Massive post COVID-19, geared up the technique of virtual currency, which was discussed by Satoshi Nakamoto in 2008, his basic aim, was to design a substitute to edict currency, to solve the problems of the perverted currency by operators. There is a lack of central authority in most of the cryptocurrency setups across the world and according to which the worth of the currency becomes burdensome. The evolution of virtual currency was done using Bitcoin, which was introduced in 2010, for buying two pizzas. After watching the growth in 2010, unadulterated cryptocurrencies began to appear in 2011 and due to which the wave of popular virtual currency started in India naming Unocoin, Bitxoxo, etc.
There was a chaotic environment for the regulation of virtual currencies. Then in 2013, the RBI issued a Press Release in spreading awareness among the Indian citizens relating to the operation of the virtual currency like Bitcoin. Subsequent to it, another Press Release was issued in 2017, owing to the growth of acceptance of virtual currency in India, whereby it reiterated the previous concerns which were raised in 2013 Press Release. Similarly, a Press Release was issued by the Ministry of Finance on the endangers related to the usage of virtual currency.
A huge step was taken by the Government concerning the issues on usage of cyrptocurrency, a high-level Inter-ministerial Committee was appointed in the year 2017, to look through matters concerning virtual currency, which released its report in 2019, resulting in banning all private cryptocurrencies in India. In conclusion to the above Press Releases whether by Ministry of Finance or the RBI, we can say that it was just was recommendatory release which did not enabled the operation of virtual currency in India.
RELEVANT TERMS IN THE CRYPTOCURRENCY ECOSYSTEM
Blockchain- Considered as a distributed and decentralized open ledger where all transactions are secured in a block. In full blockchain, all the transactions are open for all but is unchangeable. Hacking this database is equal to impossible because the hacker has to hack more than 50% of the database.
Cryptocurrency Network- Cryptocurrency is using Peer to Peer (P2P) network architecture. All are free and peers to each other in this type of participation. All the nods in it are equal and connected using a mesh network with a flat topology. Another example of this P2P network is Bit Torrent file-sharing network.
Cryptography- In general terms, it is a process of sending a message safely through unsafe channel. It processes through various mathematical tricks, elliptic curves to decode the message by the receiver.
Mining- To validate the transaction is called mining in the language of virtual currency. In this method of validation, one or more than one system can participate. This process uses a very typical mathematical algorithm that becomes complex if the new individual joins the validation process. The participant in this method of mining also gets a reward fee for the same.
Wallet- For enacting in cryptocurrency one needs to first have a cryptocurrecy wallet, which is basically asoftware, that stores, receives and sends the cryptocurrency.
TYPES OF CRYPTOCURRENCY
Bitcoin (BTC) - One of the most popular original currency is Bitcoin, which was created in 2009 as open source software. Bitcoin allow its users for peer to peer transactions through blockchain technology. Users are thereby free to view their transactions as they are secured by complex algorithm within blockchain. Although everyone can view the transaction but only owner can decrypt it with a private key, which is provided with each owner. There is no central authority in Bitcoin as also stated above, unlike a bank. Bitcoin users can also control the sending are receiving of money transactions around the world.
Litecoin (LTC)- Litecoin was established in the year 2011 as an alternate to Bitcoin. Like Bitcoin, Litecoin is also a peer to peer cryptocurrency and a open source and decentralized networking system . it is different from Bitcoin in two ways-
Litecoin is faster than Bitcoin. Litecoin takes 2.5 minutes to process a block whereas Bitcoin takes 10minutes for the same.
Coin limit for litecoin is 84million whereas for Bitcoin is 21million.
Ethereum (ETH)- Ethereum is a cryptocurrency, created by VitalikButerin, a renowned cryptocurrency researcher and programmer, in 2013 but got launched in July, 2015. It is also open source software based on blockchain technology.
Ripple (XRP)- It is a real-time gross settlement system , developed by Ripple Labs Incorporation, in 2012, by a US based company. Ripple helps in transaction process through crypto currency and virtual payment method both. It works globally and aims at providing secure, safe, faster and cost effective network. It allows exchange of any type of currencies through it whether it is gold or other currencies. It focuses on moving sums of money on a larger scale rather than just focusing on peer to peer transactions.
