Abstract:
The concept of cryptocurrency, fueled by blockchain technology, has introduced a revolutionary
shift in digital finance and privacy. Cryptocurrencies rely on cryptographic principles to offer a
decentralized and tamper-resistant ledger of transactions, thus ensuring anonymity for
participants. However, this anonymity, alongside rapid technological advancements, has led to
skepticism and regulatory challenges globally. In India, legal and regulatory efforts have
struggled to keep pace with the evolving crypto landscape, highlighted by the Reserve Bank of
India’s (RBI) stance against cryptocurrency usage. This paper explores the legal pathways
through which cryptocurrency could be incorporated within India’s Information Technology Act,
proposing mechanisms such as a centralized currency reserve and strengthened Know Your
Customer (KYC) regulations to address risks of fraud, money laundering, and terrorism
financing. Additionally, it compares international approaches, examining how jurisdictions such
as the United States, China, Australia, and Switzerland have tackled cryptocurrency regulation
through distinct frameworks that balance innovation, investor protection, and financial stability.
This comparative analysis aims to provide insights into potential regulatory models that India
and other countries could adopt to harness cryptocurrency’s benefits while mitigating associated
risks.
Keywords: risk mitigation, comparative analysis, cryptography, cryptocurrency
Cryptography has nonchalantly proved its potential to entwine the very fabric of privacy. It has
proven its potential, by achieving great speeds to facilitate transactions, using only the
processing power of the system on which it is based upon. It has the potential of transforming
every facet of the society with a minimalist modus operandi.
The extent to which block-chain associated encryption based technologies strive to endorse
privacy, is perceived to be skeptically cynical, and thus usually glared upon. We fail to
understand the very concept behind it. A block-chain based technology is nothing but a
decentralized distributed ledger technology based upon the transaction of currency to which it is associated with, and storing the hash functions or encryption value in them, it is a publicly
available record which cannot be altered at any point of time. The identities of both ends of the
users are virtually untraceable. However, the issue of antagonistic anonymity may be solved
using complex “Know Your Customer” mechanisms, for example, Regulated and Sovereign
backed Crypto-currencies (RSBC); and/or nation coins or nation wallets. It would then
subsequently provide largely as a data-hub, for a large number of transactions, based upon
their encryption value, date and exact time which may generally not be inclined to any external
altercations. This brings us to the next extension of the aforementioned technology which is the
crypto-currency. In simple terms, it can be defined as a medium of exchange using intricate
encryption mechanism whichtransactions and then the said information is stored in the form of a distributed ledger, the
information of which is available publicly and can be accessed at all points.
Whenever there is a transaction between two or more people, it has been seen that every
expenditure involving the crypto-currency transaction gets registered in the distributed ledger,
with the exact amount and the encryption value as associated with the transaction. The network
related to such a technology helps in detailing each and every transaction facilitated during a
certain time frame into a list. The list is essentially referred to as a ‘Block’. There are certain sets
of people who actually verify the validity of such transactions, who generally identify themselves
as ‘Miners’. Miners typically use their high-end hardware computer components to solve
complex mathematical problems and thereby validating any transaction associated within the
said system.
HOW TO MAKE IT LEGAL IN INDIA?
The issue surrounding the legalization of crypto-currency has been afloat since the summer of
last year when a notification by RBI declared the usage of crypto-currency in any manner,
illegal.
Since the usage of crypto based technology and the currency, it has in itself proven to be
a challenge in front of all the crypto geeks. Here are few ways under Indian Information
Technology Act, 2000 by which we can make crypto legal:
1. INCULCATION OF CRYPTO-CURRENCY U/S 2(f) OF IT ACT, 2000: Section 2(f) of the
Act states the components of an Asymmetric Crypto system which paves a way for legalizing
the crypto currency in all walks of life. The definition speaks about an asymmetric system which
is a dual factor authentication, exactly similar to the technology which is used for the transaction
of any crypto-currency. When the question of legality arises then it is possible to inculcate the
crypto-currency based systems into it. Thereby making the systems associated with it, legal and
once the system is legal we can legalize the currency. The method for legalizing
Crypto-currency is very simple; the first eventual step of which is to legalize the systems
associated with it.
2. CREATING A CENTRALIZED CURRENCY RESERVE: The government solution for
legalizing crypto-currency will be to diversify the current critical sector agency called NCIIPC[1]
established under Section 70(a) of the Information Technology Act, 2000 and empower it to
make rules pertaining to regulation of centralized Crypto-currency reserve. The value of a
centralized currency can be associated with any material goods in order to fluctuate the value
for any future scenarios and the government will also be satisfied that it can manipulate the
value at any time and monitor the transaction at the same time. The agency could be a sub
organization under NCIIPC focusing purely on the Crypto-currency regulations and monitoring
authority. This will also strengthen the information gathering sector and shall minimize the rate
of money laundering.
