address money laundering involving
cryptocurrencies. The Enforcement Directorate (ED) has been active in
investigating and prosecuting cases under this act. According to a
statement by the ED, "cryptocurrencies are treated as 'property' under
the PMLA, and transactions involving them can be scrutinized for
money laundering activities."6
• Crypto Fraud Cases: Several high-profile crypto fraud cases have led
to legal actions in India. For instance, the E-Nuggets case involved
fraudulent activities in cryptocurrency schemes, and investigations led
to the arrest of several individuals. The Economic Offenses Wing
(EOW) of the Delhi Police reported that "crypto scams often involve
deceptive practices and false claims, leading to significant financial
losses for investors."20

18"Meity," 12 2021. [Online]. Available:

https://www.meity.gov.in/writereaddata/files/National_BCT_Strategy.pdf. [Accessed
15 09 2024].

19 V. A., R. P. S. Asharaf, Blockchain technology for cybersecurity: A text mining

literature analysis, Kerala, 2022.

20D. K. Pandey, "THE Hindu," The Hindu, 30 12 2022. [Online]. Available:

https://www.thehindu.com/news/national/ed-freezes-4221-crore-in-e-nuggets-
case/article66321191.ece. [Accessed 15 09 2024].
 • Legal Reforms: The Indian government has proposed regulatory
frameworks, such as the Digital Currency Regulation Bill 2021, to
address the legal issues surrounding cryptocurrencies. This bill aims to
regulate and prevent misuse of digital assets, including "measures to
combat financial fraud and enhance investor protection."8

The obstacles in Legalizing Cryptocurrencies

The process of legalizing cryptocurrencies in India faces several significant

challenges, including concerns related to money laundering, fraud, market
manipulation, and security issues. Here’s a detailed overview:

Risks of Money Laundering, Fraud, and Market Manipulation

Legalizing cryptocurrencies presents notable risks such as "money laundering,

fraud, and market manipulation." Cryptocurrencies, due to their
pseudonymous nature and decentralized structure, can be exploited for illicit
activities.

• Money Laundering: Cryptocurrencies can facilitate "anonymous

financial transactions," making it easier for individuals to launder
money. This risk is compounded by the lack of comprehensive
regulatory oversight. The Financial Action Task Force (FATF) has noted
that cryptocurrencies can be used to "obfuscate the source of illicit
funds and facilitate cross-border transactions without detection"21
• Fraud: The cryptocurrency market is susceptible to various types of
fraud, including "Ponzi schemes, fake Initial Coin Offerings (ICOs), and
phishing attacks." These fraudulent activities exploit the lack of investor
protection and regulatory oversight in the crypto space.22
• Market Manipulation: The volatility and lack of regulation in
cryptocurrency markets make them prone to "manipulative practices
such as pump-and-dump schemes and spoofing." Market manipulation

21"FATF," FATF, 28 10 2021. [Online]. Available: https://www.fatf-

gafi.org/en/publications/Fatfrecommendations/Guidance-rba-virtual-assets-
2021.html. [Accessed 15 09 2024].

22"SEBI," 04 04 2021. [Online]. Available: https://www.sebi.gov.in/reports-and-

statistics/publications/aug-2021/annual-report-2020-21_51610.html. [Accessed 15 09
2024].
 can result in significant financial losses for investors and undermine
market integrity.23

Security Issues and Regulatory Uncertainties

The legal framework for cryptocurrencies in India also faces challenges related
to "security issues and regulatory uncertainties":

Security Issues: Cryptocurrencies and associated technologies can be

vulnerable to "hacking and cyber-attacks." Security breaches at cryptocurrency
exchanges and wallet providers can result in significant financial losses and
undermine trust in the digital asset ecosystem. The Reserve Bank of India (RBI)
has highlighted concerns regarding the "security and stability of financial
systems affected by cryptocurrency vulnerabilities".24

Regulatory Uncertainties: The legal status of cryptocurrencies in India

remains ambiguous, leading to "regulatory uncertainties." The lack of a clear
regulatory framework can create confusion among investors and businesses,
and hinder the development of the crypto market. The proposed Digital
Currency Regulation Bill 2021 reflects the government's intention to address
these uncertainties by "prohibiting private cryptocurrencies" while fostering a
regulated Central Bank Digital Currency (CBDC).8

Global Comparison of Crypto Regulations

India’s Legal Framework vs. Other Major Markets

India:

