This article has been written by, Aayushi Swaroop, a student of National University of Study and Research in Law, Ranchi. In this article, she has discussed the meaning of bitcoins, its working, and the say of laws in the use of virtual currencies in the transactions.
The first form of cryptocurrency-bitcoins, are a digital form of money, which though matches some of the features of the traditional form of currency (namely fiat currency), is verified by using cryptography. The place where bitcoins can be sold or purchased by a person are called ‘bitcoin exchanges’. It was in 2009 when the news spread that someone with an alias or anonymous name, Satoshi Nakamoto, is the developer of bitcoins. It was proposed to be a form of electronic payment based upon mathematical proof.
The purpose of developing digital currency or bitcoins is that the payment can be made independently, that is, without any involvement of the central authority, in a safer and immutable way which is also subject to verification.
What is bitcoin
A cryptocurrency is one which involves advanced technological encryption. It is basically the digital form of currency. There are various types of cryptocurrencies which are used in the market for the purpose of exchange of goods and services, like, bitcoins, litecoins, ethereum, dash ripple, monero, etc. Ethereum is the type of cryptocurrency which is used for the purpose of smart contracts. A bitcoin is an example of a cryptocurrency which is referred to as a virtual form of currency which can be used to buy products and services.
Bitcoins have two varied components:
- Bitcoin in the token form: It carries a set of codes which are basically the digital languages that determines the ownership of that bitcoin.
- Bitcoin in the form of a protocol: It refers to the distributed network which keeps a record of all the transactions of the money made through the bitcoin in token form.
Bitcoin facilitates the use of a digital form of currency, which uses codes to identify the owner of those bitcoins, to make it the most convenient way of money exchange for buying products. Unlike other types of currencies, like coins minted of brass and paper notes which carry the amount and the name of the owner of the money on paper, bitcoins are minted by computers using a particular software.
Why do we need bitcoins?
It is well known that bitcoins are not controlled or regulated by any authority, like banks or the Government, and therefore, many people find it easier to trust it, as it is aimed at avoiding past occurrences of a crash of the financial system. Also, the bitcoins are used anonymously, that is, nobody would get to know one’s account number, unless one has informed them about the same. Also, nobody gets to know the name of the seller or the buyer unless revealed.
There are three ways in which one can obtain bitcoins. They are:
- One can buy bitcoins using fiat currency, like notes or coins.
- As a seller of goods or services you could ask your customer to make the payment in bitcoins.
- One can also mint bitcoins using his/her computer.
Where can one find bitcoins?
One can receive his/her first bitcoin from any of the following four sources:
- Any centre for cryptocurrency exchange would convert or change your real money for bitcoins.
Resources: Coinbase and Coinsquare in the US & Canada, and BitBargain UK and Bittylicious in the United Kingdom.
- Bitcoins could be obtained from the cryptocurrency exchange or any bitcoin ATM (Automated Tellering Machine) where one would be able to change the bitcoins or cash for any other type of cryptocurrency.
Resources: BTER and CoinCorner.
- If a person approaches any other person who has the classified service to help you trade your bitcoins for cash .
Resource: the definitive site in LocalBitcoins.
- A person, as a seller, could ask for bitcoins in exchange for goods or services provided to the other person.
Resource: Sites like Purse.
Just like a wallet that common people use in day-to-day life, bitcoin wallets are used to save bitcoins. The only difference is that bitcoin wallets are digital wallets and there is no state authority regulating these wallets. It is like a virtual bank account that will assist the customers to save money, or send or receive it and use it while paying for goods or services. These wallets either exist on the person’s computer or on a cloud.
Full client in a network:
It is a client who would be able to handle all aspects of the process alone. That is, the person would not have to wait for a third-party server. One can carry on the process from beginning till the end. As can be prima facie inferred, this application is not for beginners.
Lightweight client in a network:
This client assist connection with the mail server in order to gain access to the mailbox. This client can store a person’s bitcoins, but needs a server which some third-party owns to gain access to the network and make transactions.
Web client in a network:
It is the opposite of a full client scenario. A web client is totally dependent on a third-party server. Here, it would be the third-party who, by replacing you, would perform all the transactions on your part.
- When wallets are stored on the cloud, there is a high possibility that your network might get hacked. Once hacked, the offenders are likely to run away with your money.
