India’s Cryptocurrency Saga – Hit or Miss? – By Rishika & Urfee Roomi

July 27, 2021

Recently, the Indian Government proposed a ban on all private cryptocurrencies and hinted at the possibility of introducing a sovereign digital currency. But why is that a concern? Before answering that question, we need to delve into the basics.

What are Cryptocurrencies?

Cryptocurrency is a form of decentralized digital system that allows peer-to-peer secure online payments directly between parties without a need of a regulatory body.[1] Although, considered as an alternate form of money, decentralization and non-involvement of an intermediary or a government forms the very core of cryptocurrency exchange.[2] Cryptocurrencies are based on a system of computer networks that allow individuals to operate anonymously using a key, in the form of large numerical value, that is used to encrypt data.[3] Proponents of cryptocurrencies argue that not only can this technology serve all the purposes of traditional money, but also make transactions efficient and more secure than the existing payment systems. Skeptics, on the other hand, have raised concerns about tracing criminal activities, such as trafficking, prostitution, terrorism, money laundering etc., that can be committed using this digital asset.

With the increased popularity of cryptocurrencies around the world, national governments of various countries have given mixed signals about the future of this cutting-edge technology, which, in terms of cryptocurrency, can be broadly categorized into central bank digital currencies (CBDCs)[4]  and non-CBDCs. Few major concerns regarding the volatile nature of non-CBDCs are that it would destabilize the monetary systems, be used to fund illegal activities such as trafficking, theft, money laundering, prostitution etc. Major governments have reacted differently to the question of introduction of CBDC and regulation of non-CBDC. The approach of national governments ranges from countries that have banned it, countries that have proposed regulation, and countries that have legalized cryptocurrencies. Countries such as Singapore[5], the United Kingdom, Canada, and Indonesia,[6]  have introduced legislations or have made accommodations within their respective existing legal systems, some countries have completely banned them and others, like the USA[7], are yet to decide their stance.

Countries like China have taken a tough stand and have banned cryptocurrencies by declaring them illegal. The Chinese imposed restrictions on privately owned exchange platforms that traded cryptocurrencies.[8] However it is not illegal to hold or trade cryptocurrency in China as long as it is treated like a commodity and  not as currency.[9] Interestingly, China has also launched its pilot plan to develop its own CBDC, colloquially known as the Digital Yuan, and has beta tested it in a few selected cities.[10]

India’s Views on Cryptocurrencies

India has had its own struggles with cryptocurrencies since the beginning of the last decade when the movement started to see some momentum and cryptocurrency exchanges began to mushroom in India. With the increasing popularity of cryptocurrencies, like other regulatory bodies of the world, the Reserve Bank of India issued a press release in 2013 cautioning about using cryptocurrencies, including Bitcoin.[11] However, the use and acceptance of cryptocurrencies as an alternate to the traditional Rupee surged after demonetization in November 2016.[12] This massive success of cryptocurrencies prompted the RBI to issue another Press Release in 2017 reiterating its warning of 2013. In the 2017 press release, the RBI further clarified that it had not authorized any entity to operate with any virtual currency.[13] By the end of 2018, the RBI as well as the Finance Ministry had issued many such press releases, even comparing cryptocurrencies to ponzi schemes.[14] It was the RBI Circular of April 2018 that changed the game and showed that the RBI had started taking the cryptocurrency market more seriously.

Through the Circular, the RBI had prevented banks from dealing in virtual currencies and also directed them to stop providing services to entities that dealt in virtual currencies.[15] This had a crippling effect on the cryptocurrency exchanges that actually relied on the banking system for sending and receiving money even for regular administrative operations such as payment of salaries to employees.[16] Consequently, exchanges that were also members of the Internet and Mobile Association of India filed a writ petition before the Supreme Court of India challenging RBI’s Circular.[17] Analyzing the role of RBI, the Supreme Court noted that cryptocurrencies are capable of performing most of the functions of the fiat currency and that the RBI will have to regulate them, since the RBI has the power and the duty to regulate anything that can have an impact on India’s financial system. However, the Hon’ble Court struck down the 2018 Circular stating that the RBI disconnected the cryptocurrency exchanges from the banking system without just cause.

The ambiguity surrounding the cryptocurrencies and the writ petition prompted the Indian Government to up its game and set up a committee to study the issues and propose solutions regarding legalization and regulation of cryptocurrencies.[18] This intergovernmental committee proposed to introduce a bill in the Parliament to ban all private cryptocurrencies. It further suggested that India should consider launching its own digital currency. The Bill is yet to be introduced in the Parliament.

