TRAI Tariff Order and Interconnection Regulations for Broadcasting and Cable Services
The Telecom Regulatory Authority of India (‘TRAI’) has on March 3, 2017, issued two sets of regulations governing, inter alia, the pricing of television channels by broadcasters and distributors, namely the Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff Order, 2017 (‘Tariff Order’) and the Telecommunication (Broadcasting and Cable) Services Interconnection (Addressable Systems) Regulations, 2017 (‘Interconnection Regulations’), which repeal certain related regulations applicable to pricing and addressable systems.
The Tariff Order and the Interconnection Regulations specify the framework for tariffs to be charged by broadcasters and distributors and also govern the arrangements between various service providers engaged in broadcasting services, and inter alia:
(i) provide that broadcasters are required to declare a monthly maximum retail price for a-la-carte channels; (ii) prescribe the amounts distributors may charge for channels as the capacity fee per network; (iii) manner in which charges may be levied by broadcasters and distributors for channel bouquets; and (iv) manner in which discounts and carriage fees may be applied by broadcasters and distributors.
Star India and Vijay Television have filed a writ petition in the Madras High Court (‘Madras HC’) challenging TRAI’s authority to regulate pricing of content on television channels. During the pendency of these proceedings, the Supreme Court (‘SC’) has granted TRAI leave to notify regulations (including the Tariff Order and Interconnection Regulations), while observing that the new cause of action arising from the notification of the regulations may be taken up with the Madras HC.
Revised Guidelines for Registration of Infrastructure Provider – I
On January 13, 2017, the Department of Telecom (‘DoT’) issued revised guidelines for registration of Infrastructure Provider – I (‘IP-I’) to incorporate the relevant provisions of the FDI Policy. 100% FDI is permitted in an IP-I, with 49% FDI permitted under the automatic route. The guidelines clarify that both direct and indirect foreign investment in the IP-I entity will be taken into account for computing FDI.
 Infrastructure providers who provide dark fiber, right of way, duct space and towers.
Consultation Paper on Net Neutrality
In furtherance of a pre-consultation paper, TRAI has released a ‘Consultation Paper on Net Neutrality’ on January 4, 2017 to address issues such as what will be the core principles of net neutrality in the Indian context, permissible exceptions to net neutrality considering the business practices proposed by certain telecom service providers (‘TSPs’), the policy and regulatory approach to deal with issues relating to net neutrality, necessary precautions for maintaining customer privacy and preserving national security, etc.
Recommendations on Spectrum Usage Charges and Presumptive Adjusted Gross Revenue
On March 7, 2017, TRAI had issued recommendations on Spectrum Usage Charges (‘SUC’) as a percentage of adjusted gross revenue based on the amount of spectrum held by internet service providers (‘ISPs’) and commercial very small aperture terminal operators. TRAI has recommended to DoT that the existing regime be continued with respect to the spectrum assignment on administrative basis to ISP licensees in the specified bands, and the existing formula for charging SUC and payment of such charges on an annual basis by ISP licensees.
Further, TRAI has recommended to DoT that arrangements be made to accept online payment of financial levies /dues such as SUC and other fees payable by the ISP licensees for obtaining license/ approval/ clearance from DoT, set up a comprehensive and integrated on-line system as a single window clearance for issuance for approval and other permissions to the ISP licensees.
Extension of Time for Obtaining the Telecom Testing and Security Certification
By way of a notification dated April 6, 2017, DoT has extended the time for obtaining the Telecom Testing and Security Certification (‘TTSC’) from an agency / lab within India to April 1, 2018. The requirement in respect of telecom licenses for International Long Distance and National Long Distance is for TSPs to obtain the TTSC in respect of network elements before the induction of such elements into their respective telecom networks. TSPs are required to obtain such TTSC from authorised and certified agencies / laboratories within India.