- When the walletes are stored on the computer, there exists a high possibility that viruses would eat up all your data and destroy your system.
- Also, there is a possibility that one might accidentally delete the wallet.
Bitcoins for beginners
It is very easy for new users to gain access to Bitcoins. This does not require knowledge of any technical details. After a person has installed a bitcoin wallet on his computer or his mobile phone, it would automatically generate his/her bitcoin address. A person can create several bitcoin addresses if he/she wants or needs. Once the address has become known to you, you can share it with your family and your acquaintances to make payments to each other. Remember, the bitcoin address can be used only once.
Veiled buyers and sellers
Transactions that involve bitcoins as a medium of exchange, do not reveal the identity of buyers and sellers. The identification is made by the IDs of their wallets.
- The advantage with this system is that: their confidentiality is maintained;
- There is a big disadvantage attached to it and that is, by not having the names of the buyer or the seller it becomes difficult to track the person and therefore gives way to the selling of drugs or commission or any illegal activity.
What is block chain?
A block chain refers to a shared public ledger. The entire network of bitcoins relies on the shared public ledger. When the bitcoin transaction has been made successfully it adds to the block chain which allows the bitcoin wallet to calculate how much money remains in the wallets after the transaction. Basically it helps in looking at the balance of bitcoin wallets. And this further helps in maintaining records and to see if new transactions could be carried out with the left amount in the bitcoin wallet. This way, the transaction can be verified that it is being made by the original owner of the bitcoin wallet. The integrity and the chronological order of the block chains are protected by using the system of cryptography.
What is transaction?
A transaction here refers to the transfer of value between bitcoin wallets which gets included in the block chain. There are two aspects to this transaction:
- A private key: a private key or a seed is a piece of secret data stored by the bitcoin wallets. This piece of secret data is used to sign transactions as it provides mathematical proof that the transaction had been made by the real owner of the bitcoin wallet.
- Signature: Once a signature has been provided, and the bitcoin wallet has been issued, it cannot be altered by anybody. All the transactions conducted thereafter are broadcast on the network. On the network these transactions get confirmed within 10-20 minutes through the process known as bitcoin mining.
There are two main concepts which are important to understand the functioning of bitcoins:
Every block on the network is a cluster of transactions that takes place using cryptocurrencies. These transactions are contained as permanent records which cannot be modified. Not only the information is permanent and unmodifiable but also the information stored in the previous blocks cannot be modified.
Blocks cannot independently exist, and so, every one block is connected to every other block.
Bitcoin mining refers to a process of transacting money in the digital currency system. In this system, the records of all the previous transactions are also recorded in the form of blocks. These blocks together form the blockchain. There exists miners on whom the task of mining is bestowed, that is, controlling and regulating the network. They further help in verifying the transactions that are taking place on the network. They ‘mine’ the coins. Therefore, miners assist in securing and controlling the network, which further helps in verifying the transactions which are taking place.
Transactions on the network take place by using the software called ‘cryptocurrency wallets’. All the transactions that are taking place on the network are collected by the miners to form blocks. They do this in order to earn commission once the transaction gets authenticated in the banks. After this, the miners will check whether the transactions made are valid or not by seeing if the party had a sufficient number of bitcoins in the wallets for making such a transaction.
The process of verifying the transactions doesn’t involve inquiring about the same, but everything is done through a mechanism where the miner uses his computer. The job of miners is to keep releasing the hash functions, which are strings of numbers unless a solution is reached. A bunch of transactions, i.e. a block, would require a huge number of hash functions. Once the miner of that block verifies the transactions then the other miners also verify it.
Once the miners reach a solution and it is verified, the transactions become authentic. The miners hereafter receive their commission in the form of a new set of bitcoins.
Once the block finds a solution, only then a new block would be created. When this process continues a chain of blocks are formed which are called blockchains.
The bitcoin transactions are irreversible:
Once a transaction has been made, nobody can reverse it. No help could be sought in cases where one has accidentally sent the bitcoins to a scammer or one has stolen it from one’s computer. There exists no safety net in case you find yourself in the above mentioned situations.
Identity not revealed:
The buyer or the seller’s identity is not revealed in the case of bitcoin transaction, not even the information regarding the account, like the account number, are made public. One receives bitcoins on the address and connecting the identity of the user to this address is not possible on the network.
