Cryptocurrency Investment In India: Understanding the Legal Landscape

Introduction

Cryptocurrency is a digital or virtual currency protected by encryption. In layperson's terms, cryptocurrencies are distributed digital currencies that allow for safe transactions between people without the need for traditional financial gatekeepers. Cryptocurrencies such as Bitcoin, Ethereum, etc., have become increasingly popular in India as an alternate investment option, drawing interest from both individuals and organisations. Investing in cryptocurrency in India usually involves purchasing and selling virtual currencies on internet marketplaces, where traders predict price swings to profit.

Investing in cryptocurrencies is becoming more accessible because of the growth of trading platforms, wallet services, and cryptocurrency exchanges. However, investors, business owners, and other customers are left confused by the Indian government’s fluctuating position on cryptocurrencies, which has ranged from straight prohibition to cautious acceptance. Figuring out the complicated legal framework governing cryptocurrency investments in India is essential since its structure is shaped by the Reserve Bank of India’s (RBI) circulars, the Finance Ministry’s taxation policies, and judicial actions. The blog talks about the legal framework of cryptocurrency in India, analyses the dark side of cryptocurrency investment, and aims to advise investors on how they can safely invest in cryptocurrency.

Crypto Legal Landscape in India

Significant changes have occurred in India’s cryptocurrency legal setting, now striking an appropriate balance between development and regulatory caution. These changes have shaped the current state of the field. Now, let us examine the legal landscape of cryptocurrency in India.

RBI on Cryptocurrency

The Reserve Bank of India (RBI) issued a warning circular in 2013, asking the public to exercise caution when using virtual currencies such as Bitcoin, Litecoin, etc. Highlighting market fluctuations and unpredictability, the RBI underlined the dangers of cryptocurrency trading. While highlighting its continued observation of the virtual currency system, the central bank also voiced concerns regarding the authenticity of cryptocurrency investments and their indicated market prices.

In 2017, the RBI increased its caution about cryptocurrencies and clarified that they are not accepted as currency. Notable officials argued for a prohibition, pointing out the dangers of dark money and the exploitation of innocent investors. The RBI essentially limited the financial sector’s engagement with cryptocurrencies by restricting banks and other financial institutions from dealing in virtual currencies or offering services to cryptocurrency exchanges.

The RBI has expressed serious concerns about cryptocurrencies, an imminent danger to the banking system. Further, they highlighted that cryptos bring severe danger because they are not regulated by central banks and supported a ban on private cryptocurrencies as they include threats to financial authority and potential abuse by private corporations or governments. The RBI’s approach arises from concerns about crypto's uncontrolled traits, the potential to undermine financial independence, and market fluctuations, as illustrated by the cryptocurrency market fall. The RBI was considering launching an official digital currency to combat private cryptos, indicating a wary attitude toward electronic resources.

Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No. 373 of 2018

In this case, the Supreme Court invalidated the RBI’s circular banning the trading of cryptocurrencies, stating that the prohibition is “unfair and unviable.” The Apex Court noted that the RBI had overstepped its power by restricting banks from providing services to companies that deal with cryptocurrencies. The RBI has significant powers to regulate the economy but has not shown how these companies have affected the economy or banking system. Therefore, the RBI’s circular was declared unlawful and unenforceable.

Therefore, after the Supreme Court’s clear verdict, cryptocurrency is legal in India. However, there are no laws or rules regulating cryptocurrencies.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced in the Lok Sabha to create a framework for the Reserve Bank of India (RBI) to issue an official digital currency and regulate cryptocurrencies.
The Bill talks about banning every private cryptocurrency and creating a framework for the RBI to issue an official digital currency. There have been a lot of debates and discussions around the bill, but it has yet to be passed by parliament. The bill also mentions strict punishments for violating the same.

