Is Trading in Cryptocurrency Legal in India?

हिंदी में पढ़ें
August 21, 2022
By Advocate Chikirsha Mohanty

Technological advancement around the globe has paved the way for making the world digital. With the growing popularity of internet technologies, another advancement has come to light in recent years known as virtual currency or cryptocurrency. Cryptocurrency such as Bitcoin, due to its growing popularity, has become one of the most common forms of internet currency being used by millions of internet users for various digital transactions from booking hotels and flights to purchasing jewelry and computer parts. Since Cryptocurrency is not regulated by any central authority, trading in an unregulated sector can lead to money laundering, fraud and even funding terrorism. In this law guide, we are going to cover all that you need to know about trading in cryptocurrencies and the law governing it in India.

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What is Cryptocurrency?

Cryptocurrency refers to a digital or virtual currency that works as a medium of exchange and uses cryptography to secure and verify the transactions along with to control the creation of new units of a particular cryptocurrency. In other words, cryptocurrency is limited entries in a database that cannot be altered unless certain conditions are fulfilled.

Is Trading in Cryptocurrency Legal in India?

The government has, time and again, cautioned the public of India about the risks involved in dealing with virtual currencies stating that virtual currencies are not valid legal tender in India while also making it clear that the virtual currencies do not have regulatory protection in India. Moreover, various warnings were also issued by the RBI through its press releases regarding the potential risks of the use of cryptocurrencies to the financial system of the country. A report recommending certain measures about cryptocurrencies, which included a complete ban on private cryptocurrencies was also released by the Inter-ministerial committee on February 28, 2019. The committee also prepared a draft bill known as the Crypto Token and Crypto Asset (Banning, Control, and Regulation) Bill, 2018. However, the use per se was never banned.

However, in April 2018, the Reserve Bank of India (RBI) prohibited dealing in virtual currencies in India through its notification dated 06.04.2018. The notice that was issued by the central bank while exercising its powers stated that entities regulated by RBI will not deal in virtual currencies. Therefore, since the bank entities of RBI cannot deal in the purchase or sale of virtual currency, the consumers could neither process nor settle their cryptocurrency transactions.

Although, the validity of the notice was challenged in various writ petitions led by the entities trading cryptocurrencies in India. In furtherance of this, the Supreme Court of India in its recent judgment in the matter of Internet and Mobile Association of India vs Reserve Bank of India has set aside the notification issued by RBI while creating small hopes for the consumers in India who wish to trade in cryptocurrencies.

In its judgment, the apex court analyzed the role of RBI in the economy as the central bank to manage currency, money supply, and interest rates and recognized that the objective of RBI is the maintenance of price stability. It further noted that cryptocurrency is capable of being accepted as a valid payment for the purchase of goods and services and payment systems for the same can be regulated by RBI.

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Laws Governing Cryptocurrency in India

As stated above, cryptocurrencies are not legal tender in India, and while exchanges are legal, the government has made it very difficult for them to operate. Although, there is a lack of clarity on the tax status of the cryptocurrency, the chairman of the Central Board of Direct Taxes has stated that anyone making profits from Bitcoin will have to pay taxes on the same. It has also been suggested by the Income Tax department that the profits from cryptocurrencies should be taxed as capital gains.

Since there is no specific law governing cryptocurrencies, the government of India is looking at the possibility of cryptocurrency regulation. The special secretary of economic affairs in 2017 had formed a committee to suggest ways to tackle issues related to cryptocurrencies which was also working on a draft bill regulating cryptocurrencies. According to the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, holding, selling, or dealing in cryptocurrencies such as Bitcoin can land you in jail for 10 years. Besides making it completely illegal, the bill makes holding of cryptocurrencies a non-bailable offense. However, the fate of the bill is yet unknown.

Many other countries have regularized cryptocurrency in their respective jurisdiction. For instance, Canada does not treat virtual currency as a valid legal tender but allows the trade of these currencies in the country by making a few amendments to Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This not only allows virtual currencies by legalizing as a money service business for protection from money laundering. However, many countries are recognizing and legalizing this activity and are successfully able to tax the traders under various laws. For example, Israel taxes it as an asset, while the United Kingdom taxes it under various branches like Corporation pay or Corporate Tax while individuals pay capital gain tax.

The above instances from various countries show that there are many ways to regulate this business activity which could be a success, though admittedly, there are many challenges ahead in regulating this business activity. From India's perspective, a major point for consideration is that introduction of a Digital rupee as a legal tender may be a point of conflict as, by way of banning other virtual currencies and introducing the Digital Rupee, the government may have a monopoly in this business. The Hon'ble Supreme Court of India has noted this aspect while discussing this issue but evaded discussion on it by stating that such a situation has not yet arisen as enactment is still in bill shape.

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How can a lawyer help you?

Since the concept of cryptocurrency is new in India and there are no regulations regulating the same yet, a banking and finance lawyer must be consulted before getting involved in any transactions related to the same as any operation involving cryptocurrency requires vigilance and legal knowledge without which the person involved can face serious losses or in the worst-case scenario, legal charges.


These guides are not legal advice, nor a substitute for a lawyer
These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.

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