Swifter way of transacting money
Bitcoin transactions take place within a minute or so. It doesn’t take long to transact money to buy or purchase goods or services over the network from any part of the world, be it your neighbour or any person from another corner of the world.
The method is secure
The bitcoins are stored into a system called the cryptography system and therefore, only the owner of the private key can send cryptocurrency. Once it has been stored in the cryptography, no mathematical calculation would be able to break through it.
No permission required
Before one starts to use cryptocurrency, one does not have to take permission from any body. One can easily download the app (application) online, and use it for free. After installing the app, selling and purchasing of the bitcoins or other goods and services can be sent and received. No one could prevent you from gaining access to the application.
Lack of definition in Indian laws
The Coinage Act, 2011
Section 2(a) of The Coinage Act, 2011 defines the term coin. It states that: a coin is any metal or any other material that holds the stamp of the Government of India or any other authority who has been empowered by the Government to do the same. A coin is also referred to as a legal tender and includes commemorative coin and Government of India one rupee note.
For something to be called a coin, it needs to have proper stamp by the authorities. Since there is no such authority to sanction virtual currency, therefore, bitcoins do not come under the ambit of coins as defined under the Coinage Act, 2011.
Foreign Exchange Management Act, 1999
Upon giving a closer look to Sections 2(h), 2(m) and 2(q), it may be inferred that bitcoins are not covered under the ambit of the Foreign Exchange Management Act (FEMA), 1999.
- Section 2(h) talks about the different types of currencies which exist.
- Section 2(m) gives the definition for foreign currencies.
- Section 2(q) lays down the definition of Indian currency.
It is thus gathered that FEMA is not applicable to the regulation of bitcoins in India. This further means that the apex bank of the country, that is, the Reserve Bank of India, has no role to play in the regulation and operation of bitcoins in India, in the existing legal framework.
KYC stands for Know Your Customer. It is the process through which the banks obtain personal information, like the address of the account holder. The banks ask their customers to submit the KYC form at the time of opening a bank account.
It is the RBI who makes the KYC norms in order:
- To keep a record of all the transactions made by its customers.
- To maintain an updated record of the personal information of the customer.
- To hold the person liable in case he/she fails to comply with or break from the usual course of behaviour.
The widely used app in India to maintain a Bitcoin wallet is ‘Zebpay’. This app follows the KYC norms along with the Anti Money Laundering norms to ensure that the platform is not being put to illegal or wrongful use.
The Sale of Goods Act, 1930
As per Section 2(7) of the Sale of Goods Act, 1930, the bitcoins may come under the ambit of ‘goods’. The point to be kept in mind is that this rule would not apply in cases where consideration is essential as consideration can only apply in the case of price as mentioned under Section 2(10) of the Sale of Goods Act, 1930 which can only be regulated by any existent law and not otherwise. This further means that consideration cannot be in kind under Sale of Goods Act. As a result, the Indian Contract Act, 1872 will also apply in cases where the transactions between the parties are formed by lawful consideration.
Imposition of tax on bitcoins
Where bitcoins are represented as an income or as an asset, taxes would be imposed. Under Section 2(14), which deals with the properties and the securities which the assessee holds, of the Income Tax Act, 1961, bitcoins can be considered under capital assets.
Therefore if the person derives any profit from the buying or purchasing a bitcoin, the assessee would have to be taxed under the Income Tax Act, 1961 as it would come under capital gains.
As per the RBI press release 2016-17/2054, dated 1st February, 2017, it was clearly stated by the apex bank of the country that: it does not give any license or authorization to any entity or company to operate virtual currencies, and that, any user, holder, trader or investor, etc. if carrying out the business of virtual currencies will be doing it at his/her own risk.
The similarity in both the form of currency is that they are used only when parties from both sides have agreed to its use. But, they share certain differences which are as follows:
The traditional form of money, i.e. notes and currencies, are generally issued and controlled by a single authority. Like in India, the central bank is the Reserve Bank of India (RBI) regulating the issuing of money and controlling its circulation in the market. But this is not the case with bitcoins. There exists no single authority which has the power to control the regulation of bitcoins. There are a group of volunteers who are responsible for its maintenance, and it is run by an open network of dedicated computers which may be spread across the world. This characteristic of bitcoins helps those people who are not comfortable with any single authority exercising control over the circulation of money in an economy.
