This article is written by Ronika Tater, a student of University of Petroleum and Energy Studies, School of Law. In this article, she discusses the legal stance of bitcoin through the recent cases and regulations in India and also a global analysis on bitcoin legality and illegality in the present scenario.
In this technology era, we see a convergence of information, technology, business, security and law with the internet. This blends in developing at a swift pace and touches the lives of many people daily. Information technology law, privacy law, cyber law is a term that encapsulates the legal issue related to internet, information, cryptocurrencies, blockchain, privacy, e-commerce, software, intellectual property, media, communication, etc. includes the entire computer resources. These issues should be made in compliance with the existing regulatory bodies to implement a just and fair regulation.
What is bitcoin
Bitcoin is a peer to peer electronic cash system with no third party, it was first introduced in 2009 and it is the earliest form of cryptocurrency. Cryptocurrency is digital money and is considered to be more secure than actual money. It uses cryptography to secure its transactions. Cryptography is a method of converting comprehensible data into complicated codes which are difficult to decode. Cryptocurrencies belong to the same class as digital currencies, alternative currencies and virtual currencies. Consequently, there has been a rapid growth in the number of cryptocurrencies that have been developed such as Litecoin, Ripple, Ethereum, Zcash, Dash, Monero, etc. One can generate bitcoins as follows:
It is an activity where an individual (“miner”) uses his computer process to crack computationally hard puzzles, which is integral to maintaining the blockchain technology. As a reward, the miner gets new bitcoins, which is nonetheless the creation of a bitcoin or mining.
Purchasing bitcoin from bitcoin exchange against real currency
Every individual cannot be a bitcoin miner. However, one can consider purchasing bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form. CoinSwitch, Unicorn, Zebpay, Coinbase, WazirX etc., are some cryptocurrency exchanges in India. Currently, the value of 1 bitcoin is approximately about 13,94,899.30 Indian Rupees.
Receiving bitcoins in consideration of selling goods and services
Currently, few businesses prefer bitcoins instead of real currency on the sale of goods or services.
Historic stance taken by the Government of India
The first time cryptocurrencies were coined was in 2008, in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” by a single or group of pseudonymous developers by the name of Satoshi Nakamoto. The first transaction took place around the world in 2009. After the high popularity around the globe, several cryptocurrency exchanges started operating in India between 2012 and 2017 leading to establishing Indian cryptocurrency market. Various popular exchanges have been developed such as Litecoin, Ripple, Ethereum, Zcash, Dash, Monero, etc. with the increased popularity of cryptocurrencies leading to shifting from a traditional cult, it raised concerns to the Reserve Bank of India (“RBI”). Considering the role of RBI, statutory authority for the creation of economy and its powers and function with the obligation to operate the banking system and the monetary policy framework in India. Also, maintain price stability while keeping a check on the growth of the economy.
In 2013, the RBI took notice of the shift in new technology in India and issued a Press Release awarding the public against dealing in virtual currencies including Bitcoin. However, in India Bitcoin picked up in earnest after the demonetisation of high-value currency notes in November 2016, leading to a shift from traditional online banking services to digital payments as cryptocurrencies into the public consciousness. The growing popularity and the adoption of cryptocurrencies by several Indian users forced the RBI to issue another Press Release in February 2017 to reiterate its concerns raised earlier and clarified that there is no license authorised to any entity to operate with Bitcoins or Virtual Currencies. In October and November 2017, two petitions were filed in the Supreme Court by Siddharth Dalmia and Dwaipayan Bhowmickin, to restrict the sale and purchase of cryptocurrencies in India and the latter petition for the regulation of cryptocurrency.
Further, the Government of India constituted a high-level Inter-ministerial committee on the regulation of Bitcoins and Virtual Currencies. This committee submitted its reports in July 2019 recommending a ban on private cryptocurrencies in India, however, no such legal provision was implemented against the cryptocurrencies. Although, on April 6, 2018 RBI circular which thwarted the banks not only dealing or settling with virtual currencies but also directing the banks to provide any services to entities or companies dealing with bitcoins or virtual currencies. This circular crippled the business activities of the cryptocurrency exchanges, which relied on the banking services for converting cash to cryptocurrencies and vice versa. It not only affected the cryptocurrency exchanges operator but also the regular operators such as paying for office space, staff salaries, server space, etc.
With the severe blow to the operations to cryptocurrencies and the number of transaction reduced substantially, the members of the Internet and Mobile Association of India (“IMAI”) filed a writ petition in the Supreme Court on the grounds to sustain hard on the operation and reduced transaction volumes due to loss of access banking service by the RBI circular.
Judicial approach to Bitcoin
In the case of Internet and Mobile Association v. RBI, a 180-page long judgment by Justice V Ramasubramanian, the Supreme Court struck down a long-standing circular which prohibited cryptocurrency circulation in the country on the below-mention grounds:
- The RBI cannot misuse its power to regulate Virtual Currencies;
- The prohibition for any exchange that facilitates the use of cryptocurrencies is disproportionate;
- And it is ultra vires under Article 19(1)(g) of the Constitution, which states that business dealing in legitimate trade is protected by the fundamental right to carry on any occupation, trade or business.
