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. Despite the vacuum in legislation, regulators such as the Reserve Bank of India (RBI) have previously issued various cautionary circulars deterring individuals from dealing in cryptoassets. In 2018, under its circular of 6 April 2018 (the RBI Circular), the RBI banned entities regulated by it (eg, banks, financing institutions and non-banking financial institutions) from dealing in cryptoassets. While this circular did not ban cryptoassets per se, it did block any financial dealing contemplated by a buyer, seller or trader of cryptoassets. In contrast, regulators such as the Securities and Exchange Board of India (SEBI) have remained silent on regulating cryptoassets. The RBI Circular was set aside by the Supreme Court of India order of 4 March 2020, as set out below.

Given the lack of certainty, market participants filed several petitions before the Supreme Court challenging the constitutionality of the RBI Circular and sought clarity on the government’s stance on the legality of cryptoassets and cryptocurrencies in India. In response, in July 2019, the government released a draft bill (the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019) (the Cryptocurrency Bill 2019), which sought 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 Cryptocurrency Bill 2019, ‘cryptocurrency’ was defined to mean 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 or representation of having an inherent value in a business activity that may involve the risk of loss or expectation of profits; or
• that functions as a store of value or unit of account.

The only exception carved out regarding cryptocurrency was the use of its underlying technology for experimental, research or educational purposes if the cryptocurrency was not used to make or receive payment. Under the draft legislation, penalty for violation was imprisonment of up to 10 years.

In response to the petitions filed by market participants, on 4 March 2020, the Supreme Court of India passed an order setting aside the RBI Circular on the grounds of proportionality, including on account of a lack of any factual damage to RBI regulated entities arising from the use of cryptocurrencies and in the absence of any express legislative prohibitions concerning cryptocurrencies in India.

Subsequently, on 25 May 2020, the RBI clarified (in response to an application filed under the Right to Information Act 2005) that presently there is no prohibition applicable to banks to provide bank accounts to crypto exchanges or crypto traders.

From public sources, we understand that the government had proposed to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (the Cryptocurrency Bill 2021) in the budget session of Parliament in 2021. However, this bill is not publicly available and has not been tabled in Parliament.

On 31 May 2021, the RBI issued another circular to reiterate that the RBI Circular cannot be cited in light of the Supreme Court judgment of 4 March 2020. However, the RBI clarified that banks and financial institutions may continue to carry out customer due diligence processes in line with the relevant regulations and standards for know-your-customer (KYC), anti-money laundering (AML) and combating of financing of terrorism (CFT) obligations under the Prevention of Money Laundering Act 2002 and ensure compliance with relevant provisions under the Foreign Exchange Management Act 1999 for overseas remittances.

Further, the Ministry of Corporate Affairs issued a notification in March 2021 to make it mandatory for companies to disclose any dealings in cryptocurrency or virtual currency in their balance sheets.

Given the absence of an enacted legislation, coupled with the regulatory and judicial developments discussed above, any application of cryptoassets or cryptocurrency to undertake financial activities or operations in the payment ecosystem, while being current practice, may become subject to ongoing scrutiny from the regulatory authorities and result in legislative bans (ie, after the enactment of the Cryptocurrency Bill 2021 if the legislation is similar to the Cryptocurrency Bill 2019).

Presently, cryptoasset businesses are primarily operating under self-regulatory codes, which includes ensuring compliance with KYC, AML and CFT obligations.

