BITCOINS

In electronic world, Bitcoin is a kind of digital currency i.e. formed and kept electronically. They are not like conventional trading currency i.e. printed and used for day-to-day exchanges like dollar or rupees. It is popularly known as crypto currency because it is cryptographic and is in virtual form. Bitcoins can be used to make payments both digitally as well as in retail stores/outlets.

Origin of Bitcoins                                               

The genesis of Bitcoin was made in the year 2008 by a Software Developer, Satoshi Nakamoto in the form of electronic payment method which was built on mathematical proof. Then, it was digitally created by a group of people that welcomed everyone to join and make use of this ‘peer-to-peer electronic payment system’. This community network brought this virtual currency alive by introducing its own payment system.

Principles governing the evolution of Bitcoins

There are certain principles that govern Bitcoin and make it unlike the conventional currency. Let us take a look at the set of characteristics that set it different from the other Government-aided currencies:-     

  • It is not governed or regulated by any individual central authority. It is decentralized, which means, that it can be originated/mined by any machine and thereby, process payment transactions, which in turn, can formulate its payment network.     
  • There is presently no regulation on installing a bitcoin address and its setting takes few seconds at absolutely nil cost or any questioning.     
  • The users can set up more than one bitcoin address and these addresses are not associated to their names/addresses or PIN etc. 
  • The Blockchain, general ledger of the bitcoins network make the storage system of bitcoins transparent as it records particulars of every transaction. The use of bitcoins publicly displays the number of bitcoins in the address but doesn’t display the user details.     
  • There is no charge or fee on international transfers of bitcoins and showcase fast transfer network.     
  • Most important, Bitcoins are non-repudiable i.e. once send, they cannot be returned back.   

Legal Position on Bitcoins in India

It is important to analyze the risks of using bitcoins before understanding its legal position in India and why there is a need to govern the same.

Virtual currencies like e-wallets or bitcoins are in electronic forms which are stocked in online/electronic media but do involve certain risks:-     

  • They are inclined to losses that may occur out of hacking, malware attack, misuse/loss of password, compromise of retrieving credentials etc.     
  • They are not formed by or exchanged through any authorized central agency; hence the loss of e-wallet/bitcoins could lead in the enduring loss of the virtual currencies kept in them.     
  • Payment transactions made via said virtual currencies i.e. bitcoins, is conducted on peer-to-peer basis without any authorized nodal agency governing it. Currently, there is no established regulatory framework for remedy to customer's problems/disputes/charge backs, etc.     
  • In addition, there is no supporting, backing or underlying of any asset for such virtual currencies.     
  • The value of bitcoin is most probably a substance of speculation. Since virtual currencies are fluctuating/ volatile in nature, hence, holders are likely to be exposed to potential losses. It is reported that virtual currencies are being traded on online exchange platforms placed in various jurisdictions whose legal stature is also not clear.     
  • Users of virtual currencies on such online exchange platforms are open to legitimate as well as financial risks. In context to numerous media reports of the usage of said virtual currencies, including bitcoins has surprised authorities because they have been used for illicit activities in several jurisdictions.     
  • There is absolutely no information of counterparties in such peer-to-peer anonymous electronic networks that could subject the users to inadvertent breaches of anti-money laundering and in combating terrorism-funding.   

Position taken by the Reserve Bank of India (RBI) on the legalization of Bitcoins in India

Despite other countries like USA, India’s RBI has not yet governed or authorized the use of bitcoins. In a press release issued by RBI, it declared that creation, trade and use of virtual currencies like bitcoins are not authorized as mode of payment by the central bank.  RBI is still assessing the risks related with the security of using virtual currencies and there is a need to examine the regulatory framework that governs the payment system mechanism.

Position taken by the Foreign Exchange Management Act (FEMA) on Bitcoins

As per the definition of currency under FEMA, 1999, only RBI is authorized to include bitcoins within the present definition of currency. Currency other than Indian currency is known as ‘foreign currency’ and is governed by Foreign Exchange laws. Bitcoins may fall within the purview of the definition of ‘foreign currency’.

Position taken by the Indian Copyright Act on Bitcoins

Bitcoins are originated on the basis of mathematical proof or computer programs. India’s copyright Act has defined computer program as a set of instructions in words, codes or schemes that are capable of causing a computer to perform a given task or attain a particular outcome. In consideration to aforementioned legislations and advancement in global economy, India may make use of these laws to legalize bitcoins in near future.

Can Bitcoins be used as currency in India?

First let us understand the definition of currency as given in FEMA Act, 1999 which says that “currency includes cheques, drafts, currency notes, money orders, letters of credit, bills of exchange and promissory notes, postal notes, travelers cheques, credit cards, postal orders, other similar instruments as notified by RBI.”

It clearly is not an exhaustive definition and allows RBI to include or notify any other kinds of instruments. Also, all currencies that are not part of Indian currency fall in the scope of foreign currency. These foreign currencies have to comply with the rules, regulations and standards of FEMA.

In consideration to RBI press release, Bitcoin is not an authorized Indian currency and thus, fall under the head of foreign currency, which means, the rules and regulations of the foreign exchange regime of FEMA will apply on the same.

Firstly, Bitcoin is not governed by any central bank or monetary authority and secondly, acceptance of Bitcoins depends on the free will of the third parties. Thus, it cannot create or fulfill any financial obligation. Its peer to peer nature and virtual payment network needs to be regulated by RBI first before declaring it as a financial instrument under Indian law.

Hence, it cannot be treated as currency presently but RBI may consider it one in near future once it devises a regulatory framework to govern its exchange and security.