• Legal Framework: India’s regulatory approach to cryptocurrencies is

characterized by ambiguity and evolving policies. As of now,
cryptocurrencies are not officially recognized as legal tender, and their
trading is regulated primarily through tax laws and potential legislative
proposals like the Digital Currency Regulation Bill 2021. The bill
proposes to "prohibit all private cryptocurrencies" while allowing the
development of a "Central Bank Digital Currency (CBDC)" issued by
the Reserve Bank of India (RBI).8

23"IMF," 11 10 2022. [Online]. Available:

https://www.imf.org/en/Publications/GFSR/Issues/2022/10/11/global-financial-
stability-report-october-2022. [Accessed 15 09 2024].

2430 06 2020. [Online]. Available:

https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0RBIAR201920DA64F97C6E7B48
848E6DEA06D531BADF.PDF. [Accessed 15 09 2024].
United States:

• Legal Framework: In the US, cryptocurrencies are classified as

commodities by the Commodity Futures Trading Commission (CFTC)
and as securities by the Securities and Exchange Commission (SEC)
under certain conditions. The SEC has stated that "cryptocurrencies and
initial coin offerings (ICOs) that meet the definition of a security are
subject to federal securities laws." Additionally, the IRS treats
cryptocurrency as property for tax purposes, meaning that "gains or
losses from cryptocurrency transactions are subject to capital gains
tax."25

United Kingdom:

• Legal Framework: The UK regulates cryptocurrencies as a part of its

anti-money laundering (AML) and counter-terrorist financing (CTF)
regulations. The Financial Conduct Authority (FCA) oversees crypto
exchanges and wallet providers, requiring them to be registered and
comply with AML requirements. The FCA's stance is that
"cryptocurrencies are not regulated as financial products," but
businesses dealing in crypto must adhere to AML regulations and
"consumer protection standards."26

European Union:

• Legal Framework: The EU has a more structured approach to

cryptocurrency regulation. The European Union's regulations include
the Fifth Anti-Money Laundering Directive (5AMLD), which requires
crypto exchanges and wallet providers to follow AML and CTF rules.
The EU is also working on the Markets in Crypto-Assets (MiCA)
regulation, which aims to create a comprehensive framework for
"regulating crypto-assets and ensuring market integrity."27

25"IRS," 2021. [Online]. Available: https://www.irs.gov/individuals/international-

taxpayers/frequently-asked-questions-on-virtual-currency-
transactions#:~:text=In%202014%2C%20the%20IRS%20issued,property%20apply%20t
o%20virtual%20currency.. [Accessed 15 09 2024].

26"FCA," 21 10 2019. [Online]. Available: https://www.fca.org.uk/firms/financial-

crime/cryptoassets-aml-ctf-regime. [Accessed 15 09 2024].

27"LSEG," [Online]. Available: https://www.lseg.com/en/risk-intelligence/financial-

crime-risk-management/eu-anti-money-laundering-
directive#:~:text=jurisdiction%20or%20not.-
,5th%20AML%20Directive,regulatory%20controls%20across%20more%20sectors..
[Accessed 15 09 2024].
These global efforts reflect a trend toward harmonizing regulations and
fostering international cooperation to address the challenges and risks
associated with blockchain and cryptocurrencies. For further details,
you can refer to the official documents and guidelines provided by
these organizations and regulatory bodies.

Conclusion

The digital landscape in India has been completely transformed by

blockchain technology and cryptocurrencies, which have enormous
promise for safe digital transactions and decentralized finance. The
regulatory landscape is still complicated and changing, with worries
about fraud, money laundering, market manipulation, and security
notwithstanding their benefits. In order to create a balanced regulatory
framework that promotes innovation while preserving investor
protection and financial stability, the Indian government and
regulatory bodies, including the Reserve Bank of India (RBI) and the
Securities and Exchange Board of India (SEBI), have taken a cautious
approach. Though it hasn't been passed yet, the proposed Digital
Currency Regulation Bill 2021, which calls for a Central Bank Digital
Currency (CBDC) and a prohibition on private cryptocurrencies, shows
this cautious approach.

India's approach to handling the dangers connected with

cryptocurrencies is in line with global trends, although it is still rather
conservative when compared to other global markets like the US, UK,
and EU. India's place in the global bitcoin ecosystem will only increase
as the technology develops and laws become clearer. This is assuming
that inclusive, well-balanced policies are put in place to support
innovation while also providing protection.