General legal and regulatory framework

Legal framework

What legal framework governs cryptoassets? Is there specific legislation governing cryptoassets and businesses transacting with cryptoassets?

At present, there is no legal framework governing cryptoassets or cryptocurrencies (a term used interchangeably with terms such as ‘virtual currencies’). Despite the vacuum in legislation, regulators such as the Reserve Bank of India (RBI) have issued various cautionary circulars deterring individuals from dealing in cryptoassets. In 2018, pursuant to its circular of 6 April 2018 (the RBI Circular), the RBI banned all RBI-regulated entities (eg, banks, financing institutions and non-banking financial institutions) from dealing in cryptoassets. While this circular does not ban cryptoassets per se, it has blocked any financial dealing contemplated by a buyer, seller or trader of cryptoassets. By contrast, regulators such as the Securities Exchange Board of India (SEBI) have remained silent on regulating cryptoassets.

Given the lack of certainty, market participants have filed several petitions before the Supreme Court of India challenging the constitutionality of the RBI Circular and seeking clarity on the government’s stance on the legality of cryptoassets and cryptocurrencies in India. In response to these petitions, in July 2019 the government released draft legislation (Banning of Cryptocurrency and Regulation of Official Digital Currency Act 2019), which seeks to ban any person from ‘mining, generating, holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrency in the territory of India’.

Under the draft legislation, ‘cryptocurrency’ means any information, code, number or token generated through cryptographic means or otherwise that provides a digital representation of value that:

  • may be exchanged, with or without consideration, with the promise of having inherent value in a business activity; and
  • includes the risk of loss or expectation of profits or which functions as a store of value.

The only exception carved out regarding cryptocurrency is the use of its underlying technology for experimental, research or educational purposes, provided that the cryptocurrency is not used to make or receive payment. Violation of the draft legislation may result in up to 10 years’ imprisonment.

While Parliament has yet to enact the draft legislation, it is likely that any application of cryptoassets or cryptocurrency to undertake financial activities or operations in the payment ecosystem are prohibited.

Government policy

How would you describe the government’s general approach to the regulation of cryptoassets in your jurisdiction?

Since the 2013 boom in cryptoasset trading on the open market, the RBI and the Income Tax Department have been swift to shut down business operations involving cryptoassets. However, the government has switched between a negative and an agnostic approach. In his 2018 budget speech the finance minister announced that ‘the government does not consider cryptocurrencies as legal tender or coin, and will take all measures to eliminate the use of crypto assets in financing illegitimate activities or as part of the payment system’. This approach is also reflected in the draft legislation before Parliament, which explicitly bans the use of cryptoassets.

By contrast, in September 2019 a report released by a committee set up by the Ministry of Finance (Department of Economic Affairs) acknowledged that ‘Blockchain and Initial Coin Offerings (ICOs), are revolutionising the global fintech landscape’ and distinguished categories of cryptocurrency, specifically utility and security tokens. Notably, the report made no policy recommendations on cryptocurrency or blockchain, unlike other aspects of fintech (eg, agritech and know your customer).

While the Finance Ministry remains cautious, the RBI is clearly opposed to the use of cryptocurrency, as evidenced through its press releases since 2013 and the RBI Circular, which prohibits financial institutions from dealing in cryptocurrency and any relaxation on that ban within the regulatory sandbox.

Regulatory authorities

Which government authorities regulate cryptoassets and businesses transacting with cryptoassets?

No specific government authority regulates cryptoassets and businesses transacting in cryptoassets. However, the Ministry of Finance (Department of Economic Affairs), the Ministry of Electronics and Information Technology, the SEBI and the RBI have been instrumental in drafting the proposed legislation to ban cryptoassets. Accordingly, these government entities and regulators have the authority to regulate cryptoassets and businesses transacting with cryptoassets.

Regulatory penalties

What penalties can regulators impose for violations relating to cryptoassets?

At present, any entity regulated by the RBI which deals in cryptoassets would be in contravention of the RBI Circular and thereby liable for financial penalties. Despite the vacuum in legislation, the Income Tax Department has in the past issued notice or initiated proceedings which have required businesses dealing in cryptoassets to shut down. Further, criminal prosecutions may be initiated under the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies, which could lead to a maximum of 10 years’ imprisonment and monetary penalties being imposed.

Court jurisdiction

Which courts have jurisdiction over disputes involving cryptoassets?