The speculations again took off early this year, when the Union Finance Minister Nirmala Sitharaman said that a high-level internal committee has suggested to prohibit all private cryptocurrencies.  

So where does India stand on cryptocurrencies? The answer is that there is no clear answer yet. The Indian government keeps shifting the weights on the balance while waiting for the committee’s recommendations on the issue. Despite the rumors regarding the ban, the Finance Minister recently made a statement that the government is “not shutting all options,” and will give room to stakeholders for experimenting with blockchains, bitcoins and cryptocurrency.[19] On the other hand, inclined towards the launch of a CBDC, the Reserve Bank of India Governor, Shakti Kanta Das shared “major concerns” with the government regarding the impact of cryptocurrencies on the financial stability of the economy.[20]

Despite the concerns, the sentiments towards cryptocurrencies seem to be inching in favour of regulation of cryptocurrencies instead of a blanket ban. Recently, the Indian Government informed the Parliament that gains from investment in cryptocurrencies are taxable in India.[21] The clarification was welcomed by many in the crypto sector as it would make Indian companies more comfortable and welcoming about dealing in cryptocurrencies, eventually making the process more transparent.[22]

Missed opportunities for the cryptocurrency sector?

This ongoing tussle between the stakeholders has created new tensions and raised concerns regarding ownership, legal protection as well as role of intellectual property (IP) law in its growth.

Cryptocurrencies that are based on blockchain technology mostly build upon this technology and expand it in the form of a distributed-ledger based system. Essentially, cryptocurrency based on blockchain technology allows its users to build upon existing blockchain data and create new and competing codes, which could be considered as innovation. It is only logical to say that entities or persons that develop and utilize this technology would try to protect their methods, processes or any other form of innovation. This brings home the question of identifying the owner of these cryptocurrencies transactions for the purpose of protection of IP. While this technology allows its players to set the rules on private ledgers, ownership cannot be determined on community based blockchains.[23] This is one of the reasons why Bitcoin, the first blockchain based cryptocurrency, remains unprotected under the IP laws.[24] 

Despite the challenges, 2020 was the year that recorded the maximum number of blockchain and crypto-based patent applications.[25] Parallels have been drawn between cryptocurrencies and computer software, since both are based on algorithms that require performance and competition of a few steps to achieve the desired goal.[26] One of the looming questions is whether cryptocurrency technology should be considered computer software, given the similarities between the two? Determination of the status of cryptocurrency, as a computer software, would be crucial in deciding its fate for the purpose of IP laws around the world. An innovation is considered as an invention, if it solves a problem to qualify for patent protection. While computer software is essentially non-patentable, its application to solve a problem or increase efficiency can be protected by obtaining a patent. By introducing an inventive step in their technologies, companies like Mastercard, PayPal and Amazon have either already filed or obtained patents from the USPTO for methods such as ‘managing fractional reserves of blockchain currency’, ‘technology to enhance the speed of cryptocurrency payments’ etc., that attempt to solve existing problems in the cryptocurrency industry.[27]

Despite the surge in legal awareness, some critics are of the view that cryptocurrencies should not be subject to legal protection. Many skeptics are of the opinion that cryptocurrencies should remain an open source, and that regulation would actually have a chilling effect on its growth.[28] On the other hand, some believe that cryptocurrencies that are based on blockchain technology actually have self-policing mechanisms.[29]

Another question in the realm of IP is that of protection of the cryptocurrency brands via trademarks. A trademark acts as a source identifier of a product or service. If cryptocurrency is treated as an alternative to fiat currency, then it can neither be considered as a product nor as a service. However, if it is treated like a commodity, like in China, or anything beyond a currency for transaction, then it can qualify as a product or for related services. Once it has been categorized as a product, its name must indicate that it emanates from a single source. For example, Bitcoin, which is an open-source software, does not emanate from a single source.[30] Interestingly, the USPTO has declared ‘Bitcoin’ as a generic term for e-commerce services by stating that the term is descriptive and incapable of acting as a source identifier.[31] Having said this, owners of cryptocurrencies have obtained registrations for various services without specifically identifying cryptocurrency as a product.[32]

Despite the skepticism, courts across the globe have been very welcoming towards protecting cryptocurrency brands from trademark infringement and passing off[33], including the Delhi High Court that passed an interim injunction in favor of the US based cryptocurrency company, Metallicus Inc., in a passing off suit.[34]

Instead of protecting cryptocurrency itself, many have also considered using this technology as a solution to many IP related issues such as licensing of copyright and payment of royalties.[35]

