The risk relating to FEMA has been highlighted by the RBI ample number of times. In P2P transfers, while the exchange provides a portal to match the orders of a seller and buyer, the consideration would flow directly from the buyer to the seller without the exchanges being an intermediary for this leg of the trade. The exchanges would only act as an intermediary for the storing the VCs till the time the transfer of the consideration from the buyer to the seller is complete. In other words, the exchanges act as an escrow agent for the transaction between the buyer and the seller. The buyers in the P2P transaction transfer the consideration directly to the seller’s bank account. The exchanges allowed their customers to transfer VCs to foreign wallet addresses, even before the issuance of the Circular, exposing the customers to the risks of violating FEMA, AML/CFT guidelines.[1]

This means the RBI recognizes that the transfer of cryptocurrencies in the wallets, held by the foreign exchanges or persons, or held on the foreign servers would be brought under the purview of the same. The entities facilitating such transactions also come under the ambit of the FEMA. For the question pertaining to FEMA, we would be referring to section 3 of FEMA which reads as under:

“Dealing in foreign exchange, etc.—Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall—

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

(b) make any payment to or for the credit of any person resident outside India in any manner;

(c) receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner. Explanation.—For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorised person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorised person;

(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Explanation—For the purpose of this clause, “financial transaction” means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.”[2]

In some cases, the cryptocurrencies might be deemed to be securities, but they would always fall under the ambit of assets.

As per the definition of “Asset” given in the 10^th edition of Black Law Dictionary, asset means an item that is owned and has value. It is pertinent herein to note that cryptocurrencies are assets which is owned by a person on the payment of its price and therefore, buying of cryptocurrencies in India and sending the same to another Country would fall under the ambit of Section 3 clause (d) and is prohibited, as there is no rule or regulation in force permitting the same and RBI has not given any permission for such transactions.

Also, Supreme Court iterated that “…We are not in favour of general bans on cryptocurrencies or barring the interaction between cryptocurrency business and the formal financial sector as a whole, such as is the case in China for example. That would go too far in our opinion. As long as good safeguards are in place protecting the formal financial sector and more in general society as a whole, such as rules combating money laundering, terrorist financing, tax evasion and maybe a more comprehensive set of rules aiming at protecting legitimate users (such as ordinary consumers and investors), that should be sufficient.”[3]

Therefore, in our opinion dealing in cryptocurrencies may lead to violations under

FEMA.

[1] Supra note 11

[2] Section 3, FEMA 1999

[3] Supra note 3

By

Siddharth Dalmia, B.Tech.(DAIICT)

Email:dalmiasiddharth1994@gmail.com