No special court or tribunal exercises jurisdiction over disputes involving cryptoassets. Absent an express or implied bar and depending on the financial and territorial nature of a dispute (ie, civil or criminal), courts and tribunals can exercise jurisdiction in addition to an appeal lying before the State High Court and Supreme Court of India.

Legal status of cryptocurrency

Is it legal to own or possess cryptocurrency, use cryptocurrency in commercial transactions and exchange cryptocurrency for local fiat currency in your jurisdiction?

While there is ambiguity on the legality of cryptocurrencies, pursuant to the RBI Circular (ie, restricting any RBI-regulated entity such as banks and financial institutions from dealing in cryptocurrency), no exchange of cryptocurrency for local fiat currency can be affected. Further, in the event that the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies is enacted, no person can hold cryptocurrency unless to use the underlying technology or process for experimental, research or educational purposes, provided that the cryptocurrency is not used to make or receive payment in such activity.

Fiat currencies

What fiat currencies are commonly used in your jurisdiction?

The national currency in India is the rupee issued by the RBI. Any foreign currency earned through trade must be converted into rupees in accordance with foreign exchange regulations at the applicable conversion rate and may be used as valid legal tender in India.

Industry associations

What are the leading industry associations addressing legal and policy issues relating to cryptoassets?

Several associations, including the Blockchain and Virtual Currency Association, the Blockchain Foundation of India, the Digital Asset and Blockchain Foundation of India and the Internet and Mobile Association of India which include industry participants and government representatives, have recently committed to examine legal and policy issues relating to cryptoassets.

Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

Despite remaining silent on the applicability of investment laws to cryptoassets, the Securities Exchange Board of India (SEBI) has played a vital role in finalising the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies. As stated above, the draft legislation tabled before Parliament, explicitly bans any person from dealing in cryptoassets (agnostic of any specific attribute of such cryptoasset), including among other things as a means for investment. In light of the blanket ban on the use of cryptoassets, regulators have not sought to identify any attributes that would distinguish its various use cases, including as a security. (See also ‘Legal framework’.)

Investor classification

How are investors in cryptoassets classified and treated differently?

Investors in cryptoassets are not classified or treated differently. (See also ‘Regulatory threshold’.)

Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

At present, there are no rules or restrictions on the conduct of and investment in ICOs. While the facets of an ICO remain untested in an Indian legal context, in the event that funds are collected to obtain a ‘coin’ (ie, a representation of value or right) to be redeemed in the future, such collection of funds, being unregulated, could contravene the Banning of Unregulated Deposit Schemes Act 2019. Such a contravention could result in imprisonment and a financial penalty. The Inter-ministerial Committee Report and Draft Bill on Virtual Currencies explicitly prohibits the use of cryptocurrency as a medium of exchange, store of value or unit of account or use as a means to raise funds. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

Irrespective of the nature of offerings, including a security token offering, a collection of funds for such a scheme could be deemed as an unregulated deposit and result in imprisonment and financial penalties under the Banning of Unregulated Deposit Schemes Act 2019. In light of the present legislative climate, it seems unlikely that the SEBI would equate a security token to a security, in light of its role in drafting the proposed legislation banning cryptocurrency, including its use to raise funds or in financial transactions or investment schemes. (See also ‘Legal framework’, ‘Regulatory threshold’ and ‘Investor classification’.)

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

Stablecoins are akin to a hybrid cryptocurrency, created as a reaction to the unreliable nature of most cryptocurrencies, specifically bitcoin, the valuation of which is largely based on speculation. Unlike cryptocurrency, the value of stablecoins is based on an underlying asset, including fiat currencies. Irrespective of the underlying value therein, the issue of and investment in stablecoins would potentially be prohibited under the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies and its definition of ‘cryptocurrency’. (See also ‘Security token offerings’.)