Bitcoin forbids double spending
The case with electronic currencies is that the assets which are mentioned therein can be easily copied and be re-used. But, bitcoins use intelligently and cleverly coded form of cryptography which prevents one from double spending the bitcoins. Also, the group of volunteers making the bitcoins undertake incentives which forbid a person from using the same bitcoin again.
Where in the electronic form of money, this facet is looked into by the central bank, there is no one controlling the same in the open network of bitcoins.
The supply of bitcoins is limited unlike traditional currencies
The conventional form of currencies which are used by people are issued by the Central Bank of the country. It means that the Central Bank holds the power to issue as much as it wants to. This could be proven to be dangerous for an economy as the Central Bank or the apex bank of a country could manipulate the amount of money being circulated in the market and could raise its value when compared to other countries. This could create a disbalance in the economy and it would be the general public who would be ultimately be getting affected by it.
The system of bitcoins is based on a very important economic theory which says that if the demand for a commodity rises and its supply remains the same, then the value of that commodity would increase. Therefore, the system of bitcoins is that every hour a certain amount of bitcoins would be released and would continue to get released at a diminishing rate unless the mark of 21 million has been reached. This is one of the reasons why bitcoins are seen as an asset for an economy.
Semi-anonymity of the sender
In the case of traditional currencies, the person sending the money can be identified as the transactions are controlled by the banks who have all the essential information about the sender of money. Whereas, in the case of bitcoins since there exists no validator, therefore, knowing the sender is not important. The transaction is required by the address of his/her wallet. The protocol form of bitcoins, that is, the distributed network which keeps a record of all the transactions of the money made through the bitcoin in token form, keeps a record of the transactions and let the readers know if they have sufficient bitcoins in their account. The transaction that involves the use of bitcoins is looked into by law enforcement and so the identity of the customers is known to them before making such transactions. This prevents criminals from using bitcoins for a purpose other than what is legally valid.
Once sent money cannot be returned
In the case of traditional transactions, the sender might ask for the money to be returned to him. But in the case of bitcoins, once the money has been sent, the transaction cannot be reversed, and if an hour has passed after the transaction being made, getting the money back becomes an impossible task. This is so because there is no central authority controlling or regulating the transactions involving the use of bitcoins. This assures that the transactions made using bitcoins cannot be manipulated.
Bitcoins facilitate microtransactions
‘Satoshi’ is the name given to the smallest unit of bitcoin whose value is equal to one-hundredth of a cent. This facilitates microtransactions which are not possible with the traditional form of currencies.
How to protect one’s bitcoins on the network?
Like in our normal course of life, where we use only a small amount of money in our purse and wallet and keep the larger store of it in a locker or any other safer environment, same is the case with bitcoins. Herein, a person would store only a little amount of bitcoins in the wallet, or the computer, or mobile or on his server and the rest of it would be kept in a safe environment.
Following steps could be followed to protect the bitcoins:
- It is important that one backs up his bitcoin wallet on a regular basis.
- It is also essential that you keep a strong password on your smartphone to protect the bitcoins from hackers.
- It would be a smart thing to keep only the required amount or only a few more than that in your online wallet. The rest could be stored in your offline wallet, disconnected from your network.
- An updated software where multiple signatures would be required would act as an added security. Using this software would make your give multiple approvals, each approval independent of the other approval.
Bitcoin mining is a process of creating or discovering the bitcoin currency for unlike the real currencies, that is, paper notes and coins which are printed and minted, the bitcoins have to be created or say have to be mined by using mathematical calculations. There is a public ledger called the block chain, that contains all the transactions and whenever a new bitcoin is mined, it is added as a new transaction to this ledger. The public ledger is also there for verifying all the past transactions as legitimate and to ensure that coins have been spent accordingly.
Bitcoin mining is basically the process of introducing new coins into the system, as rewards for doing computational work.
- To make the bitcoin nodes secure and tamper-resistant.
- To make sure that the design of the bitcoins are resource-intensive so that too many blocks are not created every day. This is done to avoid rapid inflation.
- In order to be considered as valid by the public ledger, it is important that every block chain has a proof of work.