It may also be noted that the Indian Computer Emergency Response Team (the CERT-In), set up under the Information Technology Act 2000 (IT Act), had, on 28 April 2022, issued directions under the IT Act with respect to information security practices, procedure, prevention, response and the reporting of cyber incidents for a safe and trusted internet. These directions require, inter alia, the ‘virtual asset service providers’, ‘virtual asset exchange providers’ and ‘custodian wallet providers’ to mandatorily maintain (1) information obtained as part of KYC and (2) records of financial transactions, for five years. The directions also prescribe a list of ‘officially valid documents’ (OVD) for the customer identification procedure in line with the Reserve Bank of India (RBI) Directions 2016/Securities and Exchange Board of India (SEBI) circular dated 24 April 2020/Department of Telecom (DoT) notice 21 September 2021 for the purpose of KYC. It may also be noted that the terms ‘virtual asset service provider’, ‘virtual asset exchange provider’ and ‘custodian wallet provider’ are presently not defined under these directions; however, the frequently asked questions issued in relation to these directions indicate that such providers may include cryptoasset businesses as well.

Further, the Finance Act of 2022 (Finance Act) has introduced a regime for the taxation of virtual digital assets (VDAs) by amending the Indian Income Tax Act 1961 (Tax Act). The key features of this regime cover, inter alia, (1) the introduction of a wide definition of VDAs and including cryptocurrencies and non-fungible tokens (NFTs) within its ambit, (2) withholding tax at the rate of 1 per cent on the payment of consideration to a resident for the transfer of a VDA and (3) the levy of a 30 per cent tax on the gains from a transfer of VDAs.

Government policy

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

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, for a brief period, the government had switched between a negative and an agnostic approach. In his 2018 budget speech, Arun Jaitley, the former 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 cryptoassets in financing illegitimate activities or as part of the payment system.’ This approach was also reflected in the Cryptocurrency Bill 2019, which explicitly banned the use of cryptoassets.

In contrast, in September 2019, a report on fintech-related issues released by an inter-ministerial committee set up by the Ministry of Finance (the 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 KYC).

The Cryptocurrency Bill 2021 was due to be introduced in the budget session of Parliament in 2021, though the same was not tabled. It remains to be seen whether the proposed law will be similar to the Cryptocurrency Bill 2019 or whether it will move away from that bill’s blanket-ban position and instead provide a regulatory landscape for cryptocurrencies in India.

While the Cryptocurrency Bill 2021 is not currently available publicly, in December 2021, public reports emanating from a cabinet note suggested that the Cryptocurrency Bill 2021 will treat cryptocurrencies as ‘cryptoassets’ and designate SEBI as the apex regulator for the sector. Further media reports suggested that the proposed bill would, inter alia:

• bar the use of cryptoassets as legal tender;
• require existing crypto exchanges to be registered with SEBI;
• mandate a uniform KYC process to be adhered to by exchanges;
• require exchanges to share KYC data, including investor-details with relevant government regulators;
• ban use of cryptocurrencies as a method of payment in India with violations being ‘cognisable’ and ‘non-bailable’ offences;
• ensure the government’s ability to monitor exchange’s ledger to look for foreign exchange transfers; and
• allow only Indian crypto exchanges to operate with investors required to move their crypto assets to INR wallets.

Publicly available information also indicates that in May 2021, the government was looking to set up a new panel to decide the fate of cryptocurrency regulation in India. However, details of whether this panel has been set up or any developments in cryptocurrency regulations continue to be unavailable. In recent discussions during the parliamentary sessions in July 2022, Nirmala Sitharaman, the finance minister, while addressing the questions raised by both the houses of Parliament, specified that ‘Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.’ Further, Nirmala Sitharaman, the finance minister also specified that while NFTs fall within the definition of VDAs under the Tax Act, this shall not include any NFTs whose transfer results in the transfer of ownership of underlying tangible assets and the transfer of ownership of such underlying tangible assets is legally enforceable.

Publicly available information also indicates that the recent meeting of the Financial Stability and Development Council (FSDC), chaired by Nirmala Sitharaman, the finance minister, impressed upon the members the need for a clear consensus on the legality of cryptocurrencies in terms of whether to legalise or ban crypto assets.

More clarity on this issue will emerge when the draft of the Cryptocurrency Bill 2021 – or any updated draft legislation – is tabled in the Indian Parliament and made public.

Regulatory authorities

• Which government authorities regulate cryptoassets and businesses transacting with cryptoassets?