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

The principle behind an airdrop is to increase demand and the value associated with cryptoassets by distributing the same to investors for free. Increasingly, cryptocurrency has been dispensed to the wallet addresses of potentially aware or unaware investors, which are deemed owners of said assets once they are aware of the airdrop. Indian regulators and legislatures have not yet examined the transfer of cryptoassets; however, under the current legislative scenario, when an investor becomes aware of having cryptoassets (ie, it is their deemed owner), they would be subject to the proposed ban to holding or possessing cryptoassets. An airdrop could therefore inadvertently lead to the potential holder becoming liable for penalties, including imprisonment.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

Given the legislative proposal to equate any activity involving cryptoassets with illegal activity, the advertising or marketing of cryptoassets could fall foul of generally accepted advertising standards as well as applicable criminal laws depending on the nature of loss suffered by viewers of such advertising. Such a violation could thereby lead to pecuniary penalties and imprisonment.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

Such activity could potentially be deemed illegal; however, at present, there are no regulations governing investors trading in initial offerings of cryptoassets. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

Crowdfunding is in essence the collection or pooling of funds through small financial contributions from multiple individuals for a specific project, venture or social cause. While crowdfunding is not regulated per se, a subset of crowdfunding (ie, peer-to-peer lending of fiat currency by regulated entities) is a permitted legal activity regulated by the Reserve Bank of India. Given that an offering of cryptoassets is a collection of fiat currencies for a potentially illegal activity (ie, ‘dealing in cryptocurrency’), such an offering could fall foul of the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies and accordingly be deemed illegal.

Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

At present, there are no regulations applicable to cryptoasset transfer agents and share registrars. (See also ‘Legal framework’ and ‘Regulatory threshold’.)

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

Any party that attempts to or knowingly assists in any process or activity connected with the proceeds of a crime, including its concealment, possession, acquisition or use will be guilty of money laundering.

Although offering cryptoassets is not an offence at present, given the draft proposal tabled before Parliament it is likely that any party participating in an offering of cryptoassets would fall foul of anti-money laundering laws. Any party found guilty of such an offence may face imprisonment and a fine. In order to prevent money laundering activities, regulated entities (eg, banks, stock exchanges, financial institutions or parties carrying out designated business) must undertake know-your-customer (KYC) checks. KYC obligations include the collection of personal details such as an individual’s personal account number and unique identification number.

A key concern for businesses offering cryptoassets is the likelihood that they will act as a vehicle for money laundering activities in India. As a result, such businesses undertake extensive KYC checks despite not being legally mandated to do so.

Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

As a member of the Financial Action Task Force, India has set up the Financial Intelligence Unit – India (FIU-IND) to be its central national agency responsible for receiving, processing, analysing and disseminating information relating to suspicious financial transactions. 

Pursuant to anti-money laundering legislation, reporting entities must provide information regarding cash transactions exceeding permitted values, suspicious transactions and cross-border transactions exceeding specified thresholds. In the event that a regulated entity (eg, a bank, financial institution or stock exchange) receives information regarding the suspicious transaction of cash that breaches prescribed thresholds, the FIU-IND may take appropriate action (including criminal proceedings) against the parties involved in such transaction irrespective of whether it concerns cryptoassets.

Cryptoasset trading

Fiat currency transactions

What rules and restrictions govern the exchange of fiat currency and cryptoassets?

Pursuant to the Royal Bank of India’s circular of 6 April 2018 (the Reserve Bank of India (RBI) Circular), fiat currencies cannot be exchanged for cryptoassets. (See also ‘Legal framework’.)

Exchanges and secondary markets

Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?

Investors will be unable to execute a trade of cryptoassets for fiat currency pursuant to the RBI Circular. Absent an exchange of fiat currency, investors can execute pure cryptoasset trades. Based on the proposed legislation tabled before Parliament, a cryptoasset exchange executing a pure cryptoasset trade could also result in penalties given that a ban has been proposed on any ‘dealing’ of cryptoassets, including via an exchange. (See also ‘Legal framework’.)

Custody

How are cryptoasset custodians regulated?

At present, cryptoasset custodians are unregulated in India, although their operations could be deemed illegal after the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies is enacted. (See also ‘Legal framework’.)

Broker-dealers

How are cryptoasset broker-dealers regulated?

While cryptoasset broker-dealers are not regulated at present their operation would be illegal under the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies being enacted.

Decentralised exchanges

What is the legal status of decentralised cryptoasset exchanges?

At present, cryptoasset exchanges (centralised or decentralised) remain unregulated and this may affect the trade of cryptoassets for cryptoassets. However, on the enactment of the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies, such an exchange would be deemed to be an illegal activity and prohibited from affecting any cryptoasset trade. (See also ‘Exchanges and secondary markets’.)

Peer-to-peer exchanges

What is the legal status of peer-to-peer (person-to-person) transfers of cryptoassets?

