The term ‘crypto’ has been derived from the Greek word ‘kruptos’ meaning hidden.  Merriam – Webster’s online dictionary[1] defines the adjective ‘crypto’ as “not openly avowed or declared - often used in combination”. Authorities across the world are wary of cryptocurrency because of the ability of any person mining, holding or transferring cryptocurrency to do so with complete anonymity.

The prospect of recognizing and allowing cryptocurrency as a form of currency involves a host of issues, including legal and regulatory challenges. From a purely operational standpoint, cryptocurrency may meet some of the characteristics of currency. However, the acceptance of cryptocurrency raises larger questions of supervision and regulation, stability and protection of value for users, impact on financial and other sectors, misuse for money laundering, fraud, funding of terrorism or other illegal activities. There have been several incidents of trading of fake currency, fraudulent and fake exchanges, diversion of bitcoins by exchange, and other malpractices.

Every facet of economy of any country is intricately linked to its monetary system, its stability and continuity. The monetary system and policy of any country involves balancing of several factors. Central banks and government machinery play a very important role in maintaining such stability by adopting various measures e.g. regulating bank rates, controlling monetary liquidity, controlling credit limits, foreign exchange, devaluation, demonetization, printing of currency, targeted government spending in priority sectors, modifying tax rates and structures, imposing restriction on imports through import duties, safeguard duty and a host of other steps.

The present article confines its focus to the regulatory and legislative response to the burgeoning cryptocurrency industry in India and regulatory concerns stemming in light of the fact that cryptocurrencies are essentially decentralized and not backed by any central authority.

Reserve Bank of India

The Reserve Bank of India (“RBI”) is the central bank for India, responsible for operating the monetary policy framework of India, ensuring the stability of prices, managing public debt, issuance of bank notes, regulation of financial institutions and credit systems. The RBI exercises its regulatory and supervisory powers over the Indian banking and financial sector primarily through the Banking Regulation Act, 1949 (“Banking Act”), the Reserve Bank of India Act, 1934 (“RBI Act”) and the Payment and Settlement Systems Act, 2007 (“PSS Act”), and rules, regulations and guidelines issued thereunder.

RBI has adopted a cautioned approach towards cryptocurrency. It issued press note dated December 24, 2013 warning holders and traders of virtual currencies against the financial, legal and security-related risks associated with such currencies. Similar press notes were subsequently issued in February 2017 and December 2017 wherein the RBI reiterated that entities dealing in virtual currencies had not been authorized, and would be doing so at their own risk. Subsequently, RBI issued a circular on April 06, 2018 (“RBI Circular”) prohibiting all entities regulated by RBI from providing any services for or facilitating any person or entity in dealing with or settling virtual currencies, and all such regulated entities offering such services were provided a period of three months to exit such relationship with their clients.

The issuance of the RBI Circular upended the cryptocurrency industry in India and effectively brought it to a standstill. The RBI Circular essentially prohibited all entities regulated by the RBI from dealing in virtual currencies in any manner whatsoever. The RBI Circular did not impose any legal sanctions on, or prohibit, the usage of virtual currencies, but restricted the use of regulated banking channels for dealing in virtual currencies.

Supreme Court of India on Cryptocurrency

The RBI Circular was challenged before the Supreme Court of India on the following grounds, amongst others: (i) lack of jurisdiction of the RBI under the Banking Act, the RBI Act and the PSS Act to prohibit trading in virtual currencies through virtual currency exchanges since cryptocurrency does not constitute “legal tender” but constitutes goods or commodities; (ii) the RBI Circular imposed a total prohibition, vide subordinate legislation, of an activity not declared to be illegal, if violative of the Constitution of India which guarantees to all citizens the right to “practise any profession, or to carry on any occupation, trade or business”; and (iii) the RBI Circular being manifestly arbitrary and imposing disproportionate restrictions. 

