As crypto gains currency in India, experts call for cautious regulation

Demands for a judicious system to regulate the cryptocurrency ecosystem have been here for a while. But they have gained momentum since last year, after the Supreme Court of India struck down the Reserve Bank of India’s (RBI’s) circular that had prohibited banks and financial institutions from providing such services.

The apex court had struck down the circular on grounds of proportionality (that the action was more drastic than needed for obtaining the desired result; in this case regulation). With mounting allegations of cryptocurrency fraud and many aggrieved citizens approaching courts, experts say the need for a regulatory mechanism is urgent.
 

The Saket District Court in New Delhi had, last week, ordered for the publication of a notice in newspapers across the country, inviting those who alleged fraud against IQ Option — an online cryptocurrency trading platform — to join a class action lawsuit.

The case, Achin Sharma vs IQ Option Europe, serves as a precedent, given that it is among the first cases against an online cryptocurrency trading platform.
 

Sharma, a Delhi-based businessman, claims he was charged an exorbitant amount of hidden facilitation fees at the time of making a $320 deposit in his crypto wallet on the platform. “After the deposit, when I tried to withdraw my money, I was told that my account needed to be ‘verified’,” he claims.
 

Sharma says every time he tried to verify his account, the website showed an error. Finally, when the website approved his account, his withdrawal request was rejected. He claims that repeated attempts by him and his counsel, Nipun Saxena, to contact the Cyprus-based entity resulted in a single response, saying Sharma was not a client of the website.
 

IQ Option claims to have over 40 million registered accounts in several countries. When contacted by Business Standard, the firm refused to comment.
 

Over the past two years, several Ponzi schemes pertaining to cryptocurrencies have emerged. Another such alleged case is that of one Amit Bhardwaj, who has been accused of a scam of $300 million, promising a whopping 10 per cent monthly return on Bitcoin investments under multi-level marketing schemes.
 

After absconding and then being apprehended by the police in Bangkok in 2018, he had chargesheets filed against him in Chandigarh, Mumbai, Pune and Delhi.
 

With Bitcoin rallying to unprecedented highs over the past few days, surpassing $37,000, concerns of fraudsters feeding off this fervour have risen, which have led to rising calls for better regulation.
 

“A vacuum has been created, given that there is no specific law regulating cryptocurrencies in India. Accordingly, such transactions come with their own set of risks,” says Rishi Anand, partner, DSK Legal.
 

Dinkar Kalra, advocate-on-record in the Supreme Court and author of Cryptocurrencies in India: Not Illegal, But Not Quite Legal, says cryptocurrency regulation has always been a grey area. “Multiple Bills have been introduced, but nothing has materialised. Many companies have approached the government and said they’ve built a world-class setup for trade, but the government is yet to make up its mind.”

Digitally safe

• Last year, the Supreme Court struck down an RBI circular that prohibited banks and financial institutions from providing crypto trading services
• Since then, crypto trading has been functioning in a vacuum, without a specific regulatory regime
• Previous Bills on the matter haven’t been revisited and the government is yet to announce its stance
• A class action suit against a Cyprus-based online crypto trading platform was filed last week, accusing the firm of fraud
• Amid increasing cases of fraud, calls for regulation have risen

The draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, is yet to be taken up. The Bill stipulates that the use of cryptocurrency is punishable with a fine or imprisonment of up to 10 years.
 

However, keeping in mind the apex court’s judgment on the RBI circular, the Bill may fail the test of proportionality too, say lawyers, which is probably why the government hasn’t revisited it yet.
 

The Inter-Ministerial Committee’s initial report in 2018, along with a draft Bill —Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018 — may also warrant reconsideration.
 

This Bill allows the sale and purchase of cryptocurrencies at recognised and regulated exchanges.
 

Some laws, though, do exist to provide some protection to investors: Consumer Protection Act, criminal laws, and the Foreign Exchange Management Act (for controlling transactions abroad).
 

However, experts have stressed upon the need for a specific law for better protection.
 

“Almost all financial intermediaries come under a regulator. A similar licensing regime can be introduced for exchanges and wallet providers, so that they can be held accountable. This will result in more confidence and better consumer protection,” says Jaideep Reddy, leader, Nishith Desai Associates.
 

Reddy adds that many already follow self-regulation and it would be good if such a code of conduct was formalised.