The paper analyses the laws and regulations that apply to Bitcoin te India, and comes to the conclusion that the government has broad powers that it can exercise, if it wishes, to regulate Bitcoin. Given the lack of existing legal and regulatory analysis on this kwestie te India, wij greatly welcome comments on this punt.
This paper is an effort to examine the legal ondergrond and treatment of Bitcoin under the current legal and regulatory staatsbestel ter India. It seeks to explore whether Indian laws and regulations spil they stand today would even consider Bitcoin spil ‘currency’ and which regulations would govern different kinds of Bitcoin transactions. Ter this paper wij shall very first give a schrijven description of Bitcoin and then stir on to what its legal treatment would most likely be which would then lead us to examine which regulations would most likely apply to various Bitcoin transactions.
What is Bitcoin?
Bitcoin is a cryptography based digital currency very first described ter a 2008 paper by a single or group of pseudonymous developer(s) by the name of Satoshi Nakamoto, who called it a “peer-to-peer, electronic contant system”. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each Bitcoin is subdivided down to eight decimal places, forming 100,000,000 smaller units called satoshis. Bitcoins can be transferred through a laptop or smartphone without an intermediate financial institution. The processing of Bitcoin transactions is secured by servers called Bitcoin “miners”. Thesis servers communicate overheen an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology, also known spil the “blockchain”. The integrity and chronological order of the blockchain is enforced with cryptography. Ter addition to archiving transactions, each fresh ledger update creates some newly-minted Bitcoins. The number of fresh Bitcoins created te each update is halved every Four years until the year 2140 when this number will round down to zero. At that time no more Bitcoins will be added into circulation and the total number of Bitcoins will have reached a maximum of 21 million Bitcoins.
Each user of Bitcoin gets a digital wallet and a Bitcoin address which is the address from and to which Bitcoins can be transferred once this address is given to another party for the transfer. A transaction or transfer of Bitcoins is simply a transfer of value inbetween Bitcoin addresses that gets included ter the block chain or the system loom, which ensures that each transaction is valid and that nobody can use his or hier Bitcoins more than once i.e. it avoids dual spending.. Bitcoin wallets keep a secret lump of gegevens called a “private key” for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the holder of the addresses. The “signature” also prevents the transaction from being altered by anybody once it has bot issued.
With this very basic and epistel understanding of Bitcoin, wij shall now attempt to examine whether Bitcoins should be treated under Indian law spil (i) currency, (ii) security, (iii) derivative, (iv) negotiable muziekinstrument, (v) prepaid payment muziekinstrument, or (vi) movable property.
Can Bitcoins be Treated spil Currency?
Indian laws do not define digital currency or virtual currency, so wij will have to look at the traditional definition of currency to see if Bitcoin falls te that definition. The term currency is defined te section Two(h) of the Foreign Exchange Management Act, 1999 (“FEMA”) te the following words:
“currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, spil may be notified by the Reserve Bankgebouw,
It is notable here that this is an inclusive definition which means that it has a large scope for expansion. The legislature has consciously made the definition capable of further expansion by making it inclusive and also by providing the Reserve Bankgebouw of India (“RBI”) the authority to notify other similar instruments. This means that if any muziekinstrument which is being used spil a currency is not covered by the definition spil it stands, then the RBI is free to notify it and include it te the definition of currency. All “currency” other than Indian currency is considered by the FEMA spil “foreign currency” which would have to then conform with various rules and regulations under FEMA. This means that if Bitcoin is classified spil a “currency”, it would have to come under the definition of “foreign currency” and Bitcoin transactions would therefore have to obey with the entire foreign exchange staatsbestel under FEMA.