Conclusion

What does this say about protection of cryptocurrency in India? Till the Indian government clears its stance on this issue, the fate of cryptocurrency in India is uncertain. Despite the Indian government’s indecisiveness, the crypto sector is more optimistic about the future of cryptocurrencies in India. Many Indians have invested heavily in different types of cryptocurrencies. According to The Chainanalysis 2020 Geography of Cryptocurrency Report, India stands on the 11^th position in the global crypto adoption by nations listing.[36] From the trend, it seems that the Indian Government is looking to follow China’s suit of banning non-CBDCs and stringent regulation of cryptocurrencies, in general. Stakeholders speculate, and rightly so, that a complete ban on private exchanges would lead to yet another wave of brain drain of both business and talent and will set India back in years.[37] On the other hand, younger India has shown an increased interest in digital currencies.

Given the heightened interest in this issue globally and in India, the Indian Government will have to be very careful with its position on the ban-regulation spectrum. Although unregulated transactions and their role in funding illegal activities are real issues that need to be addressed and not avoided, it is crucial to accept that fiat currencies are just as dangerous and have been used in the past and continue to be used for these purposes. Concerns regarding use of cryptocurrencies in consumer protection can be addressed by introducing security standards. It is important to note that regulation of cryptocurrency will not have an isolated effect on the financial sector but also on various segments of the legal sectors. If regulation cripples innovation and the freedom of transactions, it will inhibit people from exploring new territories and stifle creativity and innovation, in which India is considered as a pioneer, eventually acting as a deterrent in utilizing the potential of this technology. Financial regulators, particularly the RBI, as well as the national governments must come out of their comfort zones in light of the technological advancements. Currently, all the issues surrounding cryptocurrencies can be addressed and resolved by a robust regulatory framework. The aim of regulation should be to come up with the least adverse measure providing enough space to experiment with cryptocurrencies. Since the technology behind cryptocurrencies is changing rapidly, it will be very difficult to come up with the right solution soon. A balanced and fluid approach is definitely the need of hour.      

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Rishikaa is an associate at Sujata Chaudhri IP Attorneys. She obtained a B.A.LL.B. degree from Symbiosis International University (First Rank holder) and an LL.M. from Penn State University, with a focus on Intellectual Property law. Previously, she worked with a legal-tech startup company in the US. Rishikaa is most interested in the intersection of Intellectual Property law and emerging technology.

Urfee’s practice focuses on trade mark, copyright and customs prosecution and enforcement matters, including oppositions, cancellations and litigation. He has also worked on prosecuting international applications filed through the World Intellectual Property Organization, and has experience in handling domain name disputes and also works on criminal enforcement efforts for clients.

[1] Gregory S. Rowland& Trevor I. Kiviat, Cryptocurrency and Other Digital Assets for Asset Managers, Blockchain & Cryptocurrency Regulation, First ed. (2019), https://www.acc.com/sites/default/files/resources/vl/membersonly/Article/1489775_1.pdf s

[2] David W. Perkins, Cryptocurrency: The Economics of Money and Selected Policy Issues, Congressional Research Service Report R45427 (Updated 2020), https://fas.org/sgp/crs/misc/R45427.pdf

[3] Id.

[4] Alyssa Hertig, What is a CBDC?, Coindesk, December 5, 2020, https://www.coindesk.com/what-is-a-cbdc

[5] Staff of Global Legal Research Directorate, Regulation of Cryptocurrency Around the World, The Law Library of Congress, Global Legal Research Center, 2018,  https://www.loc.gov/law/help/cryptocurrency/cryptocurrency-world-survey.pdf

[6] Id.

[7] Joe Liebkind, Bitcoin Government Regulations Around the World, Investopedia, June 25, 2019, https://www.investopedia.com/news/bitcoin-government-regulations-around-world/

[8] Shen Wenhao, Regulation of Cryptocurrency in China, Mondaq, June 12, 2020 https://www.mondaq.com/china/fin-tech/944330/regulation-of-cryptocurrency-in-china

[9] Id.

[10] Arjun Kharpal, China has Given Away Millions in its Digital Yaun Trials. This is How it Works, CNBC, March 4, 2021, https://www.cnbc.com/2021/03/05/chinas-digital-yuan-what-is-it-and-how-does-it-work.html

[11] Reserve Bank of India, Press Release: 2013-2014/1261, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247

[12] Vipul Kharbanda, Cryptocurrency Regulation In India – A Brief History, The Centre for Internet Society, March 5, 2020, https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history

[13] Reserve Bank of India, Press Release: 201617/2054,  https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435 and Press Release: 2017-2018/1530, https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462

[14] The Economic Times, Cryptocurrency in India: The Past, Present and Uncertain Future, March 9, 2021,  https://economictimes.indiatimes.com/tech/trendspotting/cryptocurrency-in-india-the-past-present-and-uncertain-future/articleshow/81410792.cms?from=mdr  

[15] Reserve Bank of India, Circular DBR.No.BP.BC.104/08.13.102/2017- 18,

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF

[16] Supra at 20. 

