Sep 17, 2018

Blockchain & Cryptocurrency Regulation – 2019 | India


In India, cryptocurrencies started gaining popularity since around 2013, when small scale businesses began accepting bitcoin as a form of payment. Since then, cryptocurrencies have grown into a means of investment evidenced by the emergence of cryptocurrency exchanges in India.

The first regulatory response in the context of cryptocurrencies was when the Reserve Bank of India (“RBI”) issued a press release – on December 24, 2013 (“Press Note 1”). The RBI (which is in charge of monetary policy, regulation of financial markets and exchange control related issues) was careful in terms of neither sanctioning, nor prohibiting, cryptocurrencies; rather, all that Press Note 1 constituted was a caution to users, holders and traders of ‘virtual currency’, of potential risks associated with cryptocurrencies.

Almost immediately after the issuance of Press Note 1, several bitcoin exchanges such as ‘’ and ‘INRBTC’ temporarily shut operations. The Enforcement Directorate (“ED”), which enforces exchange control regulations) undertook raids on the proprietor of ‘’ to examine if transactions being carried out on its platform violated foreign exchange control regulations.

While Press Note 1 and the ED’s actions caused a setback in the popularity of cryptocurrency transactions. This was only temporary; ultimately, cryptocurrencies weren’t banned or prohibited, and India witnessed a steady rise in transactions in cryptocurrency, tracking the global increase in similar activities.

The RBI released warnings similar in scope to Press Note 1 on February 01, 2017 (“Press Note 2”) and December 5, 2017 (“Press Note 3”) reiterating its caution, and went one step further to clarify that it (i.e. the RBI) has not provided any entity any license or sanction to transact with cryptocurrency.

It should be noted that the government does distinguish between bitcoin and its underlying technology, i.e., block chain. Despite the issuance of the press notes cited above, the RBI has issued a White Paper on ‘Applications of Block Chain Technology to the Banking and Financial Sector in India’ in January 2017, which views the application of block chain technology by banks favorably. The RBI has also indicated that it may create a domestic ledger platform involving National Payment Corporation of India similar to existing platforms (such as RTGS, NEFT and IMPS). Towards this end in particular, the RBI, in September 2017, announced that it has taken steps to create such a platform, and also filed three patent applications in this regard.

Along similar lines, the Indian Finance Minister, in his Budget Speech on February 1, 2018 stated that although the Indian government does not recognize bitcoin as legal tender, it does encourage the use of block chain technology in payment systems.

The Budget Speech is often cited as the precursor to the regulation on cryptocurrency in India, although it is certainly not the sole reflection of the Indian government’s attitude to cryptocurrency. Since RBI’s press releases, the government has constituted an inter-disciplinary committee (which includes representatives from the RBI) to examine (i) the present status of cryptocurrency in India and globally; (ii) the existing global regulatory and legal structures governing cryptocurrency; (iii) measures to address issues relating to consumer protection and money laundering.

These developments initially suggested a positive approach towards the regulation of cryptocurrency, in that it was expected, by some quarters at least, that the RBI and the government would officially permit the use of cryptocurrencies.

All that changed with RBI’s circular dated April 6, 2018 (“Circular”), as a result of which the dealing of cryptocurrency in India today has been substantially impeded. Through the Circular, the RBI banned all entitles regulated by it (i.e., banks, financing institutions, non banking financing institutions, payment system providers and the like) from dealing in, or facilitating any dealings in, cryptocurrencies. These entities were provided a three month period within which all accounts dealing with cryptocurrency would have to be shut down.

As a consequence, while the government has not per se banned cryptocurrency in India, it has certainly made it quite difficult for participants to conduct transactions by using traditional banking channels. No other regulator in India has issued any directions concerning cryptocurrencies. Press releases as recent as July, 2018, indicate that the government will clarify its stand on cryptocurrency and is working with various industry participants to issue detailed guidelines, although timing in this regard remains uncertain.

Indian Supreme Court on Cryptocurrency

Along with the executive contemplating regulation of cryptocurrency, several stakeholders have also approached the judiciary by filing petitions before the Indian Supreme Court (“SC”) in order to compel the government to provide clarity.

The two primary petitions seeking to address the legality of cryptocurrency were filed by (i) Vijay Pal Dalmia and Siddharth Dalmia through civil writ petition 1071 of 2017 on June 2, 2017 (“Dalmia Petition”), and (ii) Dwaipayan Bhowmick through civil writ petition 1076 of 2017 on November 03, 2017 (“Bhowmick Petition”).