It is clear that Bitcoin is not truly similar to any of the instruments mentioned ter the definition, not least because none of them are digital or virtual ter nature. On May Three, 2000 the RBI notified “debit cards, ATM cards or any other muziekinstrument that can be used to create a financial liability” spil “currency” under the FEMA (by Notification No. FEMA 15/2000/RB dated May Three, 2001). Since Bitcoin is not indeed backed by any institution and has no backing by any central handelsbank or institution and because most of the transactions involving acceptance of Bitcoin are voluntary ter nature, therefore it does not seem that Bitcoin is an muziekinstrument that can be used to create a financial liability. This can be explained further with the help of two examples:
(i) If a person wields Indian rupee notes worth Rs. 500 and everyone stops accepting the currency, he can always go to the Governor of the RBI and voorwaarde Rs. 500 from him, however if I own Bitcoins then whether my Bitcoins can be used to buy any goods or services is entirely dependant upon the preparedness of third parties to accept Bitcoin spil a valuable voorwerp.
(ii) If I order a pair of boots worth Rs. 500 from flipkart.com and pay for those boots using Indian currency, then it does not matter if flipkart determines to not accept Indian currency (whether by means of contant, credit card, cheque, etc.) and accepts payment only ter Bitcoins. Spil soon spil I give flipkart currency notes or coins worth Rs. 500, my legal obligation to pay for the footwear is fulfilled. On the other palm if I pay for those boots with Bitcoins then unless flipkart voluntarily accepts payment te Bitcoin, my liability to pay for the boots will still legally exist till I pay flipkart Rs. 500 ter Indian currency.
Therefore it is clear that Bitcoins do not getraind into the plain vanilla definition of currency under Indian law. However this does not mean that the RBI cannot regulate Bitcoins or transactions involving Bitcoins. The RBI can very well notify Bitcoins spil “currency” and then come out with rules and regulations for Bitcoin transactions. Cynics may argue that this is not possible due to the peer to peer nature of Bitcoins and the Bitcoin network and they would be right to the extent that it may not be physically feasible for the RBI to regulate every Bitcoin transaction, but it would be possible for them to target Bitcoin exchanges which is the entry point for most users of Bitcoin. To sum up, albeit Bitcoins may not be classified spil a currency at present, this does not preclude the RBI from regulating them ter the future.
Can Bitcoins be considered spil Securities?
The term “securities” is defined ter section Two (h) of the Securities Contracts (Regulation) Act, 1955 te the following manner: “securities” include —
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature ter or of any incorporated company or other assets corporate,
(ib) units or any other muziekinstrument issued by any collective investment scheme to the investors te such schemes,
(ic) security receipt spil defined te clause (zg) of section Two of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Rente Act, 2002,
(id) units or any other such muziekinstrument issued to the investors under any mutual fund scheme,
(ii) Government securities,
(iia) such other instruments spil may be announced by the Central Government to be securities, and
(iii) rights or rente ter securities,”
It is clear from a naked reading of this definition that Bitcoin does not come within any of the parts of the definition of securities, other than possibly ‘derivative’ (which is something wij shall examine ter the next part of this paper). Bijzonder from the term derivative, the only other way te which Bitcoins can be brought under the definition of ‘securities’ is if the Central Government notifies Bitcoins spil such since the Central Government has the power to proclaim any muziekinstrument spil a ‘security’. Te such a script it will be the entire gamut of regulations governing securities including the various rules and regulations prescribed by the Securities and Exchange Houtvezelplaat of India (SEBI). Another argument is that Bitcoin may fall under the definition of a “derivative”.
Can Bitcoins be considered spil a Derivatives or a Negotiable Instruments?
The definition of “derivative” under the SCRA is
(ac) “derivative” includes— (A) a security derived from a debt muziekinstrument, share, loan, whether secured or unsecured, risk muziekinstrument or contract for differences or any other form of security, (B) a contract which derives its value from the prices, or index of prices, of underlying securities,
Spil discussed above, Bitcoin is not a security and therefore would not sate the very first part of the definition of “derivative” within the SCRA. Further since Bitcoin is only a voluntary currency based on two parties determining that the code itself has some value, therefore Bitcoin can also not be described spil a contract which derives its value from the prices or index of prices of underlying securities. Therefore it is clear that Bitcoin would not sate the requirements of being a derivative under the SCRA. Under Indian law, another definition of the term derivative is provided under the Reserve Bankgebouw of India Act, 1934 which defines “derivative” ter section 17(6A) to mean:
an muziekinstrument, to be lodged at a future date, whose value is derived from switch te one or a combination of more than one of the following underlyings, namely:–
(a) rente rate,
(b) price of securities of the Central Government or a State Government or of such securities of a local authority spil may be specified te this behalf by the Central Government,
(c) price of foreign securities,
(d) foreign exchange rate,
(e) index of rates or prices,
(f) credit rating or credit index,
(g) price of gold or silver coins, or gold or silver bullion, or
(h) any other variable of similar nature.
