Digital Investment

Regulation of Cross-Border Cryptocurrency Transactions in India

Cross-border cryptocurrency transactions

Cryptocurrency or virtual currencies have gained popularity post the 2008 financial crisis. India has recognized such currencies as ‘virtual digital assets’. Some virtual digital assets like Bitcoin have become a lucrative option for investment. On the contrary, the lack of accountability has also made cryptocurrency to be used for unethical and criminal activities. Cryptocurrency has been difficult to define and there is no universally accepted definition of cryptocurrency. In simple language, cryptocurrency can be understood as financial instruments in intangible form produced and stored on servers that use blockchain technology.
Regulating cross-border cryptocurrency transactions has gained importance with the increase in cross-border transactions. Further, cryptocurrency is simply understood as a private currency with no backing of any sovereign guarantee. Having no risk of backing up any sovereign guarantee, removes the risk of failure of the entire payment mechanism in any crisis where the sovereign is not able to fulfill its guarantee.

In India, foreign trade, foreign investment, and cross-border cryptocurrency transactions are gaining pace. The cross-border cryptocurrency transactions have also become a trend across the globe, making it important to regulate cryptocurrency in India. Since, Foreign Exchange Management Act (FEMA), 1999[1] regulates foreign investments in India, regulating cross-border cryptocurrency transactions through FEMA will be feasible. At present, the position of cryptocurrency in India is ambiguous. There is a ban on cryptocurrencies in India. The Lok Sabha introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which was intended to create a favorable framework for the creation of digital currencies to be issued by the RBI. However, this regulation is still pending in the Parliament.

What is the present status of Cryptocurrency in India?

Cryptocurrency as a payment medium is not regulated in India. No rules or regulations have been laid down for settling disputes regarding cryptocurrency. The statements of government spokespersons indicate that cryptocurrencies are illegal however, there is no express ban on them in India. If any person trades in cryptocurrency, it will be completely at his own risk. The Union Budget 2022 did propose to tax virtual digital assets however, the government is yet to pass any official confirmation on whether cryptocurrencies are legal in India or not. Cryptocurrency investors are required to report profits and losses arising from cryptocurrency as a part of their income. A tax at the rate of 30% will be imposed on the earnings from the transfer of virtual assets. The loss against a virtual asset cannot be balanced against any other income. Further, a TDS of 1% will be levied on the buyer’s payment if it crosses the prescribed threshold limit.

Regulation of Cross-Border Cryptocurrency Transactions: The Road Ahead

The investment sector is expanding both at the domestic as well as at international level. Crypto trading platforms are witnessing a rise in volumes in India making it important to regulate the crypto market in India. An unregulated crypto market is risky for young entrepreneurs and investors. Therefore, cryptocurrency should be regulated by adequately classifying cryptocurrency and creating a favorable structure for the creation of the official digital currency.

Cryptocurrency can be said to fall under FEMA as under the classification of the term ‘currency’, it has been prescribed that the RBI has residuary powers to declare any other instrument as ‘currency’ but the RBI has always been skeptical in classifying it as a currency because doing so would give it the status of fiat money or legal tender and if cryptocurrency is given the status of legal tender then it will have to be backed by sovereign guarantee. In addition to this, even the Supreme Court in the case of Internet and Mobile Association of India vs. RBI opined that the RBI had sufficient power to classify cryptocurrency as “currency” under FEMA. However, when it comes to the practical aspect of cryptocurrency, a well-incorporated framework is required otherwise it will discourage the use of cryptocurrency in India. If it cannot be classified under ‘currency’ then it can be classified as ‘foreign currency’ or ‘foreign exchange’ defined under section 2(m) of FEMA as, ‘any currency other than Indian Currency’. Under FEMA, where a currency creates a financial liability it may be considered as foreign currency. Further, as opined by the Supreme Court that RBI has the power to regulate a cryptocurrency performing the function of money. It cannot be said that just because it is not legal tender it will not be regulated by RBI.

If cryptocurrency is regulated, there will be broadly two types of cross-border cryptocurrency transactions, they are: i) purchase and sale of cryptocurrency from outside India; and ii) using cryptocurrency like money for payment of goods and services across borders or for investing, etc. There arises no issue in the first type of cryptocurrency as nothing under FEMA prohibits the purchase and sale of cryptocurrency by using currency if sent or received through an authorized channel. Such transactions are considered similar to the transactions of buying or selling goods for money. The issue arises under the second type of cryptocurrency transaction where cryptocurrency is sought to be used as a substitute for money. Under this type, cryptocurrency can be used either for investment or purchase of assets or for payment of goods. For these uses, it becomes necessary to classify or treat cryptocurrency as a ‘currency’ or a legal tender.

If we talk about the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 it states that the receipt and payment of exports and imports have to be made either in the form of a foreign exchange or a currency. As per this regulation, cryptocurrency is ipso facto barred from any transaction as it is neither foreign exchange nor currency. However, this regulation also grants residuary power to RBI to permit transactions through any other authorized instrument. 

Why regulation of cryptocurrency is necessary?

The above discussion makes it clear that the issue is in the fact that cryptocurrency has not been recognized or notified as a valid source of payment. The ball is in RBI’s court to notify cryptocurrency as a valid mode of payment which bring out an additional source to promote cross-border cryptocurrency transactions. Not regulating cryptocurrency would extinguish a unique opportunity for the Indian Industry. Further, it will be wrong to not regularize cryptocurrency thinking that cross-border cryptocurrency transactions promotes cross-border crime as non-regulation will only make it difficult to trace such transactions and deprive legitimate users of the benefits of cryptocurrency. Hence it is essential to frame proper regulations to effectively regulate cross-border cryptocurrency transactions.

Conclusion

One of the objectives of FEMA is to promote foreign trade. Banning cryptocurrency is going contrary to the objectives. The ban affects India’s capability to engage in foreign trade. RBI despite having the powers to regulate cross-border cryptocurrency transactions is not exercising it. Yet looking forward, the situation still looks as though the legislature may consider enacting a regulatory code for regulating domestic as well as cross-border cryptocurrency transactions.

Also Read: Digital Currency in the Banking Industry

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