The salient points of the verdict are very important to note as the court and petitioners have done extensive international benchmarking in defining cryptocurrencies, the identity of cryptocurrencies, the instrument it involves, and who has the authority to regulate. Many agencies around the world see crypto as having the features of money even though none of them has recognized it as legal tender, so in fact, the RBI has the power to regulate virtual currencies in this case. The RBI in its earlier press release back in the years talks about facing its entities and companies to prevent harm to the Banking sector and the economy, however, there is no empirical proof for demonstrating the harm. It is essential to note the three aspect below-mention:
- RBI in the past five years or more have not found any harm by the activities of the virtual currencies function;
- Prohibited virtual currencies;
- Even the Inter-Ministerial Committee which was constituted in 2017, which recommended a specific legal framework and also an introduction of a new law, Crypto-taken Regulation Bill 2018, the objective was not to impose a ban but to regulate the measures.
The court hereby made a point that RBI did not set alternative measures to protect against the said risks. The court benchmark to the president from the European Union Parliament that the European Central Bank and Parliament had looked not to abandon the cryptocurrency business but they recommended strengthening the financial system and regulatory schemes so the judges, in this case, mentioned that RBI overlooked alternative measures. The court also looked at the four-prong tests stated by the petitioners to determine the proportionality of the action that the RBI measures should pass as mentioned in the case Modern Dental College and Research Centre v. State of Madhya Pradesh, 2016 as follows:
- RBI measures should be designated for a proper purpose;
- Rationally connected to the purpose;
- There are no alternative less invasive measure;
- There should be a nexus between the importance of aim and limiting the rights.
The court said that mere words like “money laundering” or “black money” by the RBI does not qualify as proper purpose and alternatives should have been considered. The important point to note from this verdict is that the Supreme Court reprimanded the policymakers and several committees as well the two draft bills from not having a clear stance on cryptocurrencies.
This verdict only protects businesses mentioned under Article 19(1)(g) and not to hobbyists ( hobbyists, traders in VCs and VC Exchanges).
Why was it initially banned in India
Initially, after the launch of Bitcoin in India, several cryptocurrency transactions operated without any regulation as there was no clear provision that prohibited or regulated their use. In April 2018, the Reserve Bank of India issued a cryptocurrency circular, not per se banning the use of cryptocurrencies, however, banning the provision of banking services to any businessman dealing with such currencies. Consequently implementing a prohibition on any exchange facilitated the use of cryptocurrencies, however, the Supreme Court judgment laid out temporary relief to those persons dealing with these currencies.
In India, bitcoins gained popularity due to the efforts of the government to move towards a cashless economy and the intention to create a decentralized digital currency that would operate without any third party through an open-sourced network using cryptography for the peer-to-peer transaction, each such transaction would be managed by the blockchain technology which serves as a public ledger for all cashless transaction. However, there is no regulation or approval by the centrally administered body Reserve Bank of India for the regulation of bitcoin but we know that in the Inter-Ministerial Committee report 2019, there was already a draft bill to ban cryptocurrencies, in case if this act comes into place than virtual currencies can be deemed to illegal, till date there no such regulation.
Global regulations regarding bitcoin
The fast-growing cryptocurrency around the global is similar in the how decentralized technology known as blockchain with inherent encryption works with various terms used by countries to refer cryptocurrencies such as digital currency (Australia, Argentina Thailand), virtual commodity (Canada, Taiwan, China), cyber currency (Italy and Lebanon), electronic currency (Colombia and Lebanon), and virtual asset (Honduras and Mexico). Various countries have issued warnings that cryptocurrencies create for illegal activities such as money laundering and terrorism. For instance in countries of Australia, Canada, and the Isle of Man enacted laws to bring cryptocurrency transactions under the ambit of illegal activities.
Some countries have imposed restrictions on investment in cryptocurrencies such as Nepal, Pakistan, Bolivia and Vietnam while other countries impose indirect ban by limiting their countries investing within the border such as China, Lebanon, Columbia and Bangladesh. A limited number of countries use initial coin offering for raising funds. Not every country is an advent to the technology, some of the countries do not consider cryptocurrency as legal tender while the US, Singapore and Japan consider cryptocurrencies as legal tender. Also, some countries are developing cryptocurrency-friendly regulatory regimes to attract investment in technology to excel in technology advancement in this sector such as Spain, Belarus, the Cayman Islands and Luxemburg.
As a thriving democracy, and with the upcoming technological advancement in the society we must ensure just and fair regulation, however, the Supreme Court denies crypto not integral to the blockchain. In the verdict, the court mention crypto as a ‘by-product’ of such innovation, this is the crux why India positions and cryptocurrency are out of sync with the rest of the world because of the zero investigation of the technical function of the cryptocurrencies and how to maintain the network incentives. It is important to note that as per the verdict it is only applicable to the business under Article 19(1)(g) and not to hobbyists (hobbyists, traders in VCs and VC Exchanges) as mentioned in the present case, so there is no protection to individuals belonging to this category. The future of cryptocurrencies depends on the RBI and also on the legislative if there is any actions or law to ban or make crypto legal in India, considering the growth in the economy.
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