Legality of CrytoCurrency Exchanges in India

There is no statutory prohibition on the operation of exchanges in India. Neither has the position regarding the legality of bitcoins and other cryptocurrencies specifically addressed. In IMAI vs RBI[1], the Court looked at the draft bill which has been proposed (but not passed) by the legislature, namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019[2]. The Court held that the stand of the legislature cannot be gauged from this bill as the bill, on the one hand, imposed criminal liabilities on the users of cryptocurrencies and criminalized certain activities like mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. On the other hand, the bill paved the way for the government to introduce its own digital currency, namely “Digital Rupee,” by the Central Bank. The Court also emphasized that The Crypto-token Regulation Bill, 2018[3] initially recommended by the Inter-Ministerial Committee contained proposals (i) to prohibit persons dealing with activities related to crypto tokens from falsely posing these products as not being securities or investment schemes or offering investment schemes due to gaps in the existing regulatory framework and (ii) to regulate VC exchanges and brokers where sale and purchase may be permitted. The key aspects of the Crypto-token Regulation Bill, 2018[4], found in paragraph 13 of the Note-precursor to report‟ shows that the Inter-Ministerial Committee was fine with the idea of allowing the sale and purchase of a digital crypto asset at recognized exchanges. Therefore, the intention and the stand of the legislature remains unclear on the matter of cryptocurrencies.

But the Court has also iterated, “The argument that other stakeholders such as the Enforcement Directorate which is concerned with money laundering, the Department of Economic Affairs which is concerned with the economic policies of the State, SEBI which is concerned with security contracts and CBDT which is concerned with the tax regime relating to goods and services, did not see any grave threat and that therefore RBI’s reaction is knee-jerk, is not acceptable. Enforcement Directorate can step in only when actual money laundering takes place, since the statutory scheme of Prevention of Money Laundering Act deals with a procedure which is quasi-criminal. SEBI can step in only when the transactions involve securities within the meaning of Section 2(h) of the Securities Contracts (Regulation) Act, 1956. CBDT will come into the picture only when the transaction related to the sale and purchase of taxable goods/commodities. Every one of these stakeholders has a different function to perform and are entitled to have an approach depending upon the prism through which they are obliged to look at the issue. Therefore, RBI cannot be faulted for not adopting the very same approach as that of others. ….”[5] The extract from the judgment shows that the Supreme Court has not taken away the powers or jurisdiction of any regulatory body. This shows that the Cryptocurrencies can be treated differently by different regulatory bodies.

An exchange shall be vary of this particular instance, because a particular Cryptocurrency is brought under the jurisdiction of SEBI (Security Exchange Board of India), then the person shall be deemed liable to trade in securities to that extent and might face criminal penalties.

In 2015, the Commodity Futures Trading Commission or CFTC settled charges against online facility Derivabit and its founder for offering Bitcoin options contracts without complying with the commodity exchange act or CFTC regulations. In February 2018, the SEC charged bitcoin exchange BitFunder and its founder for operating an unregistered Securities Exchange and defrauding users of that exchange by misappropriating their bitcoins, in failing to disclose a cyber attack on BitFunder system that resulted in a theft of more than 6,000 Bitcoins. The liabilities arising out of the law could be applied retrospectively and the exchanges may be brought under the ambit of any regulatory body based on the situation and circumstances.

There is no ban or statutory prohibition on the Cryptocurrency exchanges and hence they are perse not illegal. But the Exchange might have to fulfil certain obligations or take certain precautions to not be brought under the ambit of SEBI or any other regulatory body. Therefore, subject to such prohibitions and obligations, the cryptocurrency exchanges are legal in India.

BY

Vijay Pal Dalmia, Advocate

Supreme Court of India & Delhi High Court

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AND

Siddharth Dalmia

dalmiasiddharth1994@gmail.com

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