Presently, 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, SEBI and the RBI were instrumental in drafting the Cryptocurrency Bill 2019. However, we note that aspects in relation to cryptoassets and deliberation with respect to banning or regulating of cryptoassets are being discussed at the inter-ministerial level on an ongoing basis.

Regulatory penalties

• What penalties can regulators impose for violations relating to cryptoassets (eg, injunctions, fines or prison terms)?

Despite the vacuum in legislation, the Income Tax Department has in the past issued notice or initiated proceedings that have required businesses dealing in cryptoassets to close. With the advent of the taxation regime on VDA including cryptocurrency via the Finance Act, cryptocurrency businesses as well as holders and traders will also be subject to the provisions of the Tax Act, including the applicable penalties.

Further, while the Cryptocurrency Bill 2019 had envisaged criminal proceedings to be initiated, which could lead to a maximum of 10 years’ imprisonment or monetary penalties being imposed or both, the Cryptocurrency Bill 2021 is not yet publicly available. To the extent that Cryptocurrency Bill 2021 also treats violations similarly to the Cryptocurrency Bill 2019, violations could be met with the initiation of criminal proceedings as per the provisions of the Cryptocurrency Bill 2021. This will need to be assessed once the draft of the Cryptocurrency Bill 2021 is made publicly available. Additionally, in June 2021, according to news reports, a cryptocurrency exchange in India received notices from the enforcement directorate in relation to alleged money laundering concerns and the alleged violation of foreign exchange laws. Similar notices or summons have been issued to other cryptocurrency exchanges in 2022 including, in some cases, the freezing of bank accounts of such crypto exchanges.

Court jurisdiction

• Which courts have jurisdiction over disputes involving cryptoassets?

No special court or tribunal exercises jurisdiction over disputes involving cryptoassets. In the absence of an express or implied bar and depending on the financial and territorial nature of a dispute (ie, civil or criminal), lower courts and tribunals can exercise jurisdiction in addition to an appeal that lies before the state high courts and the Supreme Court.

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 India?

While there is ambiguity on the legality of cryptocurrencies, if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, it will impose a ban on any person from holding cryptocurrencies unless the underlying technology or process is used for experimental, research or educational purposes if the cryptocurrency will not be used to make or receive payment in this activity. We note that discussions are ongoing at the inter-ministerial level with respect to the unregulated nature of cryptocurrencies in India presently, and given their borderless nature, any legislation to regulate or ban cryptoassets can only be effective after significant international collaboration, the evaluation of risks and benefits, and the evolution of common taxonomy and standards.

Fiat currencies

• What fiat currencies are commonly used in India?

The national currency of India is the Indian rupee issued by the RBI. There are restrictions under the extant foreign exchange laws in India concerning the holding and usage of foreign currencies, and any foreign currency earned or acquired may be required to be converted into Indian rupees under the applicable foreign exchange laws.

In July 2021, the RBI announced its intent to issue a central bank digital currency (ie, legal tender issued by the RBI in digital form). Subsequently, the Reserve Bank of India Act, 1934 (RBI Act) has been recently amended with a view to facilitate the issuance of central bank digital currency by the RBI. Further, the RBI, on 7 October 2022, issued a ‘concept note on central bank digital currency’ that, inter alia, sets out the objectives, choices, benefits and risks associated with the issuance of such digital currency. This note also provides an update on the issuance of digital currency and states that the RBI will soon commence the limited pilot launch in this interest, albeit for specific use-cases.

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 committed to examining legal and policy issues relating to cryptoassets.

Regulatory threshold

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

Currently, there is no enacted legislation on cryptocurrency regulation in India. The Cryptocurrency Bill 2019 had sought to ban any person from dealing in cryptoassets (agnostic of any specific attribute of that cryptoasset), including, among others, as a means for investment. In light of the proposed blanket ban on the use of cryptoassets, regulators had not sought to identify any attributes that would distinguish its various use cases, including as a security. However, some public articles suggest that the government of India may classify cryptocurrency as an asset class to be regulated by the Securities and Exchange Board of India (SEBI).

