The legality of cryptocurrency in India
One of the most frequently and widely debated topics particularly among the tech-savvy generation of today is the what the future holds for cryptocurrency. While some are wary of the risks associated with using a form of currency that is not legal tender, others have raised concerns about the illegitimate and nefarious uses for which it is being employed given the anonymous, secretive and encrypted nature of such transactions. On the other side of the spectrum, are the proponents who claim that over the course of time, cryptocurrency will govern all financial transactions, as is the natural course of technological progress, and that the government has no right to dictate terms and meddle in the private lives of individuals, when they engage in such transactions out of their own volition.
However, the state of today is no longer a laissez-fare state. The government has the power to impose restrictions and regulations even on matters which concern the private affairs of its citizens in public interest to the extent that it has authority to do so. The repeated warnings issued by the Reserve Bank of India and the express statement made by the Finance Minister in his budget speech has made one thing clear, the Government of India does not recognize cryptocurrency. This declaration might have disheartened existing and potential cryptocurrency investors but does it mean that all forms cryptocurrency are illegal or prohibited? This article attempts to comprehensively analyze the legal status of cryptocurrency in India in the light of existing statutes, government notifications and regulations.
What is currency?
Loosely speaking, the term currency means anything that is representative of the value of property and is used as a medium of exchange in trading circles. The definition of the term currency can be found in Sec 2(h) of the Foreign Exchange Management Act, 1999 as “currency includes all 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”. This definition is an inclusive one and implies that the RBI has the power to declare cryptocurrency as a legitimate currency akin to way it notified debit cards, ATM cards or any other instrument that can be used to create a financial liability” as “currency” under the FEMA on December 29, 2015. In the absence of such a notification so far, the question remains a moot point.
Where does cryptocurrency stand?
But if we examine the other instruments mentioned in Sec 2(h), it is not hard to see that cryptocurrency has barely any similarity with the rest of them. This is on account of two reasons. Firstly, none of them are digital or virtual in nature. Secondly, cryptocurrency is not backed, authorised or regulated by any institution or central bank. This makes its acceptance entirely voluntary in nature and hence cryptocurrency does not create any financial liability. The RBI has so far adopted a neutral stance by neither declaring cryptocurrency illegal nor encouraging its usage. Rather, via repeated press releases dated December 24, 2013, February 1, 2017, and December 5, 2017, it has cautioned users about the risks of virtual currencies.They state that the RBI has given no license or authorisation to any company or entity to deal in virtual currency and if any person nevertheless chooses to do so, it will be at his or her own risk. The position of the government seems to have been emphatically stated and clarified by the Union Finance minister, Mr Arun Jaitley who said in his 2018 budget speech “The government does not recognise cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system”.
Laws governing cryptocurrency
A logical question which might follow the Finance Minister’s statement is: if cryptocurrency is not legal tender, then what is it and what are the laws and rules governing cryptocurrency transactions? With internet banking and online payments becoming increasingly popular among Indians, the Payment and Settlements Act was passed in 2007 and on April 22, 2009, in exercise of its powers under Sec 18 of the Act, the RBI issued guidelines to institutions which issue prepaid payment instruments such as mobile wallets, Paypal etc. In the guidelines, prepaid payment instruments are defined as payment instruments that facilitate purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. However, what distinguishes these instruments from cryptocurrency such as bitcoin is that there is no static value in bitcoin. The value or exchange rate of bitcoin keeps changing on a daily basis whereas the value stored in prepaid instruments is always constant and is equal to the amount of money paid to the system to get a Paypal Balance. Another interpretation can be that cryptocurrency is an electronic document recognized by Sec 4 of the Information Technology Act, 2000. The Act was amended in 2008 and the first schedule lists the documents which would not come under the ambit of Sec 4 of the Act such as negotiable instruments. However, cryptocurrency finds no mention in this schedule and hence it can be safe to assume that it is an electronic document governed by the IT Act. Likewise, the Indian Copyright Act, 1957 defines computer programme via Sec 2(ffc) as“a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result” and clearly cryptocurrency complies with this definition. A much broader interpretation can be given by taking into account the General Clauses Act, 1897 which defines moveable property as property of every description, except immovable property. Immovable property has been defined to include land, benefits arising out of land or things attached to the earth or permanently fastened to anything attached to the earth. Clearly, cryptocurrency does not fall within the definition of immoveable property and given the broad nature of Sec 3(26), it would in all likelihood come under the purview of moveable property.
Transactions of cryptocurrency
The two main transactions involving cryptocurrency are generation and transfer. In the absence of any expressprovision of law to the contrary, it can be safely said that mere possession of any form of cyptocurrency is per se not an offense. As far as mining or generation of cryptocurrency is concerned, the activity entails utlilization of one’s own resources to generate more computer programme or an extension of one’s own computer programme. Unlike Sec 22 of the Reserve Bank of India Act, 1934 which gives RBI the sole right to issue bank notes of all denominations, there is no such prohibition with regard to computer programmes and hence it appears that mining of cryptocurrency is permissible. When it comes to the transfer of cryptocurrency, the transaction would be regulated by the Sale of the Goods Act, 1930 since cryptocurrency can be classified as goods which are defined under Sec 2(7) of the Act as “every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”. However, the Sale of Goods Act does not cover barter transactions since according to Sec 4 of the Act, sale is the transfer of goods for a price i.e. money consideration. Therefore, if one buys or sells bitcoins, the transaction would be covered by the Sale of Goods Act but if one buys another commodity by paying for it using bitcoin then the transaction in all probability would come under the ambit of the Indian Contract Act, 1872.
Conclusion
The success or failure of any government institution largely depends on to what extent it can keep up with the needs and expectations of the people it serves. The Finance Department and the RBI are no exceptions. Technology is evolving at an unprecedented pace and people are embracing it, out of curiosity, necessity or to keep up with the trend. It is true that such changes might have not permeated the Indian society as quickly as some of the advanced countries. Cryptocurrency might not be the most popular form of payment in India where most of the financial transactions are still cash based. However, as we have seen with Paytm and online shopping, the initial hesitation and reluctance is easily overcome. In such circumstances, the regulatory authorities cannot and should not adopt a hands-off approach or be caught napping. Given the increasing popularity of cryptocurrency, its nature as well as the fact that it is to a large extent being used for criminal activities, the Government ought to either prohibit, legalize or regulate cryptocurrency before doing so becomes practically impossible. Such a move will not only be in the interest of the people but also restore some much needed credibility in our financial institutions.