- And, every time a block is received on the network it is important that they are verified by all the other bitcoin nodes. This system is called ‘hashcash proof of work function’.
Every miner, depending upon the contribution of resources, gets a share for discovering a block if he becomes a part of the network farm.
Similarity between bitcoin mining and the mining of other material resources
- Bitcoin mining also takes great efforts by the miners as it requires complex mathematical calculation which is mentally exhaustive.
- When all the efforts put in by the miners are collected, a new currency becomes available at rates comparable to the mining resources like gold and silvers.
Is it safe to use bitcoins?
- On one hand, since every transaction which is taking place is made public, it becomes very difficult for people to copy, fake or wrongfully use the bitcoins.
- On the other hand, there are possibilities that one might accidentally deleted the bitcoins save don the cloud or computers.
- Also, it is very likely that, websites which temporarily save the bitcoins can be subject to theft.
- Since the value of bitcoins have not remained constant over the period since its existence from 2009 onwards, people do not find it safe in comparison to the real money.
The following table would give an insight into the trends of the value of the bitcoins:
No value or say zero value in the market due to lack of recognition of bitcoins as a medium of exchange. The only people using the bitcoins were the cryptography fans who were only using is as a hobby. And thus, the bitcoins had little or no value at all.
Little rise in the value, and then a decline.
The value of bitcoins had shown a slow rise.
The value of bitcoins showed a high rise on the chart, and then crashed and then rose again. Finally it became stable.
Initially the price erose , but eventually it moved towards a downfall.
The entire year experienced the downfall in the value of bitcoins.
The value against started rising.
Prices initially feel by 30% and then rose by breaking the record of November, 2013. But the end of the year the value of the bitcoins had dropped by one–third within 24 hours.
By the end of the year, the value of bitcoins has reached 4,300 dollars.
Where in the initial part of the year, cryptocurrency had experienced a fall in its value, by the month of June its value had reached worth 13,000 dollars.
The recent increase in the value of the cryptocurrencies or say the bitcoin has been because of the development of cryptocurrency and blockchain industries.
Bitcoin regulation in India
Bitcoins mining- legal or illegal?
Neither the Government of India nor the Reserve Bank of India recognizes bitcoins as legal tender of money or as a currency, therefore, using bitcoins in any transaction is illegal in India. As per the apex bank of the country, the Reserve Bank of India, dealing in virtual currency transaction is prohibited, whereby, no banks or other such regulating organizations could deal in bitcoins.
There exists no law in India which talks about bitcoins. Therefore, in the eyes of law, bitcoin mining should neither be considered as legal nor be considered as illegal. No Act, law or legislation lays down provisions, neither defining what bitcoins are nor the penalties and process of prosecution for dealing in bitcoins or even for mining bitcoins.
Where miners can mine bitcoins in India, they would not be able to use these bitcoins to carry out transactions, or buy or sell services, or carry out any bitcoin business or operation in the country, neither the banks nor from any other financial institutions. It is to be noted that any person carrying out bitcoins related work shall be solely responsible for anything that happens during the course of that work as he/she would not be able to take any protection from the Indian laws.
Securities Contracts (Regulation) Act, 1956
For bitcoins to be considered under the ambit of ‘securities’, it is necessary that it falls within the meaning of the ‘securities’ as defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956, or the SCRA Act, which states that ‘securities’ include:
- Shares, stocks, scrips, bonds, debenture stock or other marketable securities of like nature of any body corporate inclusive of derivative, units or any other instrument issued to investors in mutual fund schemes, units or any other instrument issued to investors in a collective investment scheme and security receipt as defined in SARFAESI Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002);
- It would include all those Government securities and instruments which the Central government notifies as securities.
- Rights or interest in securities.
The two important essentials are to be looked into in order to consider an instrument as a security are:
- That a corporate body should issue it and;
- That any underlying asset of the body corporate should back it.
Since bitcoins do not satisfy the two given conditions, therefore, bitcoins cannot be treated as securities as defined in SCRA.
The Foreign Exchange Management Act, 1999 (The FEMA Act )
The know if bitcoins fall under the ambit of ‘currency’, one has to look into the Foreign Exchange Management Act, 1999 or the FEMA Act, 1999. The Act states that the term ‘currency’ is inclusive of:
- Currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
- “Currency notes” are inclusive of cash in the form of coins and banknotes;
- “Current account transaction” refers to any transaction which is not made from the capital account or is different from the capital account transactions. The transactions herein would also include:
- The due payments in transactions relating to foreign trade, other current business, services, and also the banking and credit facilities which are available for a short term in the ordinary course of business.