Investor classification

• How are investors in cryptoassets classified and treated differently (eg, ordinary (retail), institutional, sophisticated, accredited)?

Investors in cryptoassets are not classified or treated differently.

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, if funds are collected to obtain a ‘coin’ (ie, a representation of value or right) to be redeemed in the future, this 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. A report on fintech related issues, released in September 2019 by an inter-ministerial committee set up by the Ministry of Finance (Department of Economic Affairs), and the Cryptocurrency Bill 2019 explicitly prohibited the use of cryptocurrency as a medium of exchange, store of value, unit of account or its use as a means to raise funds.

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 is unclear whether SEBI would equate a security token with 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.

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 their underlying value, the issue of and investment in stablecoins would potentially be prohibited under the Cryptocurrency Bill 2019 and its definition of ‘cryptocurrency’. If the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, such prohibitions will be applicable to the issue of and investment in stablecoins.

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, who are deemed owners of those assets once they are aware of the airdrop. Indian regulators and legislatures have not yet examined the transfer of cryptoassets; however, under the legislative scenario envisaged under the Cryptocurrency Bill 2019, when an investor becomes aware of having cryptoassets (ie, as their deemed owner), they would be subject to the proposed ban on holding or possessing cryptoassets. An airdrop could therefore inadvertently lead to the potential holder becoming liable for penalties, including imprisonment. Additionally, under the Cryptocurrency Bill 2019, any airdrop viewed as promoting, inducing participation or advertising cryptocurrency amounted to a contravention of the Cryptocurrency Bill 2019 and would have been subject to penalties or imprisonment or both as prescribed thereunder. If the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, a similar approach may be adopted by legislative authorities with respect to airdrop.

Advertising and marketing

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

Given the legislative proposal under the Cryptocurrency Bill 2019 to equate any activity involving cryptoassets with illegal activity, and if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, the advertising or marketing of cryptoassets could fall foul of generally accepted advertising standards and applicable criminal laws depending on the nature of loss suffered by viewers of that advertising. Such a violation could thereby lead to pecuniary penalties and imprisonment. Also, under the provisions of the Cryptocurrency Bill 2019, any person directly or indirectly promoting, issuing an advertisement, soliciting, abetting or inducing any participation in any activity involving cryptocurrency as specified under sections 6 and 7 of the Cryptocurrency Bill 2019, would have been subject to penalties or imprisonment or both as prescribed thereunder.

In July 2021, subsequent to certain petitions filed before the Delhi High Court against cryptocurrency exchanges in relation to their failure to issue adequate standardised disclaimers (similar to disclaimers offered by securities market intermediaries), cryptocurrency exchanges (while not mandated under law) now provide similar disclaimers highlighting the risks associated with trading and investing in cryptoassets.

In February 2022, the Advertising Standards Council of India (ASCI) – a self-regulatory body of the advertising industry in India – issued guidelines for the advertising and promotion of VDAs and services. These guidelines, inter alia, require a standard disclaimer to be included for all ads for VDA products, VDA exchanges or ads featuring VDAs. Further, they also require that VDA products are not compared to any other regulated asset class and words like ‘currency’, ‘securities’, ‘custodian’ and ‘depositories’ are not used in advertisements of VDA products or services, as consumers may associate the same with regulated products.

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.

Crowdfunding

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

Crowdfunding is essentially the collection or pooling of funds through small financial contributions from multiple individuals for a specific project, venture or social cause. A subset of crowdfunding (ie, peer-to-peer lending of fiat currency) is a permitted legal activity regulated by the Reserve Bank of India. Given that an offering of cryptoassets may be a collection of fiat currencies for potentially illegal activity (ie, dealing in cryptocurrency), such an offering could be seen as falling foul of the Cryptocurrency Bill 2019 and, accordingly, be deemed illegal. If the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, such crowdfunding could also fall foul of this new legislation.