The Dalmia Petition was filed against the Union of India (through the cabinet secretary), Ministry of Home Affairs, Ministry of Finance and the RBI (“Respondents 1”), seeking an order to direct Respondents 1 to “restrain/ ban the sale/ purchase of or investment in, illegal cryptocurrencies and initiate investigation and prosecution against all parties which indulged in the sale/ purchase of cryptocurrency.”

The grounds for the stated petition, as available on public sources, was based on (i) the anonymous nature of cryptocurrency transactions which makes it well-suited for funding terrorism, corruption, money laundering, tax evasion, etc.; (ii) production and introduction of new cryptocurrency being generated by private parties, without the intervention of the government, and hence violating the Constitution; (iii) use of cryptocurrency being in contravention of several laws such as FEMA and Prevention of Money Laundering Act, 2002; (iv) ransomware attacks having occurred through the use of bitcoin; (v) illegal cryptocurrency providing an outlet for personal wealth that is beyond restriction and confiscation; (vi) cryptocurrency exchanges encouraging undeclared and anonymous transactions making it difficult for government authorities to identify such transactions; and (vii) the fact that trading of cryptocurrencies permits players to bypass prescribed KYC norms.

The Bhowmick Petition was filed against the Union of India, Ministry of Finance, Ministry of Law and Justice, Ministry of Electronic and Information Technology, SEBI, RBI, Income Tax Dept. (through its secretary) and Enforcement Directorate (through its joint director) seeking an “issuance of direction to regulate the flow of bitcoins as well as requiring the constitution of a committee of experts to consider prohibition/regulation of bitcoins and other cryptocurrencies.”

The grounds for the petition, as reflected in public sources, inter alia include (i) bitcoin trading/ transactions, being unregulated, lack accountability; (ii) investigators can only track bitcoin holders who convert their bitcoin to regular currency; (iii) counterfeiting of cryptocurrency is not an issue so long as the miners keep the block chain secure; (iv) bitcoins may be used for trade and other financial activities without accountability, having an affect on the market value of other commodities; (v) conversion of bitcoin into foreign exchange does not fall under the purview of the RBI, making such transactions highly unsafe and vulnerable to cyber attacks; (vi) presently, no regulator has the power to track, monitor and regulate cryptocurrency transfers; (vii) cryptocurrency has the potential to support criminal, anti-social activities, like money laundering, terrorist funding and tax evasion; and (viii) use of cryptocurrency could result in widespread adverse financial implications if left unchecked.

Subsequent to the aforementioned petitions, certain industry participants have filed writ petitions challenging the constitutionality of the RBI’s Circular and reiterated the need for clarity on regulation. Other stakeholders, such as the Internet and Mobile Association of India have filed intervention applications in the Bhowmick Petition in order to draw attention to the impact that any restrictive regulation on cryptocurrencies may have to their businesses.

Till date, while the Supreme Court has admitted these petitions, the matters remain sub judice offering limited insight on the judiciary’s stance. Nevertheless, the arguments made (as publicy reported) indicate that there is a degree of acknowledgment that various risks are presented by the continuing lack of regulation around cryptocurrencies.

Is cryptocurrency valid currency in India?

The Indian Parliament has enacted (i) Reserve Bank of India, 1934 (“RBI Act”) regulating inter alia bank notes; and (ii) Coinage Act, 2011 (“Coinage Act”) regulating coins, and these remain the only statutes that define and recognize legal tender.

Per section 26 of the RBI Act, ‘every bank note shall be legal tender at any place in India for payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government.” The central government specifies and approves the denomination value, form and material of such bank notes and the RBI has the sole right to issue bank notes in the country. Similarly, section 6 (1) of the Coinage Act provides legal sanction to coins that are made of any metal or other material as approved by the Central Government. Bank notes and coins therefore encompass the entire universe of physical legal tender available in India.

Under the existing framework therefore, there is no sanction for cryptocurrencies as legal tender.

Is cryptocurrency a valid payment system in India?

In India, prepaid instruments and payment systems are regulated by the Payments and Settlement Act, 2007 (“PSSA”). Prior to the enactment of PSSA, a working group on electronic money set up by the RBI, issued a report in July 11, 2002 (“Report”), which defined electronic money as ‘an electronic store of monetary value on a technical device used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument.’

These products could be classified into two broad categories that is, (a) pre-paid stored value card (sometimes called “electronic purse” or “e-wallet”) and (b) pre-paid software based product that uses computer networks (sometimes referred to as “digital cash” or “network money”). It was highlighted that the stored value card scheme typically uses a microprocessor chip embedded in a physical device (such as a plastic card) while software based scheme typically uses specialized software installed in a personal computer.