On March 04, 2020, the Supreme Court of India delivered its judgment in Internet and Mobile Association of India vs. Reserve Bank of India, in a writ petition filed by the Internet and Mobile Association of India, an industry body representing the interests of the online and digital services sectors.

The Supreme Court of India observed that virtual currencies fall within the regulatory purview of RBI in light of the fact that virtual currencies cannot simply be regarded as goods / commodities and that virtual currencies have been accepted as valid modes of payment in certain jurisdictions. RBI, being a central bank has wide powers to operate the currency and credit system of the country and regulate financial systems, and the responsibility to address all issues which could be perceived as a potential risk to India’s financial systems. Since virtual currencies were likely to affect activities which the RBI does have the power to regulate, RBI had the power to issue the RBI Circular. According to the Supreme Court, the RBI Circular did not impose a total prohibition on the use of, or trading in, virtual currencies but merely directed RBI-regulated entities to not provide banking services to entities / individuals who traded or engaged in providing services which facilitated the trading of virtual currencies. Supreme Court rejected the contention that RBI, by imposing restrictions over regulated entities, cannot thereby paralyse the functioning of virtual currency exchanges in India - which did not come within the RBI’s regulatory purview.

On the issue of “proportionality”, the Supreme Court observed that: (i) the RBI had not produced any empirical evidence of having found cryptocurrency exchanges to adversely affect the functioning of RBI-regulated entities; (ii) an inter-ministerial committee of the central government constituted in 2017 had been of the opinion that a ban on virtual currencies might be an extreme measure as virtual currencies were banned only in a few jurisdictions; and (iii) the ‘Crypto-token Regulation Bill, 2018’ recommended by the inter-ministerial committee provided for regulation of virtual currency exchanges and brokers where sale and purchase of crypto-assets would be permitted. The Supreme Court noted, however, a complete volte-face in the committee’s stand in its report submitted in February 2019 when it proposed the introduction of the ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019’ which recommended a ban on the generation, holding, selling, dealing in, trading, using and disposing off of cryptocurrency in India. The Supreme Court set aside the RBI Circular on the ground of “proportionality”.

Takeaways from the judgment

The Supreme Court has upheld RBI’s jurisdiction as the central bank to regulate virtual currency or cryptocurrency. It has also upheld RBI’s power to prohibit any of the entities regulated by it from dealing with cryptocurrency in any manner. However, before exercising such power to create a complete prohibition on cryptocurrency, the RBI will have to justify the damage caused by such currency on the monetary system or the functioning of RBI or its regulated entities.

Legislative approach

The ‘Crypto-token Regulation Bill, 2018’ provided for sale and purchase of digital crypto-assets at recognised exchanges. However, the subsequent ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019’ which is pending in Parliament provides for a complete ban on the generation, holding, selling, dealing in, using, trading and disposing off of cryptocurrency in India – such activities being punishable with a fine or with imprisonment extending up to ten years, or both.

In fact, a writ petition seeking a ban on the sale and purchase of, or investment in, cryptocurrencies in India is presently pending before the Supreme Court, on the grounds that cryptocurrency is used for various illicit activities such as money-laundering, financing terrorism, tax evasion, etc. and that trading in cryptocurrency permits users to bypass ‘Know-Your-Customer’ (“KYC’) norms.


The cryptocurrency industry in India continues to be shrouded in regulatory uncertainty. The Indian government’s disposition towards cryptocurrency appears to remain hostile, while it does not seem to be averse to employing distributed ledger technology (“DLT”) and blockchain for ushering in a digital era in India’s economy. The inter-ministerial report of 2019 notes that DLT could lower KYC-related costs and improve access to credit and recommends that the Department of Economic Affairs, Ministry of Finance as well as other regulators like RBI, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority take necessary measures to facilitate the use of DLT in their respective sectors.

What remains to be seen is whether the central government will adopt a balanced / light-touch approach towards regulation of cryptocurrencies in India akin to the approach adopted by countries such as the US, UK, Japan and Singapore or whether its future actions will sound the death-knell for the cryptocurrency industry in India.