Cryptocurrency- What it is and it’s legal status in India and globally?

Author- Advocate Raghav Sood

Abstract

A cryptocurrency is a virtual currency that is protected by cryptography, which deems it

impossible to be forged or double-spend-Based on the blockchain technology. Blockchain is a
system of recording information that makes it difficult or impossible to change, hack, or cheat
the system-Legality of Cryptocurrency- India and worldwide. Countries giving legal sphere to
cryptocurrency- U.S.- The IRS (Internal Revenue Services) provided on tax treatment of crypto;
Canada- The CRA (Canada Revenue Agency) treat the cryptocurrency as a commodity, The
European Union and El Salvador. Countries imposing ban on cryptocurrency- China and Russia-
Cryptocurrency in India: Government’s stand and its legal status- Ban on cryptocurrency in
India- Why government’s are afraid of cryptocurrency- Reasons for government not in favor of
cryptocurrency- Loss of Control Due to Decentralization; Crime Concerns; Fiscal
Treatment is Complex; A Threat to the Business of Central Banks- Conclusion.

Introduction

A cryptocurrency is a virtual currency that is protected by cryptography, which deems it

impossible to be forged or double-spend. Various cryptocurrencies are dispersed networks based
upon block-chain technology a scattered ledger enforced by a different network of computers. A
significant attribute of cryptocurrency’s is that they generally are not allotted by any intermediate
authority, making them theoretically insusceptible to government intrusion or manipulation.

 What is block-chain technology?

Block-chain is a structure of recording information that renders it difficult or

impossible to alter, hack, or cheat the system. A blockchain is basically a
digital record of transactions that is replicated and distributed over the whole
network of computer systems on the block-chain. Each block-chain holds a
number of dealings, and every-time a new dealing arises on the block-chain,
the information of that dealing is fed to every applicant’s journal . The
 decentralised database is controlled by numerous participants is also known as
Distributed Ledger Technology.

Block-chain is a sort of DLT in which transactions are fed with an

incontrovertible cryptanaytics signature called a hash.

 How does a crypto dealing get into the block-chain?

Any digital transaction to be made has to be first added to blockchain but the
transaction has to be authenticated and authorised. There are several key steps
a transaction must go through before it is added to the blockchain.

 Step 1:- A transaction is requested and authenticated.

 Step 2:- A block representing that transaction is created.
 Step 3:- The block is directed to every junction in the network.
 Step 4:- Nodes authenticate the transaction.
 Step 5:- Then the nodes receive a payment for validation of work,
typically in cryptocurrency
 Step 6:- The block is then added to the existing block-chain
 Step 7:- The update is redistributed across network
 Step 8:- The transaction is complete.

Legality of Cryptocurrency

The peer-reviewed digital currency that is cryptocurrency made its official debut in
2009, steering in a new era of cryptocurrency. While the tax authorities, enforcement
agencies, and regulators worldwide are still debating best practices, one relevant
question is: Is cryptocurrency legal or illegal? The answer still depends wholly on
the location and activity of the user.

Cryptocurrency is not issued, authorized, or regulated by any central bank. Instead,

it is created through a computer-generated process known as mining . In addition to it
cryptocurrency being unrelated to any government, it is a peer-to-peer payment
system since it does not exist in a physical form. As such, it offers an appropriate
way to conduct cross-border transactions with no exchange rate fees.

Countries that gave legal sphere to cryptocurrency :

Cryptocurrency can be used anonymously to do transactions between any account

holders, anywhere and anytime across the globe, which makes it vulnerable to
criminals and terror organizations. They may use cryptocurrency to buy or sell
illegal goods like drugs or weapons. However, the trend has shifted lately, as
criminals of having the fear of being tracked move away from cryptocurrency.

In developed countries like U.S., Japan and U.K. the cryptocurrency was legal as of
June, 2021.

U.S.

In the U.S, the IRS(Internal Revenue Services) issued IRS notice 2014-2021 to
provide the necessary information on the tax treatment of virtual currency. Eminent
businesses like Dish Network, Microsoft, Subway, and Overstock (OSTK) welcome
payment in cryptocurrency.