Guidelines for TSPs in the Process of Tariff Recharges/ Payments through Third Party Apps/ Websites
On October 14, 2016, Telecom Regulatory Authority of India (‘TRAI’) issued the Guidelines for Telecom Service Providers (‘TSPs’) who provide access or internet services, directing them to ensure transparency, uniformity and protection to their subscribers in matters of tariff recharges/ payments of bills through third party applications/ websites appointed by the TSPs (‘Channel Partners’) or sub-Channel Partners appointed by such Channel Partners on their behalf (‘Sub–Channel Partners’). These guidelines require the TSPs to ensure the following:
i. All product features, tariff, and benefits available on the relevant TSP’s website should also be displayed on the website of the Channel Partner/ Sub-Channel Partner. A new feature can be launched only once it has been duly updated on the website of the Channel Partner/ Sub-Channel Partner;
ii. The TSP should ensure that all service conditions of the TSP’s license, as contained in the agreement between TSP and the Channel Partner, should be incorporated in the agreement between Channel Partner and Sub–Channel Partner; and
iii. Any new tariff product or any change in an existing tariff product can be implemented only at midnight (between 00:00 and 02:00 hours), on the date of launch/ date of change of the tariff product. Further, TSPs continue to be wholly responsible for compliance with the conditions of its license as the Channel Partners and Sub–Channel Partners are unlicensed entities.
Directions to TSPs for Delivering Broadband Services in a Transparent Manner
In supersession of the earlier directions issued on July 27, 2012 relating to provisioning of broadband services, the TRAI has, on October 31, 2016, issued directions to TSPs (providing broadband (wire – line or wireless) services) for delivering broadband services in a transparent manner by providing adequate information to broadband consumers. TSPs have been directed to provide on their website, and also in all advertisements published through any media, information (as prescribed under the directions) with respect to all broadband tariff plans offered under the fair usage policy for fixed and mobile broadband service, respectively. The information to be disclosed includes data usage limit with specified speed, speed of broadband connection up to the specified data usage limit; speed of broadband connection beyond data usage limit, etc. This information is also required to be provided to all new and existing subscribers of the TSPs on their registered email address or mobile number, as specified by the subscriber.
Further, TSPs must ensure that the download speed of broadband service provided to the fixed broadband subscriber is not reduced below the minimum download speed prescribed by Department of Telecommunications (‘DoT’) in any fair usage broadband tariff plan, after expiry of a consumer’s assigned data quota. TSPs should also provide an alert to the subscribers through SMS on their registered mobile number or e-mail, each time when the data usage reaches 50%, 90% and 100% of data usage limit under a consumer’s plan and maintain a portal/ website for the subscriber to access such usage information at any point of time.
Amendment to Mobile Banking (Quality of Service) Regulations, 2012
The Mobile Banking (Quality of Service) Regulations, 2012 (‘Mobile Banking Regulations’) mandate every TSP to facilitate banks and its agents to use SMS, unstructured supplementary service data (‘USSD’) and interactive voice response to provide banking services to its customers and deliver such messages within the time frame prescribed under the Mobile Banking Regulations. By way of this amendment dated November 22, 2016, TRAI has enlarged the scope of the Mobile Banking Regulations by permitting TSPs to also facilitate entities authorised by the RBI for delivery and banking services, to provide USSD based banking and payment services to its customers.
Clarification Regarding the Scope of Permitted Activities by an Infrastructure Provider – I
On November 28, 2016, the DoT issued a clarification stating that Infrastructure Provider – I (‘IP-I’) providers are not permitted to own and share active telecom infrastructure elements (such as antenna, feeder cable, node B, radio access network and transmission systems), and can only install such elements on behalf of telecom licensees. IP-I providers, who have invested in creation of active network infrastructure, have been granted a period of six months from the date of the clarification to either obtain a telecom license and move all such operations involving active network elements under the license for carrying on operations of such infrastructure, or transfer such network elements to a holder of a valid telecom license.
Statutory License for Internet Broadcasting under the Copyright Act, 1957
DIPP issued an office memorandum dated September 5, 2016, clarifying that internet broadcasting companies are also covered, along with radio and television broadcasting organizations, within the statutory licensing regime prescribed under Section 31D of the Copyright Act, 1957 (‘CR Act’). This view was taken based on a broad interpretation of the words “any broadcasting organization desirous of communicating to the public” under Section 31D of the CR Act read with the definition of the term “broadcast” under Section 2(dd) of the CR Act and the definition of the term “communication to the public” under Section 2(ff) of the CR Act.
