Blockchain and cryptocurrencies have gained significant recognition in India, prompting the need for regulatory frameworks to govern these emerging technologies. While India has not enacted any specific legislation for virtual currencies (VCs), various existing statutes have been contemporized to address the evolving dynamics of the financial landscape. This article explores the government's attitude and definition of VCs, cryptocurrency regulation, sales regulation, taxation, money transmission laws, anti-money laundering requirements, promotion and testing, ownership and licensing requirements, mining, border restrictions and declaration, reporting requirements, and estate planning and testamentary succession in the context of blockchain and cryptocurrency laws and regulations in India.

Government Attitude and Definition

India has not introduced dedicated legislation for the regulation of virtual currencies. However, the government has broadened the scope of existing statutes to cover virtual digital assets (VDAs) and reflect the emerging dynamics of the financial landscape. The Companies Act, 2013 now necessitates reporting of VDAs, while the Prevention of Money Laundering Act, 2002 (PMLA) has been expanded to include transactions related to VDAs. India's income tax laws have also been amended to include the taxation of VDAs, recognizing the fiscal implications of the VC market.

The government's stance on VDAs is expected to become clearer with the proposed bill titled "The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021." While the bill is yet to be available to the public, public statements by high-ranking government officials indicate a shift towards a globally aligned, internationally synchronized law regulating VDAs. India, as the G20 president, is leading global crypto regulation discussions and has released a note entitled the "Presidency Note as an input for a Roadmap on Establishing a Global Framework for Crypto Assets" for consideration by G20 members.

To understand the current attitude of the Indian government, it is essential to consider actions taken by various ministries, departments, and representatives. The National Strategy on Blockchain, released in December 2021, advocates for the development of a national blockchain infrastructure throughout the country. The Reserve Bank of India (RBI) has addressed risks associated with VDAs, proposing three policy approaches: prohibition, containment, and regulation. In addition, the Indian Computer Emergency Response Team (CERT-In) has issued guidelines for information security practices related to virtual assets.

Cryptocurrency Regulation

VDAs are not recognized as legal tender or coin in India. Individuals and entities are allowed to hold, invest in, and transact VDAs as long as they comply with existing laws. While VDAs are not expressly regulated or prohibited, they are subject to existing financial services regulations, including KYC, AML, and CFT requirements. Regulated entities, such as banks, must adhere to established due diligence processes.

The Supreme Court of India's 2020 judgment acknowledged the dual nature of VDAs, highlighting the need for suitable regulatory mechanisms. The government aims to curb the use of VDAs in financing illegitimate activities or within the payment system. Legacy legislation related to trading and issuance of securities, trading of commodities, acquisition and sale of assets, and acceptance of deposits apply to VDAs in certain circumstances.

The Advertising Standards Council of India has framed guidelines for the advertising and promotion of VDAs. These guidelines require advertisements to carry prescribed disclaimers, prohibit the use of certain words, and ensure that risks are not downplayed. Celebrities and influencers are required to conduct proper due diligence before participating in promotional activities.

The Finance Act, 2022 introduced a tax regime for VDAs. Income from the transfer of VDAs is subject to a 30% tax, and withholding tax applies to VDA transfers. Guidelines have been provided for VDA exchanges and peer-to-peer transactions. The sale of VDAs may also attract GST, and cross-border transactions pose challenges in accurately taxing VDAs internationally.

Money Transmission Laws and Anti-Money Laundering Requirements

Regulation of VDAs primarily comes from RBI circulars that mandate checks by regulated entities. These entities are permitted to handle VDAs as long as they comply with KYC, AML, and CFT requirements. The PMLA and Rules have been expanded to cover various aspects related to VDAs, including exchanges, transfers, safekeeping, and engagement in financial services. CERT-In has issued directions requiring virtual asset service providers to maintain KYC and transaction records.

Promotion and Testing

RBI has introduced the Enabling Framework for Regulatory Sandbox to promote the adoption of new technologies in the fintech space, excluding cryptocurrency and crypto asset services. Telangana has launched India's first Web3 Regulatory Sandbox to facilitate testing and innovation in blockchain and crypto products. Startups in the Sandbox receive mentorship, regulatory compliance support, and collaboration opportunities with key stakeholders.

Ownership and Licensing Requirements

Investment advisors and fund managers in India are subject to licensing and regulation by SEBI. While there are no specific restrictions on advising and managing VDAs, the list of commodities that managers and advisors can deal in does not include VDAs. Therefore, advisors and managers providing services related to VDAs are doing so in their personal capacity.

Mining

The mining of VDAs is neither prohibited nor regulated in India. Infrastructure costs incurred in VDA mining are treated as capital expenditure and are not deductible from taxable income. Commercial VDA mining operations must comply with applicable statutory laws and licensing conditions.

Border Restrictions and Declaration

Cross-border transactions involving VDAs must comply with RBI's exchange and capital control regulations under FEMA. Reporting requirements, KYC, and AML protocols apply to each cross-border VDA transaction, which must be conducted through authorized dealer banks.

Reporting Requirements

Currently, individuals are not required to report VDA transactions, except for income or profits from VDAs in income tax returns and reporting requirements under the Companies Act, 2013. However, the Ministry of Electronics and Information Technology has issued a circular mandating virtual asset service providers to maintain KYC/AML data of their users.

Reporting under the PMLA

The PMLA and Rules require reporting entities to comply with directions, including verifying client identity, conducting due diligence, recording and monitoring transactions, reporting suspicious transactions, and maintaining records. Reporting entities must maintain a record of all transactions and furnish the same to the central government and the Financial Intelligence Unit.

Estate Planning and Testamentary Succession

There are no specific laws or regulations regarding the treatment of VDAs for estate planning or testamentary succession. Succession is governed by personal laws, such as the Hindu Succession Act, 1956, the Indian Succession Act, 1925, or the Muslim Personal Law (Shariat) Application Act, 1937. Ensuring the delivery of e-wallets or private keys to beneficiaries may require novel solutions, potentially utilizing smart contracts.

In conclusion, India is actively working towards establishing regulatory frameworks for blockchain and cryptocurrencies. While VDAs are not expressly regulated or prohibited, existing laws and regulations govern their use. The government's attitude towards VDAs continues to evolve, and stakeholders must stay updated on the latest developments in this dynamic landscape.

For the latest updates on blockchain and cryptocurrency laws and regulations in India, visit LegalStix Law School.

Please note that this article serves as a general guide and does not constitute legal advice. It is recommended to consult with a qualified legal professional for specific inquiries or concerns.