Cryptocurrency rules

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The overhaul of these laws and regulations, when complete, is likely to foster a positive environment for digital-first businesses in India. Such foundational laws in the pipeline today are as follows:. These impending pieces of legislation would need be kept in mind by any Web3, blockchain or cryptocurrency business when operating in India.

Exchanges are the gateway for most retail VDA investors, creators and enthusiasts to interact with the global VDA markets and ecosystem. They act as vital on- and off-ramps and, as such, tend to interact with a large number of entities, regulators and businesses. Some key developments in law and enforcement that have impacted how Exchanges conduct business are as follows:.

In the absence of any specific legislation, VDAs are neither regulated nor prohibited. Individuals and entities are permitted to hold, invest in, and transact VDAs, provided they comply with existing laws while doing so. Further, any bank or other entities regulated by RBI will need to carry out due diligence processes in line with existing laws and regulations applicable to financial service providers governed by RBI.

It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode like the proverbial cat closing its eyes and thinking that there is complete darkness by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority. But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be.

It is as much true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. It is anticipated that the impending legislation will seek to regulate VDAs based on their functions and uses. In the absence of specific law, pieces of legacy legislation that deal with subjects such as the: i trading and issuance of securities; ii trading of commodities; iii acquisition and sale of assets to and from persons resident outside India; and iv acceptance of deposits by companies, are triggered in certain circumstances.

The nature of VDAs and their features will determine the regulatory mechanism that will be applicable to them, based on their use case, which will determine whether they will be treated as VDAs or not. Bitcoin, then it is freely tradable by individuals within India without any reporting requirements apart from the application of the IT Act.

Companies incorporated in India, on the other hand, are required to report any VDA holdings to the regulator as part of their annual returns. Where VDAs are issued by incorporated entities in India and such VDAs carry rights in the ownership or assets of such entities, such entities may be subject to rules regarding the issue of securities, collective investment schemes and other similar rules and regulations.

Similarly, incorporated entities issuing tokens that are akin to deposits being accepted from the public would be subject to rules issued in this regard. Furthermore, after the enactment of the Finance Act, , trading of VDAs is subject to taxation as discussed below. These changes can be summarised as follows:. The sale of goods in India is subject to GST at specified rates pertaining to the type of goods sold. Presently, the service fee being collected by Exchanges is being subjected to an assessment for GST.

There remains, of course, the matter of cross-border VDA transactions and the related interplay between withholding tax and Double Taxation Avoidance Agreements. The movement of VDAs across borders, to and from wallets and exchanges poses an unresolved legal challenge on how to accurately tax the sale of VDAs internationally. Owing to the pseudonymised nature of transactions related to VDAs, RBI via a circular sought to ringfence all Regulated Entities from providing any services to VC businesses, effectively enforcing a complete prohibition on dealing in VCs.

Further, the use case of VDAs may also play a determinant factor in identifying the money transmission laws applicable to it:. In an updated version of this Framework published on 8 th October , [xliv] the limitations remained consistent. The Second Cohort [xlv] of this Regulatory Sandbox included a blockchain-based cross-border payment system that sought to leverage the current infrastructure and ensure frictionless and tamperproof monitoring capabilities. Similarly, the Third Cohort of this Regulatory Sandbox included a private limited company that was working on a blockchain-based product that acts as middleware in the blockchain stack, enabling co-lending for the micro, small and medium enterprises sector.

While there is no specific restriction in the said regulations on advising on and managing VDAs, the list of commodities that managers and advisers can deal in has been notified by SEBI [xlvii] and does not include VDAs.

Therefore, any investment advisers or fund managers currently providing services related to VDAs in India are doing so in their personal capacity and not as advisers or managers licensed by SEBI. The mining of VDAs is neither prohibited nor regulated in India. As already discussed, costs incurred in the mining of VDAs will be treated as capital expenditure and will not qualify for deduction under the IT Act.

A commercial VDA mining operation in India would be subject to all applicable statutory laws and licensing conditions required for operating any commercial venture, including but not limited to corporate commercial laws, information technology laws, land zoning laws, trade licence, labour licence, etc. RBI is the financial regulator for the nation.

It issues exchange and capital control regulations from time to time under FEMA, more specifically:. Based on the categorisation of VDAs under Indian law as either a capital asset or good, the applicable legislation may be triggered. This would require each cross-border transaction in VDAs to be carried out via authorised dealer banks and be subject to reporting requirements, KYC and other AML protocols. Presently, the Indian government does not require persons to report their VDA transactions except in two circumstances: firstly, reporting of any income or profits from VDA in the income tax returns; and secondly, as required by the Companies Act, This makes it easier for authorities to trace large transactions in the future.

P2P sales, however, remain unchecked except to the extent that all transaction details are required to be reported to the tax authorities for the purposes of the IT Act. There are no specific laws or regulations regarding the treatment of VDAs for the purposes of estate planning or testamentary succession. Individuals in India are bound by their personal laws viz. Depending on the individual, the applicable personal laws would be the Hindu Succession Act, , the Indian Succession Act, , or the Muslim Personal Law Shariat Application Act, , or in cases where a will has been executed by an individual who follows the Islamic faith, the succession will be governed under the relevant Muslim personal law, which is not codified.

The first aspect to consider is how the right will devolve from the owner of VDAs to his intended beneficiaries. This right may flow through a will, or through operation of law in the event that the owner of the assets dies intestate. The second aspect to consider is the manner in which the right to the VDAs devolves upon the beneficiaries. In case of wills, to ensure that beneficiaries receive all VDAs left behind by the testator, the testator will need to put a mechanism in place enabling their executor s to take charge of and transfer VDAs to the intended beneficiaries.

Regardless of the mode of devolution of the right on the beneficiary, novel solutions may have to be devised to ensure delivery of e-wallets or private keys to beneficiaries. Smart contracts may play an important role in arriving at such solutions.

The authors acknowledge with thanks the valuable contribution of Mr. Akash Kumar to this chapter. Free Newsletter. Toggle navigation. Sign up for free newsletter. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining. However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries:. Do you have questions about cryptocurrency, digital currency, or blockchain technology?

Freeman Law can help with digital currencies, tax planning, and tax compliance. Contact us now or schedule a consultation or call to discuss your cryptocurrency and blockchain technology concerns.

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