Since Bitcoins are used spil currency because Bitcoin users think it has inherent and not because its value is derived from any other underlying thing or object, therefore Bitcoin cannot be said to fall under the definition of “derivative” under the Reserve Canap of India Act, 1934 either.
The term negotiable muziekinstrument on the other arm is defined ter the Negotiable Instruments Act, 1881 and defines a negotiable muziekinstrument spil a “promissory note, bill of exchange or cheque payable either to order or to bearer”. Since the terms promissory note, bill of exchange or cheque are lightly understood ter trading parlance, there is no need to go into the definitions of thesis instruments spil provided under the Negotiable Instruments Act, 1881, suffice it to say that Bitcoins do not fall under the definitions of any of thesis terms under the Act.
Can Bitcoin be Classified spil a Prepaid Payment Muziekinstrument?
The enactment of the Payment and Settlement Systems Act, 2007 has brought the payment systems involved ter the issuance of prepaid payment instruments under the regulatory jurisdiction of the RBI. Ter exercise of its powers under Section Legal of the Payment and Settlement Systems Act, 2007 the RBI on April 27, 2009 issued policy guidelines governing institutions issuing prepaid payment instruments such spil mobile wallets, Paypal, etc. Te thesis guidelines the term Prepaid Payment Muziekinstrument is defined ter the following words:
Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by contant, by debit to a canap account, or by credit card…
Since Prepaid Payment Instruments have a definite value stored on them which is equal to the amount paid by the holders ter specie or by debit or credit card, it seems that Bitcoins cannot be classified spil Prepaid Payment Instruments since there is no static value stored ter Bitcoins, rather they have an inherent value. Te other words the amount of money that a person pays to buy Bitcoin does not represent the value of the Bitcoins that the person is buying, rather the value (or exchange rate) of Bitcoins keeps switching on a daily onderstel. Therefore Bitcoins cannot be classified spil prepaid payment instruments because the value stored on prepaid instruments such spil Paypal is always onveranderlijk and is equal to the amount of money paid to the system to get a Paypal balance, but this is not the case with Bitcoins.
What can Bitcoins be Classified Spil?
Spil discussed above, Bitcoins cannot be classified spil regular financial instruments such spil ‘currency’, ‘security’, ‘derivative’ or ‘negotiable instruments’ spil thesis instruments are presently defined under Indian law. What therefore, should be the legal treatment of Bitcoins under Indian law? Bitcoins are essentially lines of code which create the system of transfer of Bitcoin currency from one account to another. The Indian Copyright Act defines the term “computer programme” spil “a set of instructions voiced ter words, codes, schemes or ter any other form, including a machine readable medium, capable of causing a laptop to perform a particular task or achieve a particular result”. Based on this definition spil well spil the generally understood meaning of rekentuig programme it would be fairly safe to say that Bitcoins would fall under the definition of the term “computer programme”. Now the General Clauses Act, 1897 defines the term movable property spil property of every description, except immovable property. Immovable property has bot defined to include land, benefits arising out of land or things linked to the earth or permanently fastened to anything linked to the earth. Clearly a pc programme would not getraind into the definition of immovable property and relying upon the broad definition of movable property te the General Clauses Act, 1897 it can be said that a pc programme and by logical extension Bitcoins should be considered spil movable property. Further the Forward Contracts (Regulation) Act, 1952 also defines goods to mean “every kleintje of movable property other than actionable claims, money and securities”. It would seem that on a nude reading, Bitcoins would also fulfill this condition and be generally defined spil goods under Indian law.
