Govt needs to clear up confusion surrounding cryptocurrencies

The message sent out by the Government during the Budget on ensuring that cryptocurrencies was not to be used for illegal purposes, led to speculation that legislation regarding the same would be introduced soon. So, when it was announced on February 20 that the Union Cabinet had got clearance to introduce the ‘Banning of Unregulated Deposit Schemes Bill 2018’ (Bill) in Parliament, the industry went into overdrive and panic spread amongst the cryptocurrency players that doomsday was finally here.

However, on closer examination, the picture does not seem to be as bleak as it is being made out to be. According to the press release, the object of the Bill is to prevent illicit deposit taking activities by prohibiting unregulated deposit schemes and introducing punishment for players engaged in the promotion or operation of such schemes. This is far from the speculation that has come up in the market where many have interpreted the Bill to include a prohibition on trading of cryptocurrencies such as Bitcoin. Such an interpretation is completely incorrect and in ignorance of the declared legislative intent behind the Bill.

If we examine it more closely, the subject matter of the Bill concerns a “deposit” which is defined as the “receipt of money, by way of advance or loan or in any other form, to be returned, whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, by any deposit taker, with or without any benefit in the form of interest, bonus, profit or in any other form.”

On reading, this does not appear to cover a transaction involving the simple purchase of cryptocurrency on the exchanges. However, it may be argued that the purchase of cryptocurrencies on an exchange constitutes a “deposit” because the receipt of cryptocurrencies in return for deposit of money is a return in kind.

The same reasoning can be applied to any sale-purchase transaction. Adopting such an interpretation would mean that all sellers of goods/services would be considered deposit takers and every purchase would be considered a deposit in terms of the Bill.

To avoid such an anomalous situation, the Bill has specifically listed transactions which will not be considered as deposits. It carves out a specific exemption for any amount received as payment for supply of goods or services, which is repayable only in the event that the goods or services are not in fact sold or provided. Purchase of any cryptocurrency such as Bitcoin through an exchange falls squarely within the above exemption.

While there is still some debate around classification of cryptocurrencies as “goods” or “services”, it is undeniable that payment made to a cryptocurrency exchange for the purchase of a Bitcoin would be “payment for the supply of goods or services.” This would be repayable only in limited circumstances such as when the sale does not take place i.e. “in the event that the Bitcoin is not in fact purchased/sold.”

Notably, the Bill does not contain even a single reference to terms such as “cryptocurrency”, “currency exchange’, “bitcoin”, “blockchain”, etc. Most grapevines have relied on a press release  issued in December last year from the Ministry of Finance, where the speculative nature and lack of any apparent underlying asset in cryptocurrencies was compared to Ponzi schemes. Thus, the conclusion was reached that cryptocurrencies are Ponzi schemes and that the Bill is aimed at curbing the trading of cryptocurrencies.

It is true that the Union Government and the Reserve Bank of India (RBI)  have time and again warned against the potential hazards associated with cryptocurrency investments — given the volatility of the market and the prevalent use of cryptocurrencies for illicit transactions — and have refrained from recognising cryptocurrencies as legal tender. However, just as with the misinterpretation of the Budget speech, the recent suggestions that the Bill prohibits trading of cryptocurrencies is a simple case of dissemination of incomplete information.

This all points towards the need to have regulations in place for dealings involving cryptocurrency. Even with promises of the Blockchain technology being accepted for the purposes of governance, the Government’s silence on the cryptocurrency issue may hurt common investors in the long run. With the market running amok with initial coin offerings and burgeoning exchanges, the wait and watch game may not be beneficial. It is time the fintech community should be summoned to put forward their ideas and a comprehensive solution be arrived at without compromising the interests of the State.

Rashmi Deshpande is an Associate Partner, while Anjali Krishnan, Associate Partner, Khaitan & Co. The views expressed by the authors are personal.