Can Bitcoins be used as  ‘Prepaid Payment Instruments’ in India

Payment and Settlement Act, 2007 has allowed the issuance of prepaid payment instruments like mobile wallets, PayPal etc. under RBI jurisdiction. These prepaid payment instruments are used to buy goods or services against the amount stored in this instrument. This stored amount is the value paid for by the holders by way of cash/debit card/credit card.

Since the said instruments store a definite value which is equivalent to the value paid for by the holder by way of cash/debit or credit card, hence, bitcoins cannot be considered as prepaid payment instruments. Bitcoins have an innate value rather than definite value. In simple terms, the user of Bitcoins doesn’t represent the value of this virtual currency that he is buying. In fact, unlike other prepaid payment instruments, the value of Bitcoins keeps fluctuating on daily basis.

How are Bitcoins classified

Interestingly, Bitcoins cannot be categorized as usual financial instruments which are defined under Indian legislations like currency, security or negotiable instruments. The big question now is then where can be they classified and what is their legal treatment?

As per Indian Copyright Act, term “computer programme” is “a set of instructions stated in schemes, codes, words or computer originated language in order to achieve a particular target or accomplish a specific task.”

Bitcoins are computer generated lines of code that run the transfer system of bitcoin currency from an account to another. This would categorically put it into the definition of computer programme.

As per General Clauses Act, 1897, movable property includes all kinds of property except immovable property. In that context, computer programmes will also fall in the broad purview of this definition which, thereby, allows bitcoins to be considered as movable property.

Forward Contracts (Regulation) Act, 1952 gives us a broad definition of goods which include ‘every kind of movable property other than actionable claims, money and securities’.

In consideration to all above and this, Bitcoins are generally classified as ‘Goods’ under the Indian legislative System.

Can Bitcoins be transferred from person to person within the Indian Territory?

Now, Bitcoins are considered to be classified as goods and hence, can be regulated under Sales of Goods Act, 1930, but, transfer of bitcoin currency from one account to another is more like barter transaction. In legal parlance, sale of goods implies transfer of goods owned by an individual in lieu of money, where price plays a vital role in executing or completing the transfer. But, in Bitcoins, there is no exchange of actual price. For instance, any purchase of goods against bitcoins on an e-commerce website like Amazon.in, which if accepts bitcoins as mode of payment, then that transaction would be like a barter trade and will not be regulated by Sale of Goods Act.

Can Bitcoins be traded in lieu of Indian currency (Where trade is taking place within the Indian Territory)

In contrary to above, if online exchange of bitcoin is initiated which allows the person to sell or buy bitcoins using Indian currency, then such online transactions of exchange will be regulated by Sale of Goods Act or any other pertaining laws with regard to sale/purchase of goods on any exchange platform. Further to above, sale of goods like computer programmes on online exchange would also be governed under Forward Contracts (Regulation) Act,1952 if it is offered in the form of Bitcoin Derivatives i.e. Bitcoin futures or bitcoin options. Such derivatives are required to get registered under Forward Contracts (Regulation) Act and comply with its prescribed rules and regulations.

The bottom line here is that there has to be an exchange of bitcoins in Indian currency and that the transactions are entirely based in and within Indian terrain.

Bitcoins traded in lieu for Indian rupees (where the trade is taking place outside the Indian Territory)

Any import of physical goods/shipments into India attracts levying of custom duty as per the India’s custom laws and at applicable rates, but what about import of softwares via internet? Does it also attract custom duty? No, the person purchasing a computer software /program is not liable to pay any custom duty or has to undergo any documentary formalities as otherwise. The same is applicable on Bitcoins. Any Indian buying bitcoins via online exchange i.e. based outside India has to just execute certain bank documents which will enable the exchange of Indian currency into foreign currency and then transfer the same into given foreign bank account provided the amount of exchange is more than USD 5000. In other cases except credit card transactions, it just needs a letter containing basic information i.e. name and address of applicant and beneficiary, amount and purpose of remittance.

Non Resident Indian (NRI) and Bitcoins (Where an individual sending bitcoins is an NRI)

Another interesting yet significant point to consider is to categorize the transfer of bitcoins from an NRI to an Indian resident. In general view, it is considered to be an import of computer programmes within India but any transfer of bitcoin against any import of item or rendering of service will more likely be a barter transaction. India’s import and custom laws do not comprehend barter transactions as it makes valuation of the goods uniquely difficult.  The current guidance rules of Central Board of Excise and Customs do not exclude barter transactions but also doesn’t discuss valuation of such transactions.

In addition to above discussion any transaction by an Indian to any foreign national/NRI by using bitcoin currency is allowed provided the export of such an item or service is legally permissible.

This can be elucidated by an example where an Indian developing a website for his American client and then, being compensated in Bitcoin currency would be considered legal whereas dispatching/forwarding illegal goods to his American client and then paid in bitcoins is not legally permissible. There is a need to review all the related laws, restrictions before analyzing the legality of such import/export transaction within countries before evaluating the legality of transfer of bitcoins currencies.

Bitcoin may universally become one of the modes of future payment transaction where it can be either regulated centrally or through country’s own regulatory mechanisms. In India, its adoption is still apprehensive. From the above discussions, we understand that bitcoins can be categorized as movable property/goods and under the definition of computer software/programme. RBI has the authority to bring Bitcoin in the definition of existing financial instruments i.e. currency, security or prepaid payment instrument and also to govern it by making certain amendments in regulations.

This peer to peer electronic currency is decentralized which pose significant problems before authorities of different countries as there will be no central regulatory agency or institution that can help in settling inter-country disputes. On the other hand, these authorities can track the online exchanges that run through bitcoin portals/networks and operated by individuals or communities and take necessary action of shut-down by mutilating the source where cash/real currency leaves the system.

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