- The due payments which are basically the interest that one has to pay on the loans as well as the interest that has to be paid on the net income from the investments.
- The remittances which one has to pay as the result of the expense when someone from the family, like the parents, spouse or children are residing abroad.
- The expenses that one has to bear when someone from the family, like the parents, or the spouse or the children, goes abroad for education or medical care.
Since the Reserve Bank of India has already prohibited the use of virtual currencies like the bitcoins, thus, the bitcoins cannot be considered as an instrument under the definition of currency as laid down under the Foreign Exchange Management Act, 1999.
Payment and Settlement Systems Act, 2007
The Act which is responsible for the regulation of all the payment systems in India is the Payment and Settlement Systems Act, 2007. According to Section 2(i) of the Payment and Settlement Systems Act, 2007, a ‘payment system’ is one where the payments being made between the payer and beneficiary are given effect. The word ‘payment’ in this section is inclusive of clearing, payment or settlement service or all of them. The stock exchange is not a part of the ‘payment system’ under the ambit of this section.
On further explaining the definition, the following are also included in the payment system- credit card operations, debit card operations, smart card operations, money transfer operations or any other similar operations.
The ‘payment system’ in India is regulated by the Reserve Bank of India. Since the Reserve Bank of India prohibits the use of bitcoins in any transaction with the banks or any other financial institutions, that is, neither they can deal them nor provide services related to them, therefore, bitcoins cannot be considered under the scope of ‘payment system’ in India. Also since bitcoins cannot act as a gateway between the payer and the beneficiary, therefore it cannot be included under the ‘payment system’ clause laid down under the Payment and Settlement Systems Act, 2007.
Of the various token sales, there are some sales which are inclusive of acceptance of money or other tokens. These sales are regulated by the Companies Act and the Companies (Acceptance of Deposit) Rules, 2014 (Deposit Rules). This act lays down that: in the case where the receipt of money by a company has been produced either in the form of deposit or loan or in any other form, the receipt would be termed as a deposit. This would also provide it with an exemption from its applicability.
For example, if in the course of business of supplying goods, a certain sum of money has been given as an advance, then this sum would not be considered as an advance in the case where it has been appropriated against the supply of goods or services within a period of 365 days. If a company goes against this rule, then charges would arise under the Companies Act and the Companies (Acceptance of Deposits) Rules, 2014 and also under the Reserve Bank of India’s rules and regulations.
A bill titled ‘the Banning of Unregulated Deposit Schemes Bill, 2018’ was introduced in Parliament, that is, by far, the law has only been proposed in the Parliament, it has still not been passed. In case the bill is passed in the current form, then a person would not be held liable only when the person issuing the virtual currency ensures that no money that has been received should be returned.
If virtual currencies like bitcoin are classified within the scope of commodities, then its operation and exchange for trading would be treated and regulated as any other commodities exchange. The implication of carrying out operations or trading of virtual currencies would have implications under the Foreign Direct Investment (FDI), that is, the Consolidated FDI Policy Circular of 2017 (FDI Policy) and the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017 (TISPRO).
There are two essentials with the scope of the word ‘commodity’:
- A commodities spot exchange, which deals with ready delivery and,
- A commodities derivatives exchange, which deals with derivative contracts.
The FDI Policy holds the power that without seeking any approval from the Government, it can restrict the amount to foreign investment into commodity spot exchange to 49% of the share capital. The only rule which has been provided under SCRA (Special Class Railway Apprentice) the exchange which takes place that facilitates the commodity derivatives are required to a recognised stock exchange, that is, it should be a licensed authority.
Pursuant to the introduction of the law stating that the regulation of virtual currencies would not be permitted in India, the Central Government has passed a notification that there are certain goods which are for the purpose of the term commodity derived under the Special Class Railway Apprentice and includes no virtual currency as its part. This was mentioned in the Securities and Exchange Board of India (SEBI) Circular, read with the Central Government’s notification. The Notification has only been made applicable to the commodity derivatives and not to the ready delivery contracts. It provides the closest guidance on the point of what may be considered a commodity exchange at the moment.
