Cryptocurrency and Virtual Digital Assets

In one line

India has no statute regulating cryptocurrency, the Reserve Bank of India's attempt to cut it off from the banking system was quashed as disproportionate in 2020, and what exists instead is a punitive tax, a reporting obligation under the anti-money-laundering law, and a five-year record-keeping direction from CERT-In.

What a cryptocurrency is, mechanically

Three ideas, and a lawyer needs all three to follow the argument.

A public ledger. Every transaction is recorded in a chain of blocks, each block carrying a hash of the previous one, so that altering an old block changes every hash after it. Chapter 270 explains hashing and chapter 1020 the ledger.

Key pairs instead of accounts. A holding is controlled by a private key. Whoever has the key can spend; there is no institution to appeal to, and a lost key is a lost holding. Chapter 260.

And a consensus mechanism by which participants agree which version of the ledger is correct, whether by proof of work, which is computationally expensive, or proof of stake.

Three consequences for law. There is no issuer to regulate, so there is nobody to license. There is no intermediary in the ordinary case, so the classic technique of regulating the bank does not reach it. And possession is the key, so theft is complete when the key is copied and is practically irreversible.

What Indian law calls it

Not a currency. Only the Reserve Bank of India may issue bank notes, under section 22 of the Reserve Bank of India Act, 1934, and nothing else is legal tender. A cryptocurrency is not money in Indian law, and no one is bound to accept it.

"Virtual digital asset" is the statutory term, and it comes from tax rather than from any regulatory statute. Section 2(47A) of the Income-tax Act, 1961, inserted by the Finance Act, 2022, defines it as any information, code, number or token, not being Indian or foreign currency, generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functioning as a store of value or a unit of account; and includes a non-fungible token and any other token of a similar nature notified by the Central Government.

"Virtual asset service provider" is used by the CERT-In directions of 28 April 2022 and by the anti-money-laundering notification, following the Financial Action Task Force vocabulary.

And note what follows from the drafting. A thing may be a virtual digital asset for tax and be subject to record-keeping under two other instruments, without any statute saying whether it may be issued, traded, advertised or held.