In November 2017, a high level inter-ministerial committee (IMC) was constituted under the chairmanship of the Secretary of the Department of Economic Affairs (DEA) under the Ministry of Finance, Government of India to examine the policy and legal framework for regulation of virtual / crypto currencies ("VCs") and recommend appropriate measures to address concerns arising from use of such VCs. In doing so, the IMC studied the regulatory initiatives in different jurisdictions to understand the trajectory of regulation and development in the sphere of VCs.
As a result of its deliberations, the IMC recently published the 'Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies' ("VC Report") along with a draft legislation, namely, the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 ("VC Bill") that captures the IMC's recommendations in relation to VCs.
Recommendations made by the IMC:
Some of the key recommendations made by the IMC under the VC Report include: -
• Since private VCs (such as bitcoin, ripple etc.) lack attributes of a currency and cannot replace a fiat currency, VCs (except those issued by the State), should be banned and carrying on of any activities connected with such VCs should be criminalized in India.
• The Government should consider introduction of a central bank digital currency ("CBDC") as a digital form of fiat money in India. If the Government decides to issue CBDC in India, which has the status of legal tender, the RBI should be the appropriate regulator for such CBDC by virtue of the Reserve Bank of India Act, 1934.
• The Government and various regulators such as the Reserve Bank of India, the Securities and Exchange Board of India etc. should explore usage of distributed ledger technology given its huge benefits. The potential use cases / applications of distributed ledger technology envisaged by the IMC, especially in the financial services sector include, inter alia,: (a) payments system (including both cross border as well as small value payments); (b) KYC requirements for various financial entities; (c) insurance; (d) collateral and ownership registries; (e) loan issuance and tracking; (f) e-stamping etc.
Highlights of the VC Bill:
• Any use, issuance, transfer, mining, generation, disposing of or sale of VCs in the territory of India will be prohibited (except for specific use cases identified in the VC Bill).
• Use of VCs as a legal tender or currency at any place in India will not be permitted.
• The Government of India may, in consultation with the RBI, approve issuance of VCs in the form of digital rupee as legal tender in India.
While ban on the issuance of VCs by non-sovereign private players will be an impediment in the growth of the new-found cryptocurrency industry in India, in our view, express recognition of the distributed ledger technology and its uses by the IMC is a welcome step, which will help in proactively ushering in the digital economy. The distributed ledger technology can be particularly valuable in the areas of trade financing, lowering costs of KYC and improving access to credit.
Rohan Bagai, Partner Poojan Sahny, Senior Associate