What is Bitcoin? Is it Legal in India? What if I get defrauded? Is my money safe with Bitcoin?, these are some questions that are popping in the minds of many Indians right now. Let’s take a dive into this issue to know its legality.
Let’s start with a famous Dialogue from Web Series Scam1992 “Risk hai to Ishq Hai”, this phrase, usually sums up the whole idea of Bitcoin in India right now.
Money — a concept that has changed and continues to change throughout time. Think about it, the very first form of exchange was the barter system. Although there was no “money”, value was added to items for exchange. There were clearly limitations in the system, prompting the change to money-minting. This is how modern currency came into being.
After the arrival of the internet, the world showed rapid change. Money running the world, it changed too. Here came net-banking and digital money transfers that changed Money as we know. Notes and Coins were replaced by cards and digital transactions. This became the Fintech sector – Financial Technology. These digital transactions always have the valued physical coins or notes behind them, controlled by the central monetary authority, like RBI in India. This digital transaction can be turned into physical money. For such transactions to actually work a go-between like a bank is needed, the only way money can be transferred to an account from another.
In recent years terms like “cryptocurrency” and “Bitcoin” have gained popularity, many being unaware and fearful of what this new-age concept is. However, this has not stopped it from gaining attraction and demand. Much of this attraction has come around due to the questions getting raised on it.
What really is cryptocurrency? How does it work? What can one do with it? How can one own it? And most importantly, Is It Legal?
What is cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend These cryptocurrency companies use the block-chain technology and are decentralized networks. Since these currencies are not issued by a Central/ State authority, they are immune to government interference.
The “crypto” in its name comes from the cryptographic techniques and encryption algorithms which help in safeguarding these virtual monies. Cryptocurrency is largely praised for their profitability, divisibility, inflation resistance, and transparency. The owner of cryptocurrency thus owns a digital asset, unregulated but at the same time largely profitable.
The governments of various Nations (and even some individuals) are against this new form of currency due to its unregulated nature, their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them.
The first block-chain based cryptocurrency was launched in 2009, by an unknown person/ group by the name of Satoshi Nakamoto, famously known as Bitcoin. As of March 2021, over 18.6 million Bitcoins are in circulation with a total market of around $927 billion.
Eventually, other competing cryptocurrencies also came up such as Litecoin and Dogecoin.
How does it work?
Cryptocurrency uses the block-chain technology that allows for secure online payments in terms of virtual tokens. The simplest example of this can be thought of as the ‘coins’ one receives in virtual games. Now these tokens can be used to make transactions that are represented by ledger entries internal to the system. Since these transactions are actually not of the ‘real-world money’, a need for a third party such as a Bank is not necessary. The transaction is an exchange of the tokens from one user to another.
Here comes the question of how actually these tokens can be owned. In terms of Bitcoin, one may buy it with real-world money from another user, which can be extremely expensive. On the other hand, one can “Mine” a Bitcoin. Bitcoin mining is the way by which new bitcoins are added into circulation. Mining is painstaking, expensive, and irregularly rewarding. Yet, it has an appeal for many investors interested in cryptocurrency because such miners are rewarded for their technological work with crypto-tokens, or a Bitcoin.
This has made cryptocurrency a gold mine. Now every gold mine is overseen by authority, but this one isn’t; thus making it prone to irregularities and illegal activities.
Bit Coin & India:
Even though Bitcoin first came up in 2009, nothing was clear about it till 2018. There was neither a clear definition nor a law that prohibited or regulated its use. Around 2012, the popularity of cryptocurrency erupted in India.
- RBI’s view on Cryptocurrencies( Bitcoin):
In 2013, the RBI first began to take notice of cryptocurrencies or Bitcoin and in June released a Financial Stability Report which defined them as
“a type of unregulated digital money, issued and controlled by its developers and used and accepted by the members of a specific virtual community”.
It was followed by issuing press-releases warning the public against dealing in such currencies in 2013.
In 2017, the Indian Government constituted a high-level Inter Ministerial Committee to report on various issues relating to the matter. In 2019, this committee suggested a blanket ban on such currencies entirely.
Within a year of constituting this committee, the Reserve Bank of India issued a circular in 2018 stating that banks were not to support any entity dealing in virtual currencies. This did not place a ban on cryptocurrency as such, but was like a back-handed stop to them.
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- Supreme Court on Cryptocurrencies:
The Supreme Court of India quashed this circular in the case of Internet and Mobile Association of India V. RBI in March 2020. In the judgment authored by Justice V Ramasubramanian, the court found RBI had the power to regulate Virtual Currencies; however, the prohibition imposed by them in the circular of 2018 was unconstitutional.
This decision was reasoned by taking the reference to Article 19 (1) (g) on the Constitution of India. This article deals with the fundamental right to operate or carry on business, trade or any occupation. Thus, suppressing banking services to such entities or individuals operating Cryptocurrencies was to be treated as a legitimate trade under the Constitution.
The Court analyzed the role of RBI in the economy as a central bank to manage currency, money supply and interest rates and recognized that the maintenance of price stability as an objective of RBI. The Supreme Court observed that cryptocurrency can be accepted as valid payment for purchase of goods and services, as such can be regulated by the RBI.
The RBI had not necessarily found anything wrong with such cryptic transactions, but the circular disconnected the banking sector from it. It was also noted that the RBI did not explore alternative measures such as regulating cryptocurrency trading and cryptocurrency exchanges before issuing the said circular.
Road forward:
The judgment provided temporary relief in the matter. However, currently an absence of definitive regulation in the issue can be seen. Due to this, the sector remains extremely unpredictable. The lack of a proper law will become a bar for financial institutions and the banking sector to incline towards investing in virtual currencies.
Further, a look into the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” has to be made. The Indian Parliament has not yet approved this bill; but it would be interesting to see how opinions on it may change in light of post-Covid ideologies. The gist of this Bill is that it places a ban on Private Cryptocurrencies running in India. Thus, Bitcoin won’t be used. However, exceptions are made in promoting the underlying technologies behind such virtual monies. The RBI will have the authority to control the framework and creation of it.
Another development made to recognize Indian use in cryptocurrencies was with the amendments made in the month of March 2021 to Schedule III of the Companies Act, 2013. Accordingly, from the new financial year, companies will have to disclose their investments in cryptocurrencies along with details of such transactions.
This amendment was largely welcomed by the community as it is hoped understanding would increase, thus leading to opening doors in the Industry.
As of May 19, 2021 it has been heard that the government may set up a new panel to study crypto regulations. It is good to see that India is trying to put its best foot forward in such modern aspects, while at the same time keeping the safety of its citizens on top of the list.
Conclusion:
From the above it can be concluded that there are gray areas with respect to legality of Bitcoin in India, but the Judgment of Supreme Court in International and Mobile Association (Supra) does give it support and hopes that it will be the next big thing in Indian Economy. As of today, if you are buying Bitcoin, then buy it at your risk, because you are on your own, there is no such regulatory body like with the banks, to indemnify in case of any fraud or loss. So if you believe in the popular Dialogue of “Risk Hai to Ishq Hai” from Scam 1992, then go ahead.
“Cryptocurrency is such a powerful concept that it can almost overturn Governments.”
-Charlie Lee
Edited by
Rajat Rajan Singh
Editor-in-Chief at Law Trend
Advocate at Allahabad High Court, Lucknow
Written by
Sai Kulkarni-Intern