But, it is at the discretion of the Central Government, if it wants, then it can at any time choose to notify virtual currencies (either in general form or any other form) as commodities within the scope of its released notification. This would facilitate the bringing of derivatives contracts within the scope of virtual currencies under the ambit of Special Class Railway Apprentice (and therefore, the Securities and Exchange Board of India’s notification). The spot trading and the foreign direct investment would fall under the ceiling of 49% slab of the capital. India presently has no separate licensing regime in case of commodities spot exchange.
RBI’s Prohibition on dealing cryptocurrencies
On 6th April 2018, Saurav Sinha, the Chief General Manager-In-Charge released a circular called as the RBI circular, reminding the users, holders and traders of the virtual currencies, including bitcoins, of the risk that is involved in dealing with the same.
The Reserve Bank of India in its circular mentioned that:
“Keeping in mind the risk which is associated with the dealings made using virtual currency, it has been decided, with immediate effect, that those banks which are regulated by the Reserve Bank of India shall prohibit dealing in it or provide services for the same or facilitate any person or entity in dealing with the virtual currencies.”
As defined by the Reserve Bank of India the term ‘services’ as mentioned above would incorporate maintaining accounts, registering, settling, trading, clearing, giving loans by using virtual currencies as a medium of exchange, or accepting them as consideration or as a collateral, opening any account of exchange dealing with them and transfer/ receipt of money in account related to any purchase or sale of the virtual currencies.
Those people who were involved in any of the above mentioned activities were asked to quit such a relationship within a period of 3 months from the date of the release of this circular.
The Sections and the Acts based on which this circular was released are:
- Section 35A (power of the Reserve Bank to give directions), read with Section 36(1)(a) (further power and functions of the Reserve Bank) of the Banking Regulation Act, 1949
- Section 45JA (power of the bank to determine police and issue direction) and 45L (power of the bank to call for information from financial institutions and to give directions) of the Reserve Bank of India Act, 1934 and,
- Section 10(2) (power of Reserve Bank to issue guidelines) read with Section 18 (power of the Reserve Bank to give directions generally) of the Payment and Settlement Act, 2007.
The Supreme Court had asked all the High Court to transfer the cases to it which are related to the virtual currency. And had also asked the petitioners, who wanted to make any representations to the Reserve Bank of India in regard to the 2018 circular, within a time period of two weeks. The purpose of this was to provide the petitioner with an opportunity for exchanges, that is, to present the self-regulatory policies, like Know Your Customer (KYC) and Anti Money Laundering (AML) to the officials of the Central bank. The petitioners in these cases had one common ground for challenging the Reserve Bank of India’s circular and that was, that the circular was not preceded by any stakeholder consultation.
The writ petition filed by a crypto dealer, Paras Lehana, was dismissed by the High Court of Punjab and Haryana. He had challenged the order on the ground that it was violative of his fundamental right to carry out any occupation, trade or business throughout the territory of India. The Court said that since the circular was released under the scope of the Banking Regulation Act and therefore, the court does not hold any power to interfere with this or any such policy matters. 
Potential Tax Implications
In India, there are two types of taxes which exist, and they are:
- Direct tax- They are taxes levied on the income of the person.
- Indirect tax- These taxes are levied on the expenditure made by a person.
Therefore, the tax which would be imposed on the virtual currencies like bitcoin would be of two types: first, the income tax or the direct tax and second, service tax or GST (Goods and Services Tax) which is an indirect tax.
Taxes which are imposed on the income of a person or say the direct taxes are governed by the Income Tax Act, 1961. As per the rules laid down in the Income Tax Act, 1961, a person who is a resident of India has to pay the tax on all his income, including the once coming from abroad whereas the non-residents are only subjected to the tax levied on the income which they are earning in India. However, any country with which India has signed a tax treaty and whose citizens are living in India, that is, the non-residents who are residents of another country, have the option of being taxed pursuant to the tax treaty or the Income Tax Act, 1961, whichever is more beneficial.