Revisions to FDI Policy
The Department of Industrial Policy and Promotion (‘DIPP’) has, by way of Press Note No. 5 dated June 24, 2016 (‘Press Note 5’), introduced the following notable amendments to the FDI Policy:
i. 100% foreign direct investment (‘FDI’) is permitted under the approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India;
ii. In the defence sector, FDI beyond 49% is permitted through the approval route, where the investment results in Indian access to modern technology or for other reasons. The erstwhile condition for such FDI, requiring such investment to result in access to ‘state-of-art’ technology, has been dispensed with;
iii. Foreign investment in the civil aviation sector has been liberalised, whereby: (a) 100% FDI is permitted under the automatic route in brownfield and greenfield airport projects; and (b) FDI has been raised to 100% (with up to 49% under the automatic route and 100% through the automatic route for non-resident Indians (‘NRIs’)) for scheduled air transport services, domestic scheduled passenger airlines and regional air transport services. Foreign airlines continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to 49%;
iv. FDI in brownfield pharmaceutical projects has been permitted up to 100%, with 74% under the automatic route. However, a non-compete clause is not permitted in transactions, except in certain special circumstances with the prior approval of the Foreign Investment Promotion Board;
v. Local sourcing norms have been relaxed for three years for entities engaged in single brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ technology, and where local sourcing is not possible;
vi. FDI in private security agencies has been raised to 74%, with 49% permitted under automatic route. It is clarified that the terms ‘private security agencies’, ‘private security’, and ‘armoured car service’ will have the same meaning as ascribed to such terms under the Private Security Agencies (Regulation) Act, 2005. Accordingly, private security agencies would include any person (other than any governmental agency) providing private security services including training of private security guards and deployment of armoured cars;
vii. FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture was permitted up to 100% under the automatic route under controlled conditions. The requirement of ‘controlled conditions’ for FDI in these activities has now been removed; and
viii. 100% FDI in broadcasting carriage services, including teleports, direct to home, cable networks, mobile TV and headend-in-the-sky broadcasting services, has been permitted under the automatic route.
Supreme Court Decision in the Case of Star Sports India Private Limited v. Prasar Bharati and Ors.
On May 27, 2016, SC upheld the order passed by the Delhi High Court against Star Sports India Private Limited (‘Star Sports’), in connection with a dispute relating to the mandatory sharing of feeds for television broadcast of sporting events of national importance on cable or direct-to-home (‘DTH’) networks in India.
Under Section 3 of the Sports Broadcasting Signals (Mandatory Sharing with Prasar Bharati) Act, 2007, a content rights owner or holder and a television or radio broadcasting organisation (‘Broadcaster’) are prohibited from carrying live television broadcast of a sporting event of national importance on cable or DTH networks, unless it simultaneously shares the live broadcasting signals, without its advertisements, with Prasar Bharati to enable it to retransmit the same on its terrestrial and DTH network.
In the present case, live feeds being provided by Star Sports to Prasar Bharati contained commercial enhancements such as ‘logos’ and ‘on-screen credits’ (‘Logos’) inserted by the event organiser, i.e., International Cricket Council (‘ICC’). Star Sports argued that the words ‘without its advertisements’ in Section 3, relates to advertisements inserted by the Broadcaster and not by the event organiser, and therefore the Logos inserted were not prohibited under Section 3.
The SC observed that the word ‘its’ under Section 3 relates to all three categories, viz: (i) content rights owner; (ii) contents holder; and (iii) television or radio broadcasting service provider. Accordingly, the SC held that Star India is required to remove all commercial content from the feed, even if such commercial content has been included by ICC and Star Sports does not earn any revenue from such commercial content, before sharing the feed with Prasar Bharati.
The Telecommunication Interconnection Regulations, 2018
In addition to the existing framework of interconnection in India under the Unified License regime, the Telecom Regulatory Authority of India (‘TRAI’) has, on January 1, 2018, issued the Telecommunication Interconnection Regulations, 2018 which have been made applicable to all telecom service providers (‘TSPs’) in India with effect from February 1, 2018. These regulations, inter alia, provide for important aspects of interconnection, such as, the procedure for entering into interconnection agreements, bank guarantee to be furnished by TSPs prior to entering into agreements, interconnection charges, framework for provisioning of initial interconnection and augmentation of points of interconnection (‘POIs’), disconnection of POIs and financial disincentive on interconnection matters.
