Cryptocurrencies, worryingly unregulated, decentralised virtual currencies, are steadily gaining traction in the Indian transaction landscape. With digitalisation and smart contracts becoming the new norm (especially considering the COVID-19 pandemic), global trade in cryptocurrencies has increased by leaps and bounds. However, one cannot ignore the unprecedented rise in cybercrimes across the globe, relatable to virtual currencies. The expansion of the cryptocurrency landscape poses various challenges in the form of regulatory, legal, and operational risks. Whilst appropriate measures to regulate cryptocurrencies are the need of the hour, the Indian judiciary has been rather proactive in its dealing with such cryptic virtual currencies.
In 2018, the Reserve Bank of India (“RBI”) sought to restrain trade in virtual currencies vide its circular dated April 6, 2018 (“2018 Circular”). This 2018 Circular was set aside by the Supreme Court in the case of Internet and Mobile Association versus Union of India. Thereafter, on May 31, 2021 the RBI issued a fresh circular advising banks and financial institutions not to rely on the 2018 Circular while cautioning their customers, as the same had been set aside by the Supreme Court. Whilst the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ was to be discussed in the monsoon session of the Parliament, the same had not been listed for discussion. Meanwhile, the RBI has announced its plan to launch the sovereign reserve backed digital unit called ‘Central Bank Digital Currency’ in a phased manner, as an alternative to the rather volatile private cryptocurrencies.
In a recent case involving purported fraud committed in the sale and purchase of bitcoins in India, Ld. Metropolitan Magistrate, Tis Hazari Court, Delhi (“Court”) has made some pertinent observations regarding cryptocurrencies and the incumbent responsibility on intermediary platforms involved in trade of virtual currencies. The Court inter alia observed that (i) transactions in cryptocurrency have to comply with the general law in force in India including Prevention of Money Laundering Act, 2002 (“PMLA”), Indian Penal Code, 1860 (“IPC”), Foreign Exchange Management Act, 1999 (“FEMA”), the tax laws, and with the RBI regulations mandating know your customer (“KYC”), Combating of Funding of Terrorism (“CFT”) and Anti-money Laundering Requirements (“AML”); (ii) KYC is the responsibility of the intermediary, which in turn cannot shy away from the responsibility of ensuring legitimacy of the source and destination of money, and establishment of the real identity of the parties; (iii) Even in the absence of any specific law regulating or banning, or monopolising cryptocurrency, only legitimate trade in the same, through legitimate intermediaries may aspire for protection under Article 19 (i)(g) [i.e. the freedom to practice any profession, or to carry on any occupation, trade or business] of the Constitution of India.
The complainant in the instant case inter alia dealt in sale and purchase of bitcoins (the “Complainant”). The case involves the accused (the “Accused”) who allegedly purchased certain bitcoins from the Complainant on multiple occasions. According to the Complainant, the Accused would transfer funds to the Complainant’s bank account and the Complainant would in turn transfer bitcoin into the Accused’s virtual wallet/ address on the online transaction portal ‘Binance’. The Complainant further stated that on July 5, 2020, he was informed that his bank accounts had been frozen, and that his transaction in bitcoins had been marked as illegal transactions. The Complainant stated that when confronted about the source/ legality of money paid against the bitcoins, the Accused had admitted the payments were a ‘scam’. The Complainant also claimed that since the Accused refused to return the bitcoins transferred to him, it amounted to cheating. Accordingly he was compelled to approach the SHO and DCP concerned, but no action was allegedly taken by the police. The Complainant accordingly filed an application under Section 156 (3) of the Code of Criminal Procedure (“CrPC”) seeking the intervention of the Court for directions to the police for registration of an FIR and commencement of appropriate investigation. The Complainant assured the Court that he always took a proof of identity before entering any trade transactions, and that he also paid taxes on the gains that he made on such trade. In order to proceed with the case, the Court had sought an ‘Action Taken Report’ from the police.
SUBMISSIONS MADE BY THE COMPLAINANT AND THE POLICE:
The counsel appearing on behalf of the Complainant inter alia submitted that (i) since the Complainant and his office were situated at Moti Nagar, New Delhi, from where all the transactions had been made, the Court had jurisdiction in the instant case; (ii) dealing in bitcoins and other crypto currency was absolutely legal, and therefore, the Complainant was carrying out a legitimate trade and profession in the exercise of his fundamental right under Article 19(1)(g) of the Constitution of India; (iii) the Complainant always took payment for sale of bitcoins through recorded medium i.e. RTGS/ IMPS, and misappropriation of proceeds of crime was never his intention, and the most which can be attributed to him, is lack of due diligence; (iv) cryptocurrency, not being a fiat currency, did not come within the purview of RBI regulations; (v) since ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has not been passed, there is no restriction on dealing in cryptocurrency.