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.

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.

Typically, to prevent money laundering activities, regulated entities (eg, banks, stock exchanges, financial institutions or parties carrying out designated business) are mandated to comply with the requisite AML or KYC requirements under Indian laws (including conducting KYC checks on customers). It may be noted that the Indian Computer Emergency Response Team (the CERT-In), set up under the Information Technology Act 2000 (IT Act), had, on 28 April 2022, issued directions under the IT Act with respect to information security practices, procedure, prevention, response and the reporting of cyber incidents for a safe and trusted Internet. These directions require, inter alia, the ‘virtual asset service providers’, ‘virtual asset exchange providers’ and ‘custodian wallet providers’ to mandatorily maintain (1) information obtained as part of KYC and (2) records of financial transactions, for five years. The directions also prescribe a list of ‘officially valid documents’ (OVD) for the customer identification procedure in line with the Reserve Bank of India (RBI) Directions 2016/ Securities and Exchange Board of India (SEBI) circular dated 24 April 2020/Department of Telecom (DoT) notice 21 September 2021, for the purpose of KYC. It may also be noted that the terms ‘virtual asset service provider’, ‘virtual asset exchange provider’ and ‘custodian wallet provider’ are presently not defined under the directions; however, the frequently asked questions issued in relation to these directions indicate that such providers may include cryptoasset businesses as well.

Further, a key concern regarding businesses offering cryptoassets expressed by the authorities is the likelihood that they will act as a vehicle for money laundering activities in India. This concern has recently manifested itself in multiple instances of cryptocurrency exchanges being issued in regulatory summons or notices for, inter alia, failure to adhere to KYC and AML standards and Indian foreign exchange laws.

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?

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

Under anti-money laundering legislation, reporting entities must provide information regarding cash transactions exceeding permitted values, suspicious transactions and cross-border transactions exceeding specified thresholds. If 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 that transaction irrespective of whether it concerns cryptoassets.

Fiat currency transactions

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

At present, no rules or restrictions govern the exchange of fiat currency and cryptoassets. However, if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, this exchange would be prohibited and could attract penalties or imprisonment, or both as prescribed thereunder.

Exchanges and secondary markets

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

In the absence of an exchange of fiat currency, investors can execute pure cryptoasset trades. Based on the Cryptocurrency Bill 2019, a cryptoasset exchange executing a pure cryptoasset trade could have resulted in penalties given that a ban had been proposed on any dealing of cryptoassets, including via an exchange. To the extent the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, such penalties could be attracted.

Custody

• How are cryptoasset custodians regulated?

At present, cryptoasset custodians are unregulated in India; although, their operations could be deemed illegal if the final cryptocurrency legislation is enacted in line with the Cryptocurrency Bill 2019.

Broker-dealers

• How are cryptoasset broker-dealers regulated?

While cryptoasset broker-dealers are not regulated at present, their operations could be deemed illegal if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019.

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, if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, these exchanges could be deemed to be illegal and be prohibited from effecting any cryptoasset trade.

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. This activity is regulated under the Payment and Settlement Act 2007 and the Reserve Bank of India (RBI) Master Directions on Prepaid Payment Instruments of 27 August 2021. However, prepaid instruments have intrinsic value and are ‘loaded or reloaded with cash’ unlike cryptocurrencies, which cannot have any intrinsic value per se, but whose value is contingent on their demand and supply. Because cryptocurrencies do not fall under the above legislation, a peer-to-peer transfer of cryptoassets would arguably be permitted. However, this transfer could potentially be deemed illegal if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, which sought 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, may be potentially illegal if the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019. In light of cryptoassets being commonly viewed as a front to conduct suspicious transactions, a cryptoasset trade with anonymous parties could attract penal consequences if it falls under the radar of the Financial Intelligence Unit – India, set up under the Financial Action Task Force.