The aforementioned definition may seem wide enough to include cryptocurrency in its scope. However, this must be read in conjunction with the PSSA which does not explicitly define electronic money, but regulates payment systems that affect electronic fund transfer. These payment systems include ‘systems that enable payment between a payer and beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange’. Such systems include credit cards, debit cards, smart cards, and money transfer operations.

In addition to the PSSA, the RBI has also issued the ‘Master Direction on Issuance and Operation of Prepaid Payment Instruments’ dated October 11, 2017 (“PPI Regulations’) that regulate prepaid wallets. Prepaid wallets may be issued by bank or non-bank entities to facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.

In order to fall under the purview of the above, the instrument in question must store some monetary value. Cryptocurrencies may not have any value stored on them and their value (if any) is contingent on market speculation. Consequently, their issuance are not likely to be construed as regulated electronic money, or a valid payment system, as is currently understood by Indian regulation. Consequently, associated compliance requirements such as obtaining RBI registration, the requirement to establish an entity incorporated in India, the requirement to comply with AML regulations etc. are not applicable.

Are cryptocurrency cross border trades, valid?

Cryptocurrencies are easily capable of being traded on a cross-border basis, and are generally speaking exchangeable into fiat currency. Under the RBI Master Directions – Liberalized Remittance Scheme dated January 1, 2016, an Indian resident individual may remit up to USD 250,000 per year towards a permissible current or capital account transaction or both.

A permissible current account transaction includes inter alia remittance towards (i) private visits, business travel, or remittance by tour operators; (ii) fee for participation in global conferences and specialized training; (iii) remittance for participation in international events / competitions (towards training, sponsorship and prize money); (iv) film shooting; (v) medical treatment abroad; (vi) disbursement of crew wages, overseas education, remittance under educational tie up arrangements with universities abroad; (vii) remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc; (viii) employment and processing, assessment fees for overseas job applications; (ix) emigration and emigration consultancy fees; (x) skills / credential assessment fees for intending migrants; (xi) visa fees, or processing fees required for registration of documents with other governments; (xii) registration / subscription / membership fees to international organizations.

A permissible capital account transaction includes inter alia remittance towards (i) investment in foreign securities; (ii) foreign currency loans; (iii) transfer of immovable property; (iv) guarantees; (v) export, import or holding of currency notes; (vi) loans and overdrafts; (vii) maintenance of foreign currency accounts overseas; (viii) insurance policies; (ix) capital assets; (x) sale and purchase of foreign exchange derivatives.

As is evident from the above, payments for cryptocurrency is not per se listed as a permitted activity. Nevertheless, it may have been possible for an individual to broadly declare the remittance of funds towards investments, without specifying that the intent was to invest in cryptocurrency. At present, given the financial blockage imposed by RBI’s Circular, if a banking institution were to examine the purpose of the remittance further or trace such remittance to its ultimate use, the individual may be held liable for violating foreign exchange regulations (at the very least, the banking institution in question would be unable to facilitate the transaction).

Closely associated with cross border transactions are anti-money laundering regimes that require periodic reporting and declarations being made prior to undertaking the transaction. While Indian money laundering regulations only apply to specific regulated entities such as banks, financial institutions, securities market intermediaries, etc., as a means to address concerns relating to money laundering, several cryptocurrency participants, such as cryptocurrency exchanges have imposed self regulatory measures such as complying with standard ‘know your customer’ obligations.


Regulatory uncertainty doesn’t seem to have hindered industry participants from applying creative alternatives to capitalize on the Indian cryptocurrency market. For instance, cryptocurrency exchanges are exploring the option of setting up a ‘peer to peer’ platform to act as an intermediary between entities trading in cryptocurrency. As a proof of concept, it can be argued that businesses in India are keen to adopt block chain and cryptocurrency, evidenced by various banks exploring the use of block-chain to facilitate cross border payments and large business houses contemplating issuing their own cryptocurrency.

Given the burgeoning market and technological potential, the Indian government is likely to seek to strike a balance in its approach. It will be interesting to witness whether the government recognizes the need of such technology by provisioning for regulation similar to the United States or Singapore governments that have imposed their taxation regime on cryptocurrency or, in the alternative, choose to nip this disruptive technology in the bud, like China, which has banned cryptocurrency.


1. Ashwin Ramanathan, Partner
2. Anu Tiwari, Partner
3. Rachana Rautray, Associate





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