In this article, Neha Verma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the legality of bitcoin mining in India
Currency is basically a money system which is generally used and is also considered as a legal tender in the country. Every country has its own currency system consisting of paper money and coins which are in physical form and the banks of the country are the centers for transactions of currency.
What is a bitcoin?
“Bitcoin” is the first of its kind digitalized payment system used worldwide where transactions are decentralized and happen without any intermediaries. Bitcoin is a cryptocurrency as it uses a strong cryptography system and codes to secure and carry out financial transactions. It was created as a new currency on 3rd January 2009 by a person going by the alias Satoshi Nakamoto. Bitcoin has been created as a “peer-to-peer” network eliminating any intermediaries in between and the bitcoin transactions are verified by using cryptography by network nodes. The record of all bitcoin transactions is kept in a “blockchain” which is a publicly distributed ledger for bitcoin transactions.
Bitcoin mining is a complex computing and mathematical process by which the bitcoin miners bring new bitcoins into the world and it is also a process of verifying and adding bitcoin transactions to the public ledger i.e. blockchain. The bitcoin mining process involves assembling a block of recent bitcoin transactions and attempting to solve computationally tough puzzles.
Regulatory framework governing Bitcoin in India
Is mining bitcoin legal in India?
Bitcoin is not recognized as legal tender or as currency by Government of India and Reserve Bank of India which means that bitcoin cannot be used in India to buy or sell anything or for any financial transaction. Furthermore, the Reserve Bank of India has prohibited all banks and regulated entities from dealing in or settling virtual currencies transactions. However, from a legal standpoint, bitcoin mining is neither legal nor illegal in India because there is no law or legislation in India which governs or recognizes bitcoins. There is no Act, law or legislation defining what a bitcoin is or for regulating bitcoin in India or prescribing any penalties or prosecution for dealing in or mining bitcoins in India.
However, while individuals or entities can mine bitcoins in India but they cannot use such bitcoins for transactions and they cannot deal in or get any services for their bitcoin business or operations from any banks and other regulated financial institutions. Moreover, any individual and entity carrying out any bitcoin-related work in India shall be doing it at their own personal risk as bitcoin has not been given legal recognition in India.
The various laws prevalent in India which are applicable to currencies circulating in India have been outlined below.
Coinage Act, 2011
Coin as defined in Section 2(a) of the Coinage Act, 2011 means a coin made of metal or any other material which is recognized as legal tender and stamped and issued by the Government or any authority empowered by the Government for this purpose which includes one-rupee note issued by Government and a commemorative coin. However, the term “coin” expressly does not include postal orders, credit and debit card and e-money issued by any financial institution, post office or bank. Therefore, bitcoins are not coins as per Coinage Act, 2011 and hence are not covered by it.
Securities Contracts (Regulation) Act, 1956
Section 2(h) of Securities Contracts (Regulation) Act, 1956 defines the term “securities” according to which ‘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 scheme, units or any other instrument issued to investors in a collective investment scheme and security receipt as defined in SARFAESI Act;
- Government securities and instruments notified as securities by Central Government;
- Rights or interest in securities.
The two most important points in considering any instrument as security is that it should have been issued by a body corporate and such issue should have been backed by any underlying assets of the body corporate. In case of bitcoin both these conditions are not satisfied and therefore bitcoins cannot be treated as securities as defined in SCRA.
Foreign Exchange Management Act (FEMA)
All foreign transactions in India are regulated by the Foreign Exchange Management Act. “Currency” as defined under the Foreign Exchange Management Act means and includes all money orders, postal orders, cheques, bill of exchange, postal notes, currency notes, traveller’s cheque, letter of credit, credit cards and such other instruments as notified by the Reserve Bank of India. As RBI has specifically prohibited bitcoin and other virtual currencies, therefore, bitcoins cannot be considered as currency and FEMA shall not be applicable to it.
Payment and Settlement Systems Act, 2007
All payment systems in India are regulated by the Payment and Settlement Systems Act, 2007 which defines “payment system” as a system which helps in making payment from a payer to a beneficiary which includes payment, clearing or settlement service or all services but does not include stock exchange. It includes systems which help in the smart card, debit card, credit card operations, money transfer or similar operations. Payment systems are regulated by RBI and as RBI has specifically restricted banks and financial institutions from dealing in bitcoins or providing services related to bitcoin, therefore, bitcoin cannot be considered as a payment system. Also, bitcoin cannot act as payment getaway from payer to beneficiary and therefore should not be considered as the payment system in India.