Canada

Unlike U.S. Canada has generally cryptocurrency-friendly stance while also ensuring
the cryptocurrency is not used for money laundering. The Canada Revenue Agency
(CRA) view Cryptocurrency as a commodity. Canada considers cryptocurrency
exchanges to be money-service businesses which brings them under the thread of
anti-money laundering (AML) laws. Cryptocurrency exchanges need to register with
the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC),
report any suspicious transactions, abide by the compliance plans, and even keep
certain records. In addition to it, some major Canadian banks have banned the use of
their credit or debit cards for cryptocurrency transactions.
The European Union

On October 2015, the European Court of Justice (ECJ) ruled that buying and selling
of digital currencies shall be considered a supply of services and thus such shall be
exempted from value-added tax (VAT) in all European Union (EU) member states.
Additionally, some individual EU countries have also developed their own
cryptocurrency bearings

In Finland, the Central Board of Taxes (CBT) has given cryptocurrency a VAT
exempt status by categorizing it as a financial service. Cryptocurrency is treated as a
product in Finland and not as a currency.

The Federal Public Service Finance of Belgium (FPSFB) has also made
cryptocurrency exempt from VAT. In Cyprus, cryptocurrency is also not controlled
or regulated either.

The Financial Conduct Authority (FCA) in the United Kingdom has a pro-
cryptocurrency standpoint and wants the regulatory environment to be supportive of
the digital currency. Cryptocurrency is under certain tax regulations in the U.K.

El Salvador

El Salvador is the only country in the world that allowed cryptocurrency as legal
tender. In June 2021, the country's Congress accepted a proposal by President
Nayeeb Bukele to formally adopt cryptocurrency as a form of payment.

Countries that haven’t recognised cryptocurrency

While some countries have welcomed cryptocurrency as source of monetary

transactions, a few countries are cautious because of its unpredictability,
decentralized nature, perceived threat to current monetary systems, and links to
illicit activities like drug trafficking and money laundering. Some nations have
absolutely banned digital currency, while others have tried to cut-off any support
from the banking and financial system essential for its trading and use.
China

China heavily prevented cryptocurrency from entering their markets thus without
actually criminalizing the holding of cryptocurrency. The government has cleft
down on the mining industry.

Russia

Like China, Russia too have banned the cryptocurrency from entering their financial
institutions. Dealing with cryptocurrency as form of goods and services is totally
illegal.

Cryptocurrency in India:-The government stand, legal status

In India around 7 million Indians have already injected over dollar 1 billion into the
cryptocurrency and the government is now facing the tough task in dealing with
virtual currency space to flourish in India while making sure it's done without safety
concerns

Government’s stand

After stalling over legalising or banning cryptocurrencies, the Indian government

have now taken an encouraging step towards regulating digital currencies in India.
The Ministry of Corporate Affairs (MCA) has made it obligatory for companies to
unveil crypto trading during the financial year.

The accounting of crypto assets is aimed at constraining illegal activities and

circulation of black money via cryptos. It can also improve corporate governance
with more transparent revelations. The Centre has assured crypto stakeholders that
there won't be an extensive ban on digital currencies and that it's still formulating its
full opinion on the matter. FM Nirmala Sitharaman has said the Centre was open to
experimentation with new technologies and is not closing its minds for them.

Crypto’s legal status in India?

Cryptocurrencies are not illegal in India. India as of now does not have a regulatory
framework to govern cryptocurrencies. The government had created an Inter-
Ministerial Committe on November 2, 2017, to analyse virtual currencies. The
Group's report, along with a Draft Bill, identified the positive aspect of distributed-
ledger technology and suggested various applications, especially in financial
services, for its use in India, including banks and other financial firms. However, the
Centre had identified reservations around its mismanagement and wanted to put a
blanket ban in India. The government is also planning to bring in the
“Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” which is
expected to clear the government’s position once and for all.

Were cryptocurrencies ever banned in India?

The RBI, through its circular in April, 2018, had advised all institutions regulated by
it not to deal in virtual currencies or provide services for facilitating any person or
institution dealing with or settling them.

In 2018, the finance ministry had also issued a statement, saying "the government
does not consider cryptocurrencies as legal tender or coin and will take all measures
to eliminate the use of these crypto-assets in financing illicit activities or a part of
the payment system the government will explore the use of blockchain technology
dynamically for assuring in the digital economy."

In mid-2019, a government committee had proposed banning all private

cryptocurrencies, with a jail term of up to 10 years as well as heavy penalties for
anyone dealing in digital currencies. However, the Supreme Court in March 2020
overruled RBI's circular, permitting banks to handle cryptocurrency transactions
from traders and exchanges.

Why Governments are afraid of cryptocurrency?

Cryptocurrency claims that “it is the first decentralized peer-to-peer payment

network that is powered by its users with no central authority or traders.” This lack
of central authority is the primary reason governments are afraid of the
cryptocurrency.