The Indian Tax on Crypto Currency

The definition of Virtual Digital Assets (VDAs) has been included under Section 2(47A) of the Income Tax Act of 1961. As all types of crypto assets come under VDAs, cryptocurrency will also come under crypto assets. Whether a cryptocurrency is taxable or not in India? The answer is yes, which can be understood in detail in the Union Budget 2022. The 2022 budget brought the term “Crypto Taxation”. The Budget stated that digital assets, such as cryptocurrencies and Non-Fungible Tokens (NFTs), are taxable in India at a 30% tax rate. Losses cannot be used to compensate for other income; only acquisition expenditures are deductible. The recipient is taxed when digital assets are gifted. Further, a 1% tax deducted at source (TDS) will also be applicable on all sales starting July 1, 2022.

Hidden Dangers of Cryptocurrency Investment

Various problems arise from cryptocurrency that affect the investment process. The dark side of cryptocurrency investment is as follows:

Implementation is slowed, and legal confusion is produced by regulatory ambiguity brought on by conflicting legislation and varying international positions. Severe financial dangers, such as fraud, hacking, and cyberattacks, are associated with security issues. Additionally, cryptocurrency markets are notably irregular, with sharp price fluctuations that make investing unsafe and uncertain. Additionally, a lack of knowledge about clients results in unaware decisions, fraud, and possible misconduct: furthermore, as the number of customers and transaction volume increases, scalability issues appear, surpassing specific blockchain networks and leading to inefficiencies, delays, and higher expenditures. For the cryptocurrency market to be stable and widely adopted, these problems must be resolved.

Problems with public perception and trust, worsened by media coverage and security breaches, also hinder broad implementation. To maintain growth and sustainable operation, the banking sector must address these trust, regulatory, and environmental issues and strive for increased adoption and interoperability with traditional financial institutions.

Tips for Investors to Invest in Cryptocurrency Safely

To invest in cryptocurrency safely, the following steps would be helpful for investors:

• Investors should start cryptocurrency investment by selecting a trustworthy exchange with robust security.
• Before investing in a cryptocurrency platform, investors should verify their identity through the Know Your Customer (KYC) process by uploading a valid government-issued ID, such as an Aadhar ID or passport. This will help secure the investments without any problems.
• Investors should fund their cryptocurrency platform account after KYC approval. They can fund using any convenient option, such as bank transfers, credit cards, or UPI. Generally, they should start with a manageable amount, as cryptocurrency has high volatility.
• Investors should also track real-time market trends and global economic events, diversify wisely to reduce risk, and they can also earn potentially attractive returns and set clear investment goals.
• Investors can set up stop-loss orders to reduce losses when the price of a cryptocurrency falls. They should also do additional research to learn more about cryptocurrency investment.
  

Conclusion

Cryptocurrency investment is lawfully permissible in India, and investors should choose a reputable and trustworthy platform. For taxation reasons, holdings of cryptocurrencies are regarded as assets, and income tax is applied to trading profits. Cryptocurrency merchants and exchanges must keep precise transaction records and conform to disclosure guidelines. Investors should know crypto currency investment's various challenges and risks and invest safely after careful research. With these, investors can confidently and securely explore the dynamic landscape of cryptocurrency investing in India.

References

1. From outright ban to ‘clear danger’: A look at RBI’s stance on crypto in India
2. Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No. 373 of 2018
3. The Income Tax Act, 1961
4. The Union Budget 2022
5. N. Raja Sujith and others, THE CRYPTOCURRENCY BILL, 2021: FROM PROHIBITION TO REGULATION, Majmudar and Partners International Lawyers
6. Ektha Surana, Taxation On Cryptocurrency: Guide To Crypto Taxes In India 2024, Cleartax, July 2024
7. Sridevi and Samuel, A STUDY ON THE FUTURE OF CRYPTO CURRENCIES IN INDIA WITH THE OPPORTUNITIES AND CHALLENGES A SPECIAL REFERENCE TO CHENNAI CITY, African Journal of Biological Sciences, 2024
8. Trade Brains, How to Safely Invest in Cryptocurrency in India? October 2024