Foreign exchanges

• Are foreign cryptocurrency exchanges subject to India’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 only if it does not involve the exchange of fiat currency in light of prevailing foreign exchange norms that permit only cross-border remittances for permissible activities. Further, while the RBI Circular has been set aside by the Supreme Court, the lack of a clear directive from the RBI may also pose practical challenges in the remittance of fiat currency.

Taxes

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

The Finance Act has introduced a regime for the taxation of VDAs. The key features of this regime cover, inter alia, (1) a wide definition of VDAs including cryptocurrencies and NFTs within its ambit, (2) withholding tax at the rate of 1% on the payment of consideration to a resident for transfer of a VDA and (3) a levy of a 30 per cent tax on the gains from a transfer of VDAs.

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. Instead, 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 these assets, the Reserve Bank of India (RBI) announced its intent to issue a central bank digital currency (ie, legal tender issued by the RBI in digital form). Based on public reports, the central bank digital currency is expected to be rolled out in a graded or phased manner within the financial year of 2022 to 2023. In this regard, the Reserve Bank of India Act 1934 has been amended to enable the issue of the digital currency by, inter alia, expanding the definition of bank notes to include notes issued in digital form as well. Separately, the Cryptocurrency Bill 2019 also contained a provision concerning approval from the central government of the digital rupee being legal tender. Further, the RBI, on 7 October 2022, issued a ‘concept note on central bank digital currency’, which, inter alia, sets out the objectives, choices, benefits and risks associated with the issuance of such digital currency. This note also provides an update on the issuance of digital currency and states that the RBI will soon commence the limited pilot launch for this, albeit for specific use-cases.

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?

Under the Supreme Court decision setting aside the RBI Circular, on 25 May 2020 the RBI clarified (in response to the application filed under the Right to Information Act 2005) that there is no restriction applicable to banks prohibiting opening bank accounts for crypto exchanges or crypto traders. Further, on 31 May 2021, the RBI issued another circular to reiterate that the RBI Circular cannot be cited in light of the Supreme Court judgment of 4 March 2020, and clarified that banks and financial institutions may continue to carry out customer due diligence processes in line with the relevant regulations and standards for know-your-customer (KYC), anti-money laundering (AML) and combating of financing of terrorism (CFT) obligations under the Prevention of Money Laundering Act 2002 while also ensuring compliance with the (Indian) foreign exchange laws for overseas remittances.

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 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 the significant discussion focused on the use of cryptocurrency, there is limited public discussion on mining. Although a report on fintech related issues released in September 2019 by an inter-ministerial committee set up by the Ministry of Finance (Department of Economic Affairs) (the Inter-ministerial Committee Report) and previously the Cryptocurrency Bill 2019 had sought to ban the mining of cryptocurrency, mining as an activity is yet to be legally evaluated.

Government views

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

Government officials remain silent on cryptocurrency mining. In addition, despite public discussions on cryptocurrency mining, the Inter-ministerial Committee Report and the Cryptocurrency Bill 2019 had explicitly prohibited cryptocurrency mining. To the extent the Cryptocurrency Bill 2021 is in line with the Cryptocurrency Bill 2019, it would also prohibit the mining of cryptocurrency.

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 Finance Act of 2022 does not expressly envisage any specific tax treatment of cryptocurrency mining. While the Income Tax Act 1961 has a provision dealing with taxable income in case of transfers without consideration, the same is intended as an anti-abuse provision and, currently, it is not clear whether it would apply to the particular case of cryptocurrency mining.

Node licensing

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

At present, 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 (eg, based on sanctions/AML/KYC/FATF rules and standards)?

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 this on code. While the liabilities from these organisations remain untested in India; ultimately, the connection between the organisation and the ultimate creator or controller should be examined. For instance, companies in India are legal entities, and directors or individuals vested with the responsibility to manage the company are deemed liable for a 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 the 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, these 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 the 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 short, 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 under 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 is 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. Because 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.

Recent developments

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

There are no updates at this time.

Law stated date

Correct on October 12, 2022