Will India Be Forced to Look at Crypto Regulation After Top Court's Questions?

Last week, India's Supreme Court raised concerns about the federal government's long-standing failure to regulate cryptocurrencies.

The top court bench stated that the lack of a clear legal framework allowed their "misuse."

The Court further emphasized that unchecked Bitcoin trade amounted to "nothing but a more polished form of Hawala," an unofficial and unlawful means of international money transfers.

The Indian administration and the central bank, the Reserve Bank of India, have often cited the industry's downside as a critical basis for their untoward crypto attitude.

Cryptocurrencies have a reputation for being associated with negative things, including illegal activity, fraud, market manipulation, excessive energy usage, and worries about regulation.

After India demonetized certain currency tenders in 2016, the Unified Payments Interface (UPI) caused a sea change in digital currency and how people paid for goods and services online in the retail sector.

New rules, increased interest, and shifting government policies have all emerged with these shifts. But, it is still unclear what the future holds for cryptocurrencies in India.

The Supreme Court of India reversed the Reserve Bank of India's (RBI) 2018 restriction on financial institutions providing services related to cryptos in 2020. According to the Union Budget 2022, cryptocurrencies are not yet considered legal money in India, but they are nonetheless taxable as capital gains. In addition, the Lok Sabha, the lower house of India's parliament, is now reviewing the Cryptocurrency Bill 2021.

Despite the excitement and changing viewpoints, the legislative environment and legitimacy of crypto in India are still unclear.

Rise in Global Adoption

Globally, however, technological advancements and market shifts have facilitated the growth of the payment industry, creating opportunities for virtual assets and virtual currencies.

Digital tokens and other assets can be represented digitally using blockchain technology and cryptographic methods, known as cryptocurrency, a subset of virtual currency.

Despite their unpredictable market prices, prominent cryptocurrencies like Bitcoin, Ethereum, and Tether enable safe transactions and provide entry to the international financial system.

Cryptocurrencies, which function on decentralized blockchain networks, encounter technological and scalability constraints.

Latest Case: Supreme Court Questions Government

India's top court, hearing a case against Shailesh Babulal Bhatt, who has been accused of cryptocurrency-related fraud in numerous states, questioned why the government has not yet developed regulations.

Justices Surya Kant and N Kotiswar Singh made these remarks while hearing Bhatt's bail petition.

The bench disapproved of the Bitcoin industry's lack of regulation, even though the bail plea had little to do with larger policy issues. Additionally, it raised doubts about why the case's prosecuting body, the Enforcement Directorate, decided to apprehend Bhatt once the investigation was over rather than while it was still on.

Almost "two years ago," the highest Court in India wanted to know how the government of India felt about virtual currencies, and the bench brought that fact up to the Union government.

While it acknowledged that fresh financial structures were developing in international trade, it cautioned against outright banning cryptocurrencies and stressed the need for regulation.

The top Court in the land ruled that the government had effectively "turned a blind eye" to a serious problem by not regulating the sector.

The Supreme Court bench said, "Nobody is saying to stop it since you have said earlier that cryptocurrency is not illegal and banning it will not be wise for the economy."

The bench added, "Banning may be shutting your eyes to the ground reality. But what about regulating it?"

The Court raised concerns regarding the evidential challenges law enforcement might face because of the absence of a legal framework or clear definition for crypto assets. The Additional Solicitor General Aishwarya Bhati, representing the government, sought more time to gather the Union's response and plan.

The top Court said, "If tomorrow somebody asks, 'Prove what this asset is', how are we going to prove it?"

The bench added, "We are not experts. Experts will have to examine it, but some steps to regulate it are necessary. We are told crypto trading is very volatile...today a Bitcoin might be worth lakhs, and tomorrow it can mean nothing."

An attorney for Bhatt, Mukul Rohatgi, had previously contended that Bitcoin trading was not against the law in India.

Are Cryptocurrencies Legal in India or Not?

This was especially true following the 2020 Supreme Court ruling invalidating a Reserve Bank of India circular prohibiting banks from enabling crypto-related transactions.

Since no legislation prohibits such conduct, he maintained that Bhatt's detention was without merit.

Profits from Bitcoin transactions in India are now subject to a flat 30% tax, with an additional 1% tax deducted at source for each exchange. Nevertheless, digital currencies like Bitcoin and Ethereum are neither explicitly forbidden nor acknowledged as legal money.

Despite promoting the Digital Rupee, a digital currency issued by the central bank, RBI has consistently cautioned against investing in cryptocurrency due to the risks involved.

In 2021, lawmakers drafted a measure to regulate cryptocurrencies, but it has not yet been introduced to Parliament. In July 2023, another Supreme Court bench ordered the union government to explain the plan to create a federal agency to probe cryptocurrency-related crimes.

When the case was first heard, the court deemed it "unfortunate" that digital currencies did not have a regulation or an expert agency to investigate them.

The question doing the rounds now is whether the government will be forced to examine crypto regulation, finally putting to rest the uncertainty of India's position on the digital assets industry.