Clarification on Direct Carrier Billing for Digital Content
On March 23, 2017, the Department of Telecommunications (“DoT”) has clarified, that mobile subscribers are permitted to download all paid digital content (such as e-books, applications, etc.) through their mobile phones, and make payments for such content using pre-paid account balance or post-paid bill payment methodology. The DoT has prescribed that the maximum value of such payments will be INR 20,000 (approx. USD 310) per transaction. Further, the DoT has also clarified that such purchase of digital content will not be treated as a pass-through revenue for the purpose of computing the adjusted gross revenue for licence fee and spectrum usage charge.
Amendment to the Unified Licence Agreement
The DoT has, by way of notification dated June 23, 2017, amended the unified license in respect of the ‘Technical and Operating Conditions’ for ASP. Pursuant to the amendment, the Telecom Service Provider (‘TSPs’) can deploy any of its equipments anywhere in India (whereas earlier the TSPs could only deploy the IP based Next Generation Network, Media Gateway Controller, Soft Switch: (i) within the geographical boundaries of any of the authorised service area, provided the TSP had Access Services authorisation, or (ii) anywhere in India, if the TSPs had authorisation for National Long Distance (‘NLD’)/International Long Distance (‘ILD’) service), subject to interconnection points being located and operated in the service areas for inter operator, inter service area, NLD and ILD calls and meeting security conditions as mentioned in the licence. Further, the amendment has also deleted the requirement to intimate the DoT of the commissioning of the abovementioned equipment.
TRAI recommendations on “Issues relating to Uplinking and Downlinking of Television Channels in India”
The Telecom Regulatory Authority of India has on June 25, 2018, issued Recommendations on Issues relating to Uplinking and Downlinking of Television Channels in India. These recommendations have been issued with a view to review and amend the guidelines relating to the uplinking and downlinking of satellite television channels issued by the Ministry of Information & Broadcasting in 2011. The recommendations provide for various changes in the existing framework of uplinking and downlinking regulations including in relation to relaxations in security clearance requirements, streamlining of the application procedures overall and regulation of transfers of uplinking and downlinking permissions.
Amendment in relation to Cap for Spectrum Holding
The Department of Telecommunications (‘DoT’) has, by way of a circular dated May 30, 2018 amended the guidelines for transfer/merger of various categories of telecommunications service licenses/authorization under unified license on compromises, arrangement and amalgamation of companies dated February 20, 2014.
Pursuant to this amendment, DoT has removed the cap of 50% in a particular spectrum band for access services and increased the cap on the total spectrum holding by an entity to 35% of the total spectrum assigned for access services, from the previous cap of 25%. The revised overall cap also applies to entities resulting from implementation of a scheme of compromise, arrangement or amalgamation and merger of licenses in a service area.
However, the spectrum holding cap for 700 MHz, 800 MHz and 900 MHz bands (‘Sub 1 GHz Bands’) is different. DoT has prescribed that the combined spectrum holding of an entity must not exceed 50% of the total spectrum assigned in the Sub 1 GHz Bands. However, no such limit has been prescribed for individual or combined spectrum holding of an entity above the 1GHZ band.
DoT has also notified an option for telecom licensees to choose higher number of installments for deferred payment liabilities in respect of the award of spectrum in 2012, 2013, 2014, 2015 and 2016. There is no change or modification in the moratorium period for payment of deferred payment liabilities and the instalments already paid.
Instructions for implementing Restrictive Feature for SIMs used only for Machine-to-Machine communication service
DoT released instructions on May 16, 2018 in relation to SIM cards used for Machine-to-Machine (‘M2M’) communication services (‘M2M SIMs’), along with related Know Your Customer instructions for issuing M2M SIMs to entities providing M2M communication services under the bulk category and instructions for Embedded-SIMs.
The entity providing M2M services may require SIMs from a telecom licensee authorized by the DoT for the purpose of providing connectivity for M2M services. The instructions from the DoT clarify that the ownership of all such M2M SIMs must be with the entity providing the M2M services. Further, in case of a sale or transfer of devices having M2M SIMs, the entity providing M2M services will be responsible for (i) intimating the telecom licensee(s) from which the M2M SIMs are obtained of the details of persons to whom such devices are transferred; and (ii) fulfilling the subscriber verification norms. The telecom licensees are also required to regularly update these details in their database.
