CRYPTOCURRENCY – Approach Towards Adoption

by Unnat Akhouri

‘Ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese’

Chris Skinner

It has been rightly identified by the above quote that implementing the technological advancements in the financial sector is imperative to provide a more sustainable environment for innovative ideas. One of the major such innovations has been the introduction of Cryptocurrency, often confused with digital currency. In reality, cryptocurrency is a subset of digital currency that encompasses all the online settlement and transactions (centralized as well as decentralized).

Indian Approach to Cryptocurrency

Although India has been quite proactive in adapting the FinTech revolution such as UPI and KYC, there has been a sceptical approach towards cryptocurrency. Taking into account the increased prominence of Cryptocurrency and the issues associated with it, the Reserve Bank of India released a circular[1] in April 2018 directing all the financial institutions to refrain from carrying any transaction or dealing with these cryptocurrencies. This step was taken to address the existing questions on the legality of virtual currencies and the potential disruption which these currencies can cause to the traditional financial institutions. This mental state has been aptly identified by the following quote-

‘Bitcoin will do  to the banks what email did to the postal industry’– Rick Falkvinge

However, RBI failed to acknowledge the fact that adapting to the technological advancements will prove to be a positive step and has the potential of transforming the existing financial institutions, rather than disrupting them. The postal industry is still sustaining successfully with the service of sending goods and letters. These technological innovations bridge the existing gaps rather than hampering the existing structure. This happened to be the vision of the Internet and mobile association of India, which went against the above-said step taken by RBI before the three-judge bench comprising of Justice RF Nariman, Aniruddha Bose, and V Ramasubramanian. IMAI argued that the ban was completely on a moral basis and there happened to be no proper study conducted on the issue. Hence, it was altogether an arbitrary and unjust move which restricted the deployment of the new-age technology.

Supreme Court, on hearing both sides and considering each merit, held the RBI’s circular as unconstitutional as there was no such piece of legislation in India that restricted the use of cryptocurrency[2]. Test of Proportionality was showcased in the decision, according to which, the court can quash the steps (which are although under the powers of a body) if there is no reasonable nexus between the step taken and the objective intended.

This decision happened to be one of the landmark events in the world of cryptocurrency. But the struggle towards a liberal approach and encouragement of these technological advancements didn’t end here. Although the Supreme Court has allowed the trading of cryptocurrency, there is still a lack of proper regulatory framework which specifically addresses the circulation and trading of such virtual currencies. The absence of a comprehensive set of regulations pertaining to cryptocurrency has been a major obstacle in India’s way to become a global leader in adopting new-age innovations.

Regulatory Sandbox – Learning

In layman’s language, Regulatory sandbox is a scheme for providing a conducive environment to the new-age technological advancements, which is comparatively lesser stringent in terms of regulations, maybe for a specified time limit. This lesser-regulated environment provides them a chance to test all their functions and potentials while working under the supervision of supreme authority, as well as give the regulators a chance to perform a comprehensive risk analysis[3]. This was first introduced in the United Kingdom by Financial Conduct Authority in 2015. This was done to provide the FinTech firms a less-stringent environment to let them explore their potential in proper supervision. This paved the way for some other liberal steps by nations to provide a push to these innovative technologies.

One of the most liberal approaches was adopted by Singapore’s Monetary Authority of Singapore (MAS), which established the ‘FinTech and Innovation Group’ for better management and approach in dealing with these innovations. It went on setting up a regulatory sandbox to facilitate the firms with a time frame to work with softer regulations. One of the notable steps by MAS is discarding the concept of ideas ‘Front-Running’ the innovations. This means that subjecting the innovation to the specific regulations shall be done only after a thorough analysis of the risks and potential loopholes. If the risks cross a certain threshold, then only it will be subjected to the safety rules.

The approach used is basically ‘mitigating the existing risks and barring the evolution of other risks in the future’. Meanwhile, RBI has launched a sandbox for providing a softer environment to the FinTech innovations, it holds the vision that a bit more regulations would provide credibility and ensured standards to the new-age firms, who are aiming to attract the investors. This sandbox includes all such innovations ranging from UPI to the blockchain technology, except cryptocurrency, due to its resistive approach. However, after the SC judgment, the NASSCOM and Payment Council of India, along with other representatives of the Cryptocurrency industry are asking for its inclusion in order to bring these facilities in the mainstream market as soon as possible.

Some Key Takeaways

Even after cryptocurrency has gained so much prominence over the last decade, the legal status of cryptocurrency still remains unclear. Although the act of exchanging cryptocurrency has been allowed in most of the nations, they aren’t considered as legal tenders. However, there are certain approaches apart from the regulatory sandbox, as adopted by other nations to provide some clarity on the legal status of cryptocurrency-

Bringing cryptocurrency under the purview of goods initially till the time it is not recognized as a legal tender. This act will provide some legal recognition (by attracting goods and services tax) which will, in turn, push cryptocurrency in the mainstream market, as done by Singapore’s MAS.

Regulating the trading and exchange of cryptocurrency by a central organization, as done by Australia and Japan. This regulating authority, however, will only deal with the auditing and verification process of transactions carried out with cryptocurrency.

However, it shall be made sure that the Decentralized structure is not disrupted by bringing it under the complete control of governmental agencies. This flaw has been witnessed by the approach of Ecuador where it has banned all cryptocurrencies except for the one issued by their central government.

Certain small initiatives shall be taken up by to bring the cryptocurrency in regular use. For example- Switzerland’s city has allowed the payment towards public services by the means of bitcoin. This has been a smart move since the transaction is done with the city government itself, which makes this supervised.

Cryptocurrency has the potential for being used to serve illegitimate purposes including terrorist funding and money laundering. Hence, proper measures shall be adopted including but not limited to AML/KYC and providing a proper license to the exchanges (in order to avoid illegal operations).

In furtherance to the above discussion, we can safely conclude that the government has to draw a fine line between promoting cryptocurrency with a regulated structure and regulating them entirely. Moreover, there needs to be flexibility in the approach by RBI towards these innovations in the FinTech industry to match up with the rapid digitization.

Views are personal.

Image credits: Vectra AI


Unnat Akhouri is currently pursuing law from National Academy of Legal Studies and Research (NALSAR), Hyderabad


[1]Reserve Bank of India, Notification, Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154(Issued on April 6, 2018)

[2] Internet and mobile association of India vs Reserve Bank of India, Writ Petition (civil) No. 528 of 2018

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