This timeline of cryptocurrency regulation in India has been prepared on the basis of the discussion led by Tanya Sadana of Ikigai Law at our #NAMA Bootcamp on Understanding Cryptocurrencies, supported by Zebpay, in New Delhi on August 23. Ajeet Khurana from Zebpay gave industry insights.

2013 2017: RBI releases press releases, Finance Ministry sets up a committee

  • December 24, 2013 – First Press Release by RBI cautioning users about risks of Virtual Currency:
    • Virtual currencies are not backed by any central bank.
    • Value is a matter of speculation, not underpinned by an asset or good.
    • No trading or usage of virtual currencies has been authorised by RBI.
    • RBI is in the process of studying the extant regulatory framework relating to cryptocurrencies in India and based on their study, they will issue further directions.
  • February 1, 2017 Second Press Release by RBI cautioning users, holders and traders of virtual currencies again.
  • April 12, 2017 – Inter Disciplinary Committee set up by Ministry of Finance to study cryptocurrencies and the growth of virtual currencies
  • July 2017 – Inter-Disciplinary Committee submits report. The Report was not made public and RTIs have also been denied as “it is of strategic importance”.

“An extremely negative view came out of it [the committee], but the report was not shared.” —Ajeet Khurana

  • August 2017 – Digital Assets and Blockchain Foundation established
  • August 2017 – First PIL in relation to cryptocurrencies filed before the Supreme Court
  • December 5, 2017 – Third Press Release by RBI cautioning people about the risk of virtual currencies
  • December 2017 – Second PIL in relation to cryptocurrencies filed before the Supreme Court
  • December 29, 2017 – Ministry of Finance compares cryptocurrencies to Ponzi Schemes, cautions users in a press release; says that virtual currencies are not legal tender in India, do not invest in them.

February 2018: FM says cryptocurrencies are not legal tender in Budget speech

  • February 1, 2018: Finance Minister Arun Jaitley, in his Union Budget Speech, said that cryptocurrencies are not legal tender, and cannot be used as part of the payment systems. The government will come down heavily if someone does, and cryptocurrencies will not be allowed as they can be used for illegitimate activity.

April 2018: RBI circular prohibits dealing in virtual currencies

  • April 5, 2018: Press release by RBI indicates that the RBI was planning to prohibit its banking and related entities from dealing with cryptocurrencies
  • April 6, 2018: Circular by RBI prohibited banks and regulated entities from dealing with or providing service to any person or entity dealing with or settling in virtual currencies.

Impact: Even though RBI could not regulate cryptocurrencies as they are not a legal tender/money, it can and did regulate banks and cut off the legs of cryptocurrencies.

  1. All cryptocurrency exchanges in India functioning at that time were hindered by the circular because banks refused to service them, including processing their requests to pay rents, salaries, etc.
  2. It prohibited banks and regulated entities from dealing with any person who has any cryptocurrency holdings or settles in cryptocurrencies.

Caveat: Not all banks under the RBI are regulated directly by RBI. The State Bank of Sikkim is not under the RBI banking laws which is why all crypto-exchanges rushed there, but the State Bank of Sikkim refused to open it. The State Bank of Sikkim doesn’t have a net banking licence so was not very practical.

Effect of RBI’s circular on crypto-exchanges:

  1. Business model changed: Either exchanges shut shop, as Zebpay India did, or enabled P2P mechanisms through which money was exchanged directly between customers, and the exchanges made it technologically feasible.
  2. Trading volumes fell by 99%: India’s pre-circular daily trading volume in cryptocurrencies, which was between ₹30 crore to ₹300 crore, fell to about 1% of it, as on August 23, 2019.
  3. Loss of employment: Industry employed about 1,000 people, or 3,000 including call centre employees. Within 2-3 months, 66% jobs were lost. As of August 23, 2019, 95-96% jobs had been lost.

Problem with the RBI circular: By disabling crypto-exchanges, RBI broke the tool for governance. These exchanges, by voluntarily conducting KYC verification of their customers, were creating a record of people who were trading in cryptocurrencies. They were voluntarily following Anti-Money Laundering (AML) guidelines. Banks could not track cryptocurrency purchases and exchanges, but exchanges knew who their customers were. On being asked by a regulator, they could share customer details. — Tanya Sadana

  • April 2018: Writ petition challenging RBI circular filed before the Supreme Court

May 2018 now: Case before SC gains momentum, draft bill banning cryptocurrencies released

  • May 30, 2018: Supreme Court directs petitioners to submit representation to the RBI against the circular, and to tell RBI their grievances and how they plan to address RBI’s grievances
    • Petitioner’s representation gave detailed suggestions, including, ‘If you feel that they are being used for illicit activities, impose KYC in regulations on us, make us a regulated entity under the PMLA.’
    • RBI’s reply wasn’t comprehensive.
  • July 22, 2019: Report by Inter-Ministerial Committee headed by Economic Affairs Secretory Subhash Chandra; Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 released
  • August 2019: Arguments heard by the Supreme Court, SC directs RBI to reply to petitioners’ May 30, 2019 representation
  • September 25, 2019: Next SC hearing