The investigation officer inter alia submitted that (i) the Complainant had received the amounts from different accounts, and had been a beneficiary in the said transactions; (ii) out of the total sum of money paid by the Accused to the Complainant, against purchase of bitcoins, INR 6,00,000/- were credited from the account of a person residing at Nagpur, and the concerned person had got an FIR registered u/s 66 C and 67 of the Information & Technology Act, 2000 at PS Sitabardi, Nagpur, Maharashtra, for alleged commission of cyber offences/ cyber fraud; (iii) similarly, out of the total sum, INR 3,00,000/- were credited into the account of the Complainant, from the account of a person residing at Telangana, who had similarly got an FIR registered for commission of cyber fraud at PS Cyber Crime, Cyberabad Commissionerate, Telangana; (iv) the remaining amount was transferred prima facie from the account of the Accused himself; (v) investigation in the above two FIRs was underway, and no cause of action has been found for initiation of investigation in Delhi.
Assuming jurisdiction, the Court proceeded to determine whether the Complainant himself was carrying out a lawful activity, and whether he himself has come to the court with clean hands. Discussing the Supreme Court’s decision in Internet and Mobile Association at length, the Court noted that Supreme Court had not adjudicated upon the legality of the virtual currency, and that there is no specific legislation, as on date, specifically dealing with the legality and regulation of cryptocurrency. The Court observed that the 2018 Circular had been set aside by the Supreme Court only upon the ground of unreasonableness of restrictions imposed upon the exercise of freedom guaranteed under Article 19 (i)(g) of the Constitution of India. In this regard, the Court reiterated that while setting aside the 2018 Circular, the Supreme Court had acknowledged the fact that many institutions were accepting virtual currency as valid payment for the purchase of goods and services, and therefore, there was no escape from the conclusion that the users and traders of virtual currency carried on an activity that falls squarely within the purview of the RBI. The Court also reiterated that cryptocurrency has the potential of creating a parallel monetary system, which may be perceived as a threat to the existence of a central authority-regulated monetary system, and therefore the RBI has the power to regulate such activities. It also noted that the RBI’s power to frame policies on such matters, and to issue instructions to the banks who are ‘system participants’ under the Payments and Settlements Systems Act, 2007 has also been recognised by the Supreme Court. The Court further noted that the Supreme Court had stated that access to banking is the equivalent of supply of oxygen in any modern economy, and the total denial of such access to the persons who carry on a trade, that is not prohibited by law, cannot be said to be a reasonable restriction, and is extremely disproportionate.
The Court held that transactions in cryptocurrency have to comply with the general law in force in India including PMLA, IPC, FEMA, NDPS Act, Tax laws, and with the RBI regulations regarding KYC, CFT and AML requirements. It observed that the traceability of bitcoin transactions on the transaction portal ‘BINANCE’ may even be managed through the Blockchain Analysis, but establishing their connection with the malicious actors is a complex issue, in case the transaction intermediary is not adhering to the KYC norms.
The Court held that KYC is the responsibility of the intermediary, and cannot be left to the individuals, be it institutional transfer or person to person trade, to ensure legitimacy of the source and destination of money, and establishment of the real identity of the parties. It further held that it is the responsibility of an intermediary, such as ‘BINANCE’, to ensure adequate safeguards against activities such as ‘mixing’, which change the identity of bitcoins being held by a virtual wallet, making tracing of any illegal proceeds and any bitcoins, purchased through it, extremely difficult. It specifically noted that even in the absence of any specific law regulating or banning, or monopolising cryptocurrency, only legitimate trade in the same, through legitimate intermediaries, may aspire for protection under Article 19 (i)(g) of the Constitution of India. The Court cautioned that opportunistic activities, aimed at exploiting the lack of legal regulation, with utter disregard to the identity of parties, sources and destination of funds, and illegal purposes e.g. terrorism, narcotics, illegal arms, cross-border illegal transactions for which it may be used, still do not enjoy any route for legal and regulatory escape. Accordingly, the Court directed that the aforementioned aspects have to be investigated in detail, and any negligence or complicity of the online VC transaction portal ‘BINANCE’ in perpetration of hiding the proceeds of crime, and in the funding of any illegal activities through cryptocurrency had to be inquired into.
