SynopsisFollowing the government’s announcement that it plans to ban private cryptocurrencies, the family office has approached a leading foreign exchange lawyer to check if any laws have been violated.
Tesla’s big bet on Bitcoin has helped propel it to record levels. But in India, those with exposure to cryptocurrencies traded overseas are not joining the celebration. Reason: they are uncertain about the fate of their investments as the Indian government moves toward banning cryptocurrencies such as Bitcoin. Many of these investors, worried that they might be on the wrong side of law, are rushing to seek legal opinion on the road ahead.
Take the example of the family office of a financial services tycoon that bought Bitcoin worth $2 million through a Singapore platform despite being advised against it. Following the government’s announcement that it plans to ban private cryptocurrencies, the family office has approached a leading foreign exchange lawyer to check if any laws have been violated.
Similarly, several wealthy individuals and their family trusts had purchased Bitcoin from foreign exchanges through the Liberalised Remittance Scheme (LRS) despite regulatory ambiguity. These investors are now asking lawyers if selling the digital asset before the new law is put in place will look like admission of guilt.
“Most of them knew the risks involved. However, they thought the government would be more accommodative on Bitcoin after the Supreme Court verdict last year,” said a leading lawyer. The court had quashed a 2018 RBI circular that barred banks and financial institutions from dealing in or facilitating trade in virtual currencies.
Industry estimates suggest that investments to the tune of $15-20 million have been made by Indians in cryptocurrencies. These investors fret that such purchases would be treated as violations, especially since the Enforcement Directorate has jurisdiction over foreign exchange violations. The agency has wide-ranging powers to freeze assets when it suspects wrongdoing.
Not Explicitly Prohibited under Fema
“There has been an ambiguity on treatment of cryptocurrencies from an exchange control perspective, especially so far as transactions undertaken under the liberalised remittance scheme,” said Moin Ladha, partner, Khaitan & Co. “It will be necessary to grandfather such bonafide investments and provide clarity on how such existing investors should deal with it.”
Grandfathering is a legal provision through which existing investments are exempted from new legislation since they were made before the new rules were introduced. Finance minister Nirmala Sitharaman said Tuesday in the Rajya Sabha that a high-level committee had suggested that all cryptocurrencies, except those issued by the state, be prohibited in India.
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The minister of state for finance and corporate affairs had also noted that the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) don’t have a framework to regulate cryptocurrencies.
To be sure, Bitcoin wasn’t explicitly permitted under the Foreign Exchange Management Act (Fema). However, it wasn’t on the banned list either–a position that will change after parliament passes a law to this effect. After the Supreme Court ruling, many investors assumed that the government would go soft on cryptocurrencies. The government’s plan to ban the digital asset has surprised them.
There is no express prohibition in the LRS norms disallowing investments in offshore digital currencies like Bitcoin, said Tejesh Chitlangi, partner, IC Universal Legal.
“However, since such cryptocurrencies are not backed by real assets or tangible securities, hence one can argue that the same may in spirit not be compliant with the LRS norms which otherwise prohibit remittances for trading in foreign currencies and speculative non-real-asset-backed instruments,” he said.
Investors may be forced to book losses as the government pushes for a ban.
“Entire wealth generated in cryptocurrencies will be wiped off if investors are forced to liquidate in a short period of time,” said Anirudh Rastogi, founder and managing partner of Ikigai Law. “What if the price of the asset is not appealing during such period? This is likely to happen if an entire country suddenly becomes a seller.”
On the other hand, Bitcoin surged past $47,000 on Tuesday after Tesla said it had invested $1.5 billion in the cryptocurrency.