 Machine to Machine (M2M) Communication Services means services offered through a connected network of objects/devices with identifiers in which Machine to Machine (M2M) communication is possible with predefined back end platform(s) either directly or through some gateway. ‘M2M Communication’ refers to a communication between two or more entities (object/devices/things) based on existing and evolving communication technologies that do not necessarily need any direct human intervention.
Indian Telegraph Right of Way Rules, 2016
The DoT has, by way of a memorandum dated May 22, 2018, extended the benefit of the Indian Telegraph Right of Way Rules, 2016 (‘ROW Rules’) to Infrastructure Providers Category I (‘IP-1’), by clarifying that under clause 2(d) of the ROW Rules, the term “licensee” includes IP-1s authorised to establish and maintain assets such as dark fibres, right of way, duct space and tower for the purpose of granting the same on lease/ rent/ sale basis to the telecom services providers licensed under Section 4 of the Indian Telegraph Act, 1885 on mutually agreed terms and conditions.
The erstwhile ROW Rules did not cover IP-1s within the ambit of ROW Rules. However, the right of way was effectively permitted to IP-1s in their respective registration certificate(s) creating ambiguity. With the aforesaid clarification provided by DoT, this ambiguity has been removed.
Clarification and Amendments regarding Internet Telephony
The DoT issued a clarification on June 19, 2018 stating that internet telephony service is an un-tethered service from the underlying access network and such service can be provided by access service provider to the customer using the internet services provided by other service providers. As a step further on this clarification, DoT has amended the telecom licenses, including the unified license, to incorporate certain provisions in relation to internet telephony service. Some of the salient features of the amendment are:
i. internet telephony calls originated by international out roamers from international locations need to be handed over at international gateway of licensed international long distance operators. The international termination charges must be paid to the terminating access service provider;
ii. the mobile numbering series should be used for providing internet telephony by a licensee. The same number may be allocated for cellular mobile service as well as internet telephony service;
iii. telecom licensees are required to comply with all the interception and monitoring related requirements as specified in the respective licence (as amended from time to time);
iv. IP address assigned to a subscriber for this service must conform to IP addressing scheme of Internet Assigned Numbers Authority; and
v. the licensees providing internet service may facilitate access to emergency number calls using location services. This is not a mandatory requirement presently.
Blockchain & Cryptocurrency Regulation 2019 | India
In India, cryptocurrencies have 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 ‘Buysellbitco.in’ and ‘INRBTC’ temporarily shut operations. The Enforcement Directorate (“ED”, which enforces exchange control regulations) undertook raids on the proprietor of ‘Buysellbitco.in’ 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 1, 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 with any licence or sanction to transact with cryptocurrency.
It should be noted that the government does distinguish between Bitcoin and its underlying technology, i.e., blockchain. 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 blockchain technology by banks favourably. 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 had 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 blockchain technology in payment systems.
The Budget Speech has several times been cited as the precursor to regulation of cryptocurrency in India, although it is certainly not the sole reflection of the Indian government’s attitude to cryptocurrency. Since the 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, in 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 given 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 banned cryptocurrency in India per se, it has certainly made it quite difficult for participants to conduct transactions 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 stance 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 3, 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 indulge 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 them 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 blockchain secure;
(iv) bitcoins may be used for trade and other financial activities without accountability, having an effect 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 on their businesses.
To 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 publicly 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 the: (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 recognise legal tender.
Per section 26 of the RBI Act, “[E]very 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 may 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 schemes typically use specialised software installed on 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 effect electronic funds 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 is 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 – Liberalised Remittance Scheme dated January 1, 2016, an Indian resident individual may remit up to US$ 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 specialised 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; or
(xii) registration/subscription/membership fees to international organisations.
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, payment 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 to be 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 does not seem to have hindered industry participants from applying creative alternatives to capitalise 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 blockchain and cryptocurrency, evidenced by various banks exploring the use of blockchain 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 recognises the need for such technology by providing for regulation similar to the United States or Singapore governments which 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.