Government of India’s stand on bitcoins
Indian Government has not been an admirer of growing craze for virtual currencies and the finance ministry of India has likened cryptocurrencies like bitcoin to Ponzi schemes as they are not backed by any asset. Time and again the Government has cautioned banks, individual and entities from dealing in virtual currencies as they possess high financial risk, are unsecure, not regulated by any intermediary and are prone to hacking.
In his budget speech the Finance Minister, Mr. Arun Jaitley stated that cryptocurrencies are not regarded as legal tender by the Government and that the Government would take all steps to ensure that cryptocurrencies and crypto assets are not used in the payment system and also not used for financing illegitimate activities. The Ministry of Finance has also stated that although bitcoins are referred to as coin they have no physical attributes of a coin and therefore they are neither currency nor coin.
Although the Government has come down heavily on cryptocurrencies it has shown appreciation for blockchain technology which they believe can immensely help in strengthening the digital economy. The finance minister has also shown his inclination towards adopting blockchain technology for developing a strong digital platform in the country.
The Indian Government is believed to be coming out with a framework to regulate bitcoins and other cryptocurrencies by this year-end.
Reserve Bank of India on Bitcoins
RBI has repeatedly warned individuals, entities and banks from dealing or trading in virtual currencies including bitcoin. RBI has issued public notices to this effect in December 2013, February 2017 and December 2017. Recently on 6th April 2018 RBI issued a circular to all banks and other entities regulated by RBI prohibiting them from dealing in any virtual currencies and from providing any services to any individual or entity from dealing in or settling virtual currencies. These entities have also been prohibited from giving loan against virtual tokens, maintaining accounts, trading, clearing, registering virtual currencies, transfer or receipt of money in accounts related to virtual currencies and accepting virtual currencies as collateral.
Any regulated entity already engaged in these services have been asked to exit from such businesses within 3 months from the date of circular. Due to the potential and financial risk associated with bitcoins and other cryptocurrencies RBI has taken a tough stand on this issue and has outrightly prohibited the banking and financial system of the country from trading or dealing in such securities.
RBI is the final regulatory authority for all currencies and financial institutions, therefore, all virtual currencies shall be regulated by it and given recognition only if RBI recognizes it.
In April 2018, an Ahmedabad based Company Kali Digital Eco-Systems Pvt Ltd which acts as a cryptocurrency exchange popularly known as “CoinRecoil” filed a petition in Delhi High Court against the Reserve Bank of India, Ministry of Finance and GST council, challenging the RBI circular which had asked all regulated entities including the Banks not to provide any services to an individual or business dealing in digital currencies. The RBI circular was challenged on the ground that it does not differentiate between persons or entities dealing with virtual currencies and those who are in involved in settling virtual currencies. The Company has also pointed out that the RBI circular has failed to properly define what a ‘virtual currency’ is and any clear definition of virtual currency is not provided in any other legislation also because of which classification of virtual currencies becomes unreasonable. This matter is presently subjudice.
In Shailesh Bhatt case also known as bitcoin extortion case, Shailesh Bhatt a real estate developer was kidnapped and detained illegally and was forced to transfer his bitcoins worth Rs. 12 crores to his kidnappers. The matter is subjudice as of now. This is the first of its kind bitcoin extortion case in India.
In recent times, the public interest in bitcoins as an investment and payment system has increased multifold as bitcoin is the first cryptocurrency of the world and is easy to trade in and maintain. There is no central agency or intermediary which controls or regulates the mining of bitcoins or the transactions in bitcoin which makes bitcoin an unsecured payment system. The blockchain technology in which public ledger of bitcoin transactions are maintained is impressive and has the potential to strengthen the digital economy. Many countries have completely banned cryptocurrencies including bitcoins yet they have very well adapted and utilized the blockchain technology for their digital transactions. In India, both the Government and the RBI have looked down up any cryptocurrency being utilized for payment and therefore the RBI issued a circular prohibiting a financial institution from providing services for bitcoin transactions and to individuals or entities working in the virtual currency segment. India has not expressly declared bitcoins to be illegal and have not made any legislation to regulate Bitcoin transactions, therefore, bitcoin mining and other activities are still being undertaken in India although at a very small scale.