3. FOCUSING ON EVIDENTIARY VALUE: We know that every quanta of transaction
happening on a closed system is a part of a block. The main argument which goes along with
any Crypto-currency based technology is whether it is of any evidentiary value in a court of law?
The answer is surprising; the evidence presented in the form of a block transaction is not
admissible because the records produced is completely intelligible to human eye, only hash
function along with creation, access and modified values is represented and no data relating to
the end users is their. The 3rd eventual step will be to evaluate the evidentiary value.
Question of the hour is that how to pass this test of stable evidence? So if we are able to centralize a
crypto currency, what government can do is to create a sophisticated know your customer
mechanism which will help in realizing the identities of the end user and the person who wants
to keep his or her identity safe can be taxed by creating a new tax value of “Anonymity Tax”.
This will help in curbing practices like money laundering, Cyber fraud, terrorists group funding
etc.
Any crypto currency transaction should be passed as an electronic signature mentioned
under Section 3(2) of Information Technology Act, 2000 which speaks that any digital signature
passed under it should be subject to an asymmetric crypto authentication and wait for it! the
same technology is being used in crypto currency transaction for authentication purposes.
Once the transaction is authenticated as the electronic signature then it can be made admissible
under Section 65(b)(4)of the Indian Evidence Act, 1872 which speaks of admitting an electronic
evidence.
4. PREVENTION OF ONLINE OFFENCES PERTAINING TO CRYPTO CURRENCY: Once
everything is on the closed network and monitoring is being done by the aforementioned
authority. The crimes committed can be made punishable under the Indian Penal Code, 1860
and many other laws associated with varying degrees.
COMPARATIVE ANALYSIS OF GLOBAL
CRYPTO -CURRENCY REGIME
An outcry to essentially regulate crypto-currencies, upon its proliferation across most
burgeoning Economies across the globe, has been conceived. Rapidly evolving economies amp
supply chains, and volatile markets, make it cumbersome to legislate apposite guidelines, to
accommodate or rather assimilate with evolving standards, and expectations.
Despite deeming crypto currency exchanges, money transmitters, the United States Financial
Crimes Enforcement Network, or more popularly referred to as ‘FinCEN’, does not particularly
consider crypto-currencies, legal tender.
While the Internal Revenue Service, regards crypto-currency as “taxable property, the United States Securities and Exchange Commission has essentially been apprehensive to warn investors, investing in crypto-currencies, of the possible investing risks plausible in the market, and further placed restrictions on several initial
coin offering programmes, in pursuance of greater amendments to regulate crypto-currencies,
deeming all crypto-currencies to be securities. The Commodities Future Trading Commission
has however, on the other hand, adopted a laissez- faire approach, endorsing “Bitcoin”, as a
product/ commodity.
Financial institutions under surveillance of the People’s Bank of China, have been discouraged
from fostering relations, and facilitating crypto-currency transactions.
The institution assumed a completely antagonistic approach, by banning domestic exchanges, and initial coin offerings. Although, China has been apprehensive to clamp down on the proliferation of crypto-havens and exchanges, the country has virtually not yet banned mining associated activities. Chinese
‘bitcoin miners’ accounted for up to more than half of the global mining community , inducing the
country’s administration to focus on obviating tax evasion, corruption, and stabilizing capital
outflows. With dealings in crypto-currencies, and exchanges, being deemed legal in Australia,the country since 2017, has adopted a progressive approach towards regulation of its crypto regime, by making available- the necessary needs and demands, of an evolving and extremely
volatile market, with appropriate administrative rule-making, judicial overlook, and minimalistic
legislative interference; as juxtaposed with its controversial erstwhile policy to double tax,
incomes as have been accrued from dealing crypto-currencies, under their corresponding goods
and services tax (GST) laws.
The Reserve Bank of Australia has approbated with the usage of
crypto-currencies, as a legal and official form of currency. And moreover, beyond exchanges,
initial coin offerings have truly been proliferating, while in constant surveillance, or rather
scrutiny of the Australian Securities and Investments Commission, deriving legality of rule of law, under the ‘General Consumer Act’, and ‘The Corporations Act”.
A license from the Swiss Financial Market Supervisory Authority, must be obtained, coupled with pursuance of mandatory registration procedures, for establishment and subsequent operation of crypto-currency exchanges. The Swiss Federal Tax Administrative authority deemed crypto-currencies, to be assets, which may incidentally be subjected to its corresponding Wealth tax, legally required to
be disclosed while filing annual tax returns. It even established a functionally working initial coin
offering committee, to strengthen legality, increase financial integrity and stability.
The authors of the blog are very well aware of the paradox the suggestion will create. The laws
are in the favor technology and it now the time for the government to legalize it and strike a
balance between privacy and all the monitoring it will need to create a normalized and stable
crypto coins.