Now that wij have determined that Bitcoins would te all likelihood be treated spil goods or movable property under the current legal staatsbestel ter India, it would be beneficial to discuss what laws would regulate the various Bitcoin transactions that occur ter general practice, for the purposes of this paper wij shall limit our discussion to the following transactions:
i) Mining of Bitcoins, ii) Transfer of Bitcoins from one person to another within the territory of India, iii) Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based te India, iv) Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident te India, v) Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India.
Mining of Bitcoins
Since Bitcoins are essentially lines of code and therefore would fall within the definition of “computer programme”, the mining of Bitcoins is essentially the utilization of one’s own computing power and electro-therapy to generate more rekentuig programmes or an extension of an existing laptop programme. Thus Bitcoin ‘mining’ would be like making your own pc programme and there is no law which prevents or prohibits a person from doing so, therefore it seems that mining Bitcoins ter India would be a flawlessly permissible and legal activity.
Transfer of Bitcoins from one person to another within the territory of India
Albeit wij have determined above that Bitcoins would te all probability be treated spil goods and therefore any sale of Bitcoins would be governed by the Sale of Goods Act, 1930 however it voorwaarde be noted that the Sale of Goods Act does not regulate barter transactions. This is so because the sale of goods means a contract whereby the property te the goods is actually transferred by the seller to the buyer and according to section Four of the Sale of Goods Act the transfer of the property te the goods is for a price, i.e., for money consideration. Spil price is an essential factor of a contract of sale, barter is ruled out from a transaction of sale of goods. This means that any transaction whereby payment is made ter Bitcoins would come within the category of a barter transaction, for example if flipkart.com starts accepting payment te Bitcoin then the transaction of paying for a pair of boots through Bitcoin would infact be a barter transaction and would not be governed by the Sale of Goods Act.
Exchange of Bitcoins for Indian Rupees, provided the entire transaction is based ter India
Te case there is an online Bitcoin exchange where one can buy or sell Bitcoins using real currency (such spil Mt.Gox) based te India which deals only with Indian residents and buys or sells Bitcoins for Indian Rupees, then spil vanaf our discussion above all the transactions of this online exchange would be governed by the Sale of Goods Act and all relevant laws regarding sale of goods on an exchange toneelpodium with regard to goods such spil pc programmes would be applicable to such an online exchange including the Forward Contracts (Regulation) Act, 1952. (Spil noted above, Bitcoins would sate the definition of ‘goods’ within the Forward Contracts (Regulation) Act, 1952.) This would imply that spil long spil the online exchange does plain vanilla buying and selling of Bitcoins it would not be amenable to regulatory oversight but if it wants to suggest Bitcoin derivatives such spil Bitcoin futures then it would have to get itself registered spil vanaf the provisions of the Forward Contracts (Regulation) Act and also go after all the rules and regulations prescribed thereunder.
Transfer of Bitcoins from one person to another where the person sending the Bitcoins is not resident ter India
If Bitcoins are transferred from a person residing outside India to a person resident within India then that would amount to invoer of pc programmes within India. If this transfer is done ter come back for the Indian party sending an voorwerp or rendering a service to the foreign party then this would be a barter transaction. It is useful to note that albeit the Indian invoer and customs regulations do not mention barter transactions, the guidance on the webstek of the Directorate General of Valuation, Central Houtvezelplaat of Excise and Customs, Government of India seems to suggest that barter transactions for invoer of goods albeit are not prohibited but do present unique problems of valuation of the goods. However since software imported online does not attract any duty under Indian law, therefore it would be immaterial to discuss exactly how a barter transaction involving Bitcoins should be valued under the Indian customs staatsbestel. For the purposes of this discussion it is sufficient to note that a Bitcoin transaction entered into by an Indian with a party outside India is not prohibited spil long spil the voorwerp or service being exported out of India is itself legal and above houtvezelplaat. For example, a transaction involving an Indian designing a webstek for a person sitting ter Australia and being paid ter Bitcoin would be legal whereas sending contraband substances to the same person while getting paid ter Bitcoin would not be permitted. This would be the legal analysis for a general citizen but this analysis is subject to regulations governing specific instances, for example exchange or goods or items from certain countries may be announced illegal or the receipt of foreign articles by certain class of entities may be banned or otherwise regulated, such spil political parties or Non Governmental Oorganisations (“NGOs”).