The conflict which arises in the case of virtual currency under Direct Tax rules, is that whether they are capital gains or profits and gains that the person is gaining out of his profession or occupation or any business. For example, if A is a seller and specifically he is a trader then his occupation would fall under the ambit of business income. However, if an income does not fall under the scope of business income, then the tax imposed would be based on the nature of capital gains. There exist no laws which would determine that in which category will the virtual currencies fall. There also had been no judicial precedents in this regard.
The statutes or say the laws which look into the matter of Goods and Services Tax are:
- The Central Goods and Services Tax Act, 2017
- The Integrated Goods and Services Tax Act, 2017 and,
- (The respective) State Goods and Service Tax Acts, with each having its own jurisdictional limits.
The goods or commodities on which Goods and Services Tax is levied are:
- On the sales of goods where the goods are sold within one state in India;
- On the sales of goods where goods are transported from one state to another state;
- The provision of services within the state in India; and
- The provision of services from one state to another state in India.
Although there exists no specific category for virtual currencies within the scope of the Tariff Schedule for Goods, there is a provision for the residuary category of goods. Thus we gather that virtual currencies could be considered under the ambit of residuary category. The Goods and Services Tax is levied in cases where the goods are supplied in the course or furtherance of business, and the person who is required to pay the same has to include it in their sales invoices.
It has specifically been added that one would have to pay Goods and Services Tax only when virtual currencies are being exchanged for providing services, like services of trading exchange. In those cases where a person has sold virtual currencies only as a part of his hobby, no GST would be applicable. Also, in those cases where the selling of the virtual currencies was made as an investment, in the initial stage, then it would not be a subject under Goods and Services Tax.
It can be derived that there is a possibility that the case of double taxation may arise. For example, GST can be imposed when a person buys virtual currencies and again the GST tax may arise when he uses it in a transaction, that is, for buying or selling of services. However, the government has not given any such guidance stating the application of Goods and Services Tax on virtual currencies.
The below mentioned resources will tell one about where can one find wallets or stores that would accept eh bitcoins, exchanges for trading bitcoins, and bitcoins news, prices, charts, guides and analysis among other information. The bitcoin or say the cryptocurrency system has affected the economy and the financial system in too many ways and is still has miles to go.
99Bitcoins provides the users with videos and text tutorial on how can one buy bitcoins using apps like, Paypal, credit card, debit card, etc.
With the help of bitcoin.org, one would be able to choose one’s bitcoin wallet from twelve different applications via mobile, desktop and other hardware applications.
For those users of bitcoins who likes to spend their bitcoins to retailers, this application is helpful, for it helps in tracking the physical location of the retailers who accept bitcoins at their stores.
This particular application helps in finding out how much money is stored with your bitcoin wallet. This application is meant for checking transaction on the ledger. One could check how many bitcoins do your wallet contain, or how many bitcoins does any particular bitcoin wallet address holds.
This application is governed by a Bitcoin Foundation. Bitnodes estimates and visualizes the size of the bitcoin network.
Wizbit is fast with recording all the ew blocks are being created over the network in real time.
We Use Coins
If one needs to find the list of credible exchanges for trading bitcoins all over the world, one can access weusecoins.com. It gives you the required information.
Buy Bitcoin Worldwide
This application is very useful as it helps in tracking down Bitcoin exchange. If one needs help in finding a bitcoin exchange, one would find this application suitable.
Introduced with the intention of strengthening the digital economy, cryptocurrencies being easy to trade and maintain has recently been in wide circulation. Bitcoins, which happens to be the first type of cryptocurrency, has no authority controlling or regulating it and thus, it stands as a system which is not so secure. The blockchain technology wherein public ledger of bitcoin transactions are maintained has led to many countries adopting it and utilizing it in digital transactions, despite the fact that many countries have banned the use of cryptocurrencies.
If we look at India, it has not taken much interest in the use of cryptocurrencies and has not got any approval from the Reserve Bank of India, which is the apex bank of the country and also the Government of India. The Reserve Bank of India has, therefore, recently, and also in the past has released circular to warn the citizens of the risk which is involved in the use of cryptocurrencies. Ther banks and any other financial institutions were prohibited from using providing services for bitcoin transactions and to individuals or entities working in the virtual currency segment.
In India, there is no law which explicitly states that the use of bitcoins are illegal. There also exists no laws which are bound to regulate the bitcoin transactions. As a result, bitcoin mining and other activities involving the use of bitcoins taken place within the country though at a very small scale.