A parallel is often drawn between cryptocurrency and prepaid instruments that facilitate the exchange of funds between peers. Such an activity is regulated under the Payment and Settlement Act 2007 and the RBI Master Directions on Issuance and Operations of Prepaid Payment Instruments of 11 October 2017. However, prepaid instruments have intrinsic value and are ‘loaded or reloaded with cash’, unlike cryptocurrencies, which cannot have any intrinsic value per se, but their value is contingent on its demand and supply. As cryptocurrencies do not fall under the above legislation, a peer-to-peer transfer of cryptoassets would arguably be permitted. However, such a transfer could potentially be deemed illegal given that the Inter-Ministerial Committee Report and Draft Bill on Virtual Currencies seeks to prohibit the ‘transfer’ of cryptoassets.

Trading with anonymous parties

Does the law permit trading cryptoassets with anonymous parties?

The trading of cryptoassets, irrespective of whether such party is identified or anonymous, is potentially illegal, given that no legislation prohibiting it exists. In light of cryptoassets being commonly viewed as a front to conduct suspicious transactions, a cryptoasset trade with anonymous parties, if falling under the radar of the Financial Intelligence Unit set up under FATF, could attract penal consequences. (See also ‘Legal framework’.)

Foreign exchanges

Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?

At present, foreign cryptocurrency exchanges facilitating cryptocurrency-to-cryptocurrency trades are not subject to laws or regulations in India. 

Under what circumstances may a citizen of your jurisdiction lawfully exchange cryptoassets on a foreign exchange?

At present, an Indian citizen can lawfully exchange cryptoassets for other cryptoassets on a foreign exchange as long as it does not involve the exchange of fiat currency in light of prevailing foreign exchange norms that permit only cross-border remittances of permissible activities. Further, given that the Reserve Bank of India has issued a circular prohibiting any dealing in cryptoassets, this prohibition also potentially extends to any cross-border dealings in cryptoassets.

Taxes

Do any tax liabilities arise in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?

Despite the Indian tax authorities being proactive in initiating action against businesses involved in the exchange of cryptoassets for other cryptoassets or fiat currencies, the basis for such action must be established. Since the finance minister’s budget speech of 2018-2019, which declared cryptocurrency to be illegal tender, the Indian tax authorities have issued notices to businesses failing to declare profit earned from cryptocurrencies. Given that the legal status of cryptoassets is yet to be determined, such an earning could arguably be deemed as recurring or non-recurring income earned from other sources, which would require the payment of income tax by the individual or organisation in question.

Cryptoassets used for payments

Government-recognised assets

Has the government recognised any cryptoassets as a lawful form of payment or issued its own cryptoassets?

The government has not recognised cryptoassets as a lawful form of payment. On the contrary, the government and regulators have been vocal in their objection to the use of cryptoassets as a form of payment. In a push to eradicate the use of such assets, the government has contemplated the issuance of a ‘digital rupee’. Per public reports, the digital rupee would act as a digital representation of fiat currency issued within the monetary framework of the Reserve Bank of India.

Bitcoin

Does Bitcoin have any special status among cryptoassets?

No. At present, bitcoin has no special status among cryptoassets in India.

Banks and other financial institutions

Do any banks or other financial institutions allow cryptocurrency accounts?

The Reserve Bank of India has categorically prohibited financial institutions from dealing in cryptoassets pursuant to its circular of 6 April 2018. As a result, it is unlikely that a bank or financial institution would allow any person to open a cryptocurrency account.

Cryptocurrency mining

Legal status

What is the legal status of cryptocurrency mining activities?

The mining of cryptocurrency essentially requires the ‘miner’ to solve puzzles and add transactions to distributed ledger technology. This activity is integral to the blockchain and rewards the miner ordinarily with cryptocurrency. Cryptocurrency mining is often viewed as akin to a regulator issuing fresh currency within the financial market. Unlike significant discussion being centred on the use of cryptocurrency, there is limited public discussion on mining. While the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies seeks to ban the mining of cryptocurrency, mining as an activity has yet to be legally evaluated.

Government views

What views have been expressed by government officials regarding cryptocurrency mining?

Government officials have remained silent on cryptocurrency mining; however, given their cautious-to-negative approach to cryptocurrency, the mining of cryptocurrency would potentially be viewed in a similar light. In fact, despite public discussion of cryptocurrency mining, the Inter-ministerial Committee Report and Draft Bill on Virtual Currencies explicitly prohibits cryptocurrency mining.