With respect to the culpability of the Accused, the Court observed that the screenshots of the conversation with the Accused on whatsapp, annexed by the Complainant in his complaint, prima facie implied knowledge of the Accused regarding the source of money. The Court noted that the Accused in the present case was also the accused in the two cybercrime FIRs registered at Telangana and Nagpur. Accordingly, it observed it was quite possible that apart from being involved in the aforesaid cyber offences, the Accused may have hidden the factum of illegality of money from the Complainant, thereby inducing him to deliver bitcoins in exchange of money, while being aware of the fact that it may, sooner or later come under the radar of the banking system, and so it is better to get rid of the same, purchase bitcoins and multiply/ mix transactions to hide its source, and to encash it from ‘safe haven’ countries, where there is absence or lack of regulations. The Court further observed that there was a possibility that the Complainant was unaware of these designs of the Accused, and fell into his trap, thereby suffering wrongful loss.
However, the Court observed that it appeared that the Complainant had not disclosed the complete facts before the Court, and therefore, the possibility of his consent/ connivance in the entire gamut of activities could not be ruled out at the present stage. In this regard, the Court inter alia noted that (i) the Complainant went ahead in accepting money from different accounts, which may not have been a mere lack of caution or due diligence; (ii) in one of the whatsapp conversations annexed alongwith the complainant, the Accused is seen advising the Complainant to clear his bank accounts immediately on receipt of any consideration against sale of bitcoins, and the Complainant fails to be alarmed, thanks the Accused for such advice, and admits that he immediately converts any such consideration back to cryptocurrency; (iii) the Complainant has nowhere stated in the complaint as to how, or through whom the Accused got the whatsapp number of the Complainant, and contacted him. Accordingly the Court observed that it could not be said with certainty that the Complainant had not already been acquainted with the Accused, and that he did not have any previous dealings with him. However, referring to the submissions made by the counsel appearing for the Complainant, the Court noted that the Complainant has approached this Court with awareness of all legal consequences, and this is a ground for giving of directions for investigation to find out the real offender.
The Court held that upon a consideration of (i) the complaint under Section 200 of the Cr.P.C.; (ii) the application under Section 156(3) of the Cr.P.C.; (iii) the other material on record; and (iv) the Action Taken Report of the police, cognisable offences under Section 403, Section 411 and Section 420 of the IPC had been prima facie committed, and the real culprits need to be identified. The Court observed that the possibility of the Complainant, the Accused and the online intermediary being hand in glove could not be denied, and at the same time it was also possible that any of them may come out to be innocent, or just negligent.
Emphasising on the need for investigation by the police, the Court observed that the investigation in the instant case may be extremely technical and that true facts have to be necessarily brought before the Court. The Court then directed the PS Moti Nagar to immediately lodge an FIR under the appropriate provisions of Indian Penal Code and submit a compliance report to the Court within 2 (two) days from the date of the Order. The Court also directed the police to submit a report regarding the status of investigation on August 6, 2021. The Court, however, clarified that the registration of an FIR did not mean that the Accused was to be automatically arrested, and the concerned provisions of CrPC., and directions of Hon’ble Supreme Court and Hon’ble High Court of Delhi had to be adhered to in this regard.
Despite the excessive volatility in the value of cryptocurrencies and their anonymous nature, it appears they are here to stay, at least for the foreseeable future. The Court’s observations in the instant case, while attempting to decrypt certain complex facets of the cryptocurrency regime in India, are a step in the right direction.. However, with the burgeoning rise in cybercrimes that are unrestrained by the national or geographical boundaries, laws to govern cryptocurrencies and ensure the traceability of the money used in crypto trade is much needed. Indian regulators and authorities will need to keep pace with the global developments in this space and bring about appropriate measures to effectively monitor and regulate cryptocurrencies.
 RBI/2017-18/154 DBR No.BP.BC.104/08.13.102/2017-18
 RBI/2021-22/45 DOR AML REC 18/14.01.001/2021-22 titled as ‘Customer Due diligence for transactions in virtual currencies’
 Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207 of 2020, decided on 1st July 2021
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