[17] Internet and Mobile Association of India V. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018

[18] Asit Ranjan Mishra, Panel Favours Cryptocurrency Ban in India, LiveMint, July 23, 2019, https://www.livemint.com/industry/banking/government-panel-suggests-ban-on-private-cryptocurrencies-1563796292369.html

[19] The Deccan Herald, India wants Blockchain, will not “shut off” cryptocurrency completely, says FM Sitharaman, March 15, 2021, https://www.deccanherald.com/business/business-news/india-wants-blockchain-will-not-shut-off-cryptocurrency-completely-says-fm-sitharaman-962164.html.

[20] The Economic Times, RBI has major concerns on cryptocurrencies, flagged it to govt: Shaktikanta Das, March 21, 2021, https://economictimes.indiatimes.com/news/economy/policy/rbi-has-major-concerns-on-cryptocurrencies-flagged-it-to-govt-shaktikanta-das/articleshow/81686997.cms.

[21] Cyrptoslate, Despite no laws, Indian minister says traders must pay taxes on Bitcoin, CoinMarketCap, March 31, 2021, https://coinmarketcap.com/headlines/news/despite-no-laws-indian-minister-says-traders-must-pay-taxes-on-bitcoin/.

[22] Rajeev Kumar, Is there a future for Cryptocurrency in India? A look at recent discussions in Parliament, The Financial Express, April 3, 2021, https://www.financialexpress.com/money/is-there-a-future-for-cryptocurrency-in-india-a-look-at-recent-discussions-in-parliament/2226036/.

[23] Arun C Mohan, Trademarks for Digital Currencies, SpicyIP, April 15, 2020, https://spicyip.com/2020/04/trademarks-for-digital-currencies.html.

[24] Id.

[25] Jamie Redman, Report: Blockchain Patents ‘Skyrocket’ in 2020, Alibaba Owns the Most Crypto Patents, Bitcoin.com, September, 19, 2020, https://news.bitcoin.com/report-blockchain-patents-skyrocket-in-2020-alibaba-owns-the-most-crypto-patents/.

[26] Carly Klein, The Relationship Between Patents & Cryptocurrency, OpenMind BBVA, February13, 2019, https://www.bbvaopenmind.com/en/economy/global-economy/the-relationship-between-patents-cryptocurrency/.

[27] Id.

[28] Peggy Keene, The Intersection of Cryptocurrency and Intellectual Property Law, KLemchuk, February 27, 2018, https://www.klemchuk.com/ideate/cryptocurrency-and-intellectual-property-law.

[29] Id.

[30] Anna E. Raimer, Lauren Refinetti Timmons and Mark W. Rasmussen, Show Me the Money: Protecting Your Cryptocurrency Brand, Mondaq, September 19, 2019, https://www.mondaq.com/unitedstates/fin-tech/845962/show-me-the-money-protecting-your-cryptocurrency-brand.

[31] U.S.P.T.O. February 29, 2016 Office Action issued against Application Ser. No. 79/182,945 for BITCOIN.

[32] Supra at 30.; Chris McLeod and Alllister McManus, The Battle for Bitcoin and other Cryptocurrency Brands, The Chartered Institute of Trade Marks, August 20, 2019, https://www.citma.org.uk/resources/trade-marks-ip/intellectual-property-blog/battle-for-bitcoin-and-other-cryptocurrency-brands-trademark-blog.html.

[33] Beverly Potts and David Stone, Cryptocurrency and the Value of Trade Marks, JDSupra, June 3, 2021, https://www.jdsupra.com/legalnews/cryptocurrency-and-the-value-of-trade-3824591/.

[34] Metallicus Inc v. Gaurav Sethi & Ors., CS/COMM 997/2018

[35] Asim Vehbi, Core Issues of Copyright Law in the Digital Environment: The Promise of Blockchain, Internatioanl Journal of Applied Engineering Research, Vol. 13(20), 2018, https://www.ripublication.com/ijaer18/ijaerv13n20_07.pdf .

[36] Anna Baydakova, India’s Millennials Embrace Digital Gold Despite Proposed Bitcoin Ban, CoinDesk, March 29, 2021, https://www.coindesk.com/indias-millennials-embrace-bitcoin. 

[37] Supra at 22.

Disclaimer: The views or opinions expressed are solely of the author.