Basically, the government’s control the fiat currencies (Fiat money/currency is a

government-issued currency that is not financed by a commodity such as gold, silver,
etc. Fiat money/currency gives Central banks greater control over the economy
because they can control how much money is printed) . They use central banks to
issue or destroy money out of thin air, using what is known as monetary policy to
exercise economic influence. They also promulgate how fiat currencies can be
transferred, enabling them to track currency movement, set-out where profits from
that movement, collect taxes on it, and trace criminal activity. All of this control is
lost when non-governmental bodies create their own currencies.

The cryptocurrency users don’t need the existing banking system. The currency is
formed in cyberspace and the payment is the cybercurrency which is digitally stored
and passed between buyers and sellers without any intermediary involved.

Though the possibility for crime encapsulate the public’s attention, the role currency
plays in a nation’s monetary policy has the potential to have a far greater impact.
Because governments intentionally increase or restrict the amount of money
circulating in an economy to stimulate investment and spending, generate jobs, or
avoid out-of-control inflation and recession, control over currency is a massive
concern. It’s also an extraordinarily complex topic.

Some countries ban cryptocurrency with the fear that it shall be used for criminal
purposes and some fraudulent activities that would create a rendereous effect on the
financial institutions as they would have no control over it and their non-controlling
power would thus reflect the adverse effect on the economy. At the same time, some
economies fear that it can be a threat to their control. Five major reasons why some
governments have banned cryptocurrency:-

1. Loss of Governance because of Decentralization

 2. Criminal Concerns
3. Fiscal Assessment is Complicated
4. A Threat to the Business of Central Banks

Loss of governance because of decentralization

Governments have the authority to govern local currencies such as dollars, rupees, eros, yuan,
etc. They can change the fiscal policy to run the economy and can track the movement of money
in the economy, which earns profits and collects tax accordingly.

Similarly, can also track criminal or fraudulent activities performed with the fiat currencies
easily. Control over the currency gives the government power to influence the economy, create a
monetary policy, encourage financial transactions, etc.
With the intro of cryptocurrency in the cyberspace, it has limited the power of the government as
they lose control over the currency system due to decentralization. As crypto’s fundamental
technology doesn’t allow any central authority for any transaction, the governments can’t
regulate the monetary policy and thus lose their power. Thus, some economies are not on the
stance of introducing cryptocurrency in their financial system

Criminal Concerns

Because of decentralization and its anonymity, more and more criminals are using
cryptocurrency as a practicable method for illegal activities. Cyber-criminals are using this
cyberspace platform to steal money from the users. Many drug mafias are using the crypto
network to trade drugs and harmful chemicals. More extremely, terrorist organizations are also
involved in cryptocoin transactions for trading weapons.
These are one of the biggest criminal concerns for which many governments fear legalizing
cryptocurrency and other cryptocurrencies.

Fiscal Assessment Is Complicated

While criminal concerns are one of the most possible reasons for which governments don’t want
to legalize cryptocurrency. Another major reason is the fiscal assessment of it is quite
complicated.
As crypto functions through block-chain technology, a decentralized network, the government
finds it hard to plan the monetary policy and tax regulations. Tax assessment is one of the major
concerns in monetary policy.

A Threat to The Business of Central Banks

The government controls the country’s finance and economy with the help of central banks and
financial institutions. After cryptocurrency has become the focal-point, many central banks have
lost their business, which is eventually a loss to the government. Thus, the government, as well
as central banks, do not like cryptocurrency.

Conclusion
The cryptocurrency’s are a burning topic in the international financial system. There is great
impulsiveness of cryptocurrencies exchange rates. With this, there is a high risk of trading these
cryptocurrencies. Their growth has been able to gain the attention of many investors. They are
easily movable. It is only after the required belief in the cryptocurrencies after which they will be
used on a wider scale. If the cryptocurrencies fail to gain that belief, then their boom may
decline. They are (crypto) still in their preliminary stages, and it is not sure as to when they will
be prudently traded in the markets globally. Many different cryptocurrencies have attained the
required attention.

Despite the limitations, bitcoins are still considered a sensation in the electronic currency. It has
provided an alternative currency for the less developed countries and has opened the doors of
economic transformation. In this way, it gives the individuals more choices to manage their
finances. Without regard to bitcoins accomplishing the lofty transformations, the
cryptocurrencies are seen to be entering the financial stage and changing the global financial
landscape forever