Can an NGO based ter India receive donations ter Bitcoin?
This is an interesting question because it would be flawlessly legal for a regular citizen to receive Bitcoins from abroad spil a bounty or donation, etc. However if the entity receiving such Bitcoins is an NGO then there would be the added layer of regulation from the Foreign Contributions Regulation Act, 2010 (“FCRA”) which regulates all foreign contributions received by NGOs. Section Two(1)(h) of the FCRA defines foreign contribution to include the receipt of any article from a foreign source. This means that even if an NGO based te India receives contribution from a foreign source te Bitcoins, such a transaction would fall within the regulatory ambit of the FCRA and any such a transaction would have to be reported to the Ministry of Huis Affairs te Form FC – 7 under Rule 17(Three) of the Rules under the FCRA.
Exchange of Bitcoins for Indian Rupees, where the exchange is based outside India
If a person imports a rekentuig programme into India he would have to pay the customs duty at the prevalent rates, however if this invoer of software is done via the internet and does not involve any physical shipments (e.g. downloading paid software from the internet) then no invoer duty is levied on the invoer of laptop software te India. This would mean that any person buying a pc programme or software from a vendor abroad would not be liable to pay any customs duty or verkeersopstopping any documentation with the customs authorities te India. This situation would also be applicable to any person buying Bitcoins from an online exchange based outside India. The only documentation that would be required for buying Bitcoins from an online exchange abroad would be that which the handelsbank may insist upon for exchanging Indian rupees into a foreign currency and then transferring it to an overseas account. This documentation would involve filing of Form A-1 if the total value of the money being exchanged is greater than USD Five,000 however if the amount of money being exchanged is less than USD Five,000 then the person is only required to give a elementary letterteken containing basic information viz. the name and the address of the applicant, name and address of the beneficiary, amount to be remitted and the purpose of remittance. If the transaction is done using a credit card then ter most instances, banks would not be insist upon this letterteken since thesis transactions usually go through their automated channels.
Albeit Bitcoins can presently be classified only spil movable property and more specifically spil laptop software, this position is not tested te a Court of law. Further it shows up from the analysis of the definitions of ‘currency’ and ‘prepaid payment instrument’ that the government has the power to bring Bitcoins into the definition of either currency or prepaid payment muziekinstrument by just amending the regulations, which is not a very cumbersome process since financial regulations, by their very nature, are fairly fluid and prone to switches. Even so it is worth noting that even spil the legal staatsbestel stands now suggesting of derivative products te Bitcoins might require registration and approval under the Forward Contracts Regulation Act.
It is worth noting that unlike other digital currencies such spil e-gold, liberty reserve, etc. Bitcoin is a peer to peer network based currency which does not have one centralized agency or institution regulating the entire system and therefore an argument is made that even if the agencies want to regulate or shut it down they will not physically be able to do so spil there is no nodal institution that the authorities can go after. However this argument is fallacious to a certain extent te that the authorities can go after online exchanges which are websites or portals run by individuals or entities which have a physical manifestation. They would have names, addresses, canap accounts, etc. and the authorities could lightly go after the major exchanges to cut off the supply or metselspecie into the Bitcoin system by attacking the source where contant or ‘real currency’ comes in or leaves the system thereby severely reducing the efficacy of Bitcoins.
Looking at the relatively petite number of people who use Paypal or other e-wallets ter India, it would not be entirely unlikely that the regulations to govern Bitcoin, whenever they come, would be a reaction to a particular event and whether thesis regulations are enabling or disabling ter nature would very likely depend upon the nature of the event to which they are reacting.
Note: Albeit not referred to here because of the limited setting of this paper, a similar and much more thorough examination of the legality of Bitcoins done by Nokolei M. Kaplanov ter the article titled Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation ter the Temple Law Review.