Cryptocurrency mining licences

Are any licences required to engage in cryptocurrency mining?

At present, licences are not required to engage in cryptocurrency mining.

Taxes

How is the acquisition of cryptocurrency by cryptocurrency mining taxed?

The acquisition of cryptocurrency by cryptocurrency mining is not currently taxed and will depend on the outcome of cryptocurrency legislation and whether it is considered a legal asset.

Blockchain and other distributed ledger technologies

Node licensing

Are any licences required to operate a blockchain/DLT node?

No licences are required in India to operate a blockchain/DLT node.

Restrictions on node operations

Is the operation of a blockchain/DLT node subject to any restrictions?

The government has been proactive in its push for businesses to innovate using blockchain/DLT and has accordingly imposed no legal or regulatory restrictions on the operation of a blockchain/DLT node.

DAO liabilities

What legal liabilities do the participants in a decentralised autonomous organisation (DAO) have?

Decentralised autonomous organisations are organisations whose decisions are made electronically by written computer code or through the votes of members. It is a system wherein hard-coded rules define which actions an organisation will take. The organisation seeks to remove the ‘human element’ behind decisions and base the same on code. While the liabilities from such organisations remain untested in India, ultimately the nexus between the organisation and the ultimate creator or controller will need to be examined. For instance, companies in India are legal entities, and their directors or individuals vested with the responsibility to manage the company are deemed liable for contravention of the law. The same parallel may be drawn to DAOs.

DAO assets

Who owns the assets of a DAO?

The lack of control by a human element is a cornerstone of DAOs, but ownership is based on the parties that have ultimate influence over a DAO. For instance, if multiple parties contribute towards a DAO, each party could potentially have a right to its assets. Ordinarily, such parties would execute an agreement that identifies their contribution to the DAO and accordingly distribute the assets among them.

Open source

Is DLT based on open-source protocols or software treated differently under the law than private DLT?

The legislature has yet to address the legal and regulatory treatment and distinction between different types of DLT.

Smart contracts

Are smart contracts legally enforceable?

Unlike digital agreements, smart contracts are a series of codes or functions that facilitate the execution of an agreement. Distinct from the terminology, a smart contract can be equated with any other computer program. In other words, a smart contract facilitates the underlying activity that a legal contract seeks to enforce. Therefore, arguably if an agreement is legally enforceable, the smart contract seeking to execute the legal agreement is also enforceable.

Patents

Can blockchain/DLT technology be patented?

The popularity of blockchain/DLT technology has grown exponentially in India, among not only government entities, but also burgeoning start-ups. In India, patents are obtained pursuant to the Patent Act 1970, which requires an invention (ie, a new product or process) to involve an inventive step and be capable of industrial application. An inventive step essentially requires the invention to involve technical advancement over existing knowledge or have economic significance, which are not obvious to an otherwise skilled person in the relevant field. At first glance, blockchain/DLT technology appears an unlikely candidate for patentability. However, a key roadblock to any technological invention obtaining a patent is the legislation’s exclusion of a ‘per se computer program’. As blockchain/DLT technology is primarily a set of computer programs or codes, it may provide the author with copyright but prove difficult to obtain a patent.

Update and trends

Recent developments

Are there any emerging trends, notable rulings or hot topics related to cryptoassets or blockchain in your jurisdiction?

Unlike the resistance to cryptoassets, blockchain has recently gained much traction. The government report which forms the basis for the proposed legislation banning cryptocurrency acknowledges that blockchain will play a major role in the new digital age and explicitly excludes such technology from the purview of the ban. Private entities and government institutions have aggressively pushed for innovation using this technology. Noteworthy developments include the Andhra Pradesh government developing and using blockchain in banking and finance as well as exploring the use of smart contracts. The defence minister has also declared that blockchain has ‘revolutionised the existing paradigm of warfighting’ and that the ministry is seeking to employ this technology to better safeguard the security of critical infrastructure. In its white papers, the Reserve Bank of India has consistently highlighted the various uses of blockchain and encouraged its deployment in the financial services market. Given the vote of confidence, the Indian market is keenly following the policy initiatives that the government may potentially release in the coming years.

Law stated date

Correct on

Give the date on which the above content is accurate.

15 November 2019.