Bitcoin Cash- Bitcoin Cash is a better version of Bitcoin with vibrant features according to the needs of the competitive world. It allows faster transactions with larger blocks.
POSITION OF CRPTOCURRENCY IN INDIA
The cryptocurrency is compared with the history of rupee introduced by Sher Shah Suri, where one rupee was equal to 40 copper coin pieces. The Constitution of India empowers the Central Government to legislate Indian currency including foreign exchange legal tender etc under 7th schedule in the entry number 36 and 46.
Before deciding the status of cryptocurrency, there is a need to check various laws namely-
The Foreign Exchange Management Act, 1999 (FEMA), The Reserve Bank of India Act, 1934 (RBI Act) and The Coinage Act, 1906 (Coinage Act) act jointly to govern the usage of the circulation of currency. Hence, through the provisions of these acts, a legal definition of the currency could be derived. The definition of currency is adopted from the FEMA Act , which explains that currency is a legal tender after it is notified by the RBI and any type of currency will not be considered as foreign currency if it is not a foreign currency.
Indian Contract Act, 1872
The Payment and Settlement Systems Act, 2007
The Securities Contracts (Regulation) Act, 1956 (SCRA)
The Sale of Goods Act, 1930
INTERNET MOBILE ASSOCIATION CASE
In the year 2018, Statement and Circular of the RBI, the Internet and Mobile Association filed a Writ Petition before the Hon’ble Supreme Court of India. The Internet Mobile Association argued against the directions provided by RBI on restricting the entries regulated by it from providing services to virtual currencies but RBI circular resulted in prohibiting the usage of cryptocurrency in India. The major arguments made by the Internet and Mobile Association were- firstly, where there is no law made by the parliament, the RBI has no right to regulate it. Secondly, the limitations urged by the RBI are violative of Articles 14 and 19(1)(g) if the Constitution of India for being unreasonable and arbitrary. Lastly, the limitation urged by the RBI does not qualify the test of proportionality.
In counter to it, the RBI rebutted point wise accordingly that, firstly the RBI is the regulator of the Payment Systems and fiat currency has wide powers to regulate virtual currency in light of the provisions of the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007. Secondly, the provision of accomplish obscurity makes virtual currency conveyable for illegal acts like tax evasion, Benami Transactions. Lastly, the RBI Circular was not violative of Articles 14 and 19 as they fall within the ambit of reasonable restriction and are also proportionate under Article 19(1)(g) of the Constitution.
After hearing the arguments, Hon’ble Supreme Court held that the RBI had powers to regulate the usage of cryptocurrencie. However, the said wide powers of the RBI must be exercised in light of the constitutional principle of reasonability and pass the test of proportionality.
POWERS OF THE RBI FOR VIRTUAL CURRENCY REGULATION
The RBI had regulated the RBI Circular based on the powers conferred upon it by Sections 35A and Section 56 of the Banking Act, Sections 45JA and 45L of the RBI Act, and Sections 10(2) and Section 18 of the PASA. In giving its judgment in this case, the Supreme Court referred to the history of the Constitution of RBI to check its scope on imposing restrictions on virtual currencies. The Apex Court also referred to the objectives of the RBI- (i) regulation in issuance of currency notes (ii) the operation of monetary policy framework and stability of price within the country. Along with it, sections 45L and 45JA of the RBI Act also empowers RBI to regulate and mandate all Non-Banking Financial Companies and other financial institutions.
The Banking Act also permits the RBI to issue ordains to the Banking Companies in the interest of the public. Such ordains may be related to public interests, banking policy, interest of depositors, and proper management of banking companies. Furthermore, section 10 of the PSSA confers powers on RBI to stipulate effective directives and regulations efficient management of payment systems. Addition to it section 18 of PSSA allows RBI to issue orders to system providers, persons indulged in public interest, regulations and management of payment systems.
The IMA had argued that Section 45JA of the RBI Act owes only regulatory powers so the RBI cannot prohibit the usage on virtual currency. In addition it was also argued that res extra commercium activities can only be a law made by the legislature. Contrary to this the Apex Court held that the RBI had powers to issue such Circulars regarding ban on the usage of virtual currency because the power to regulate includes in it the right to check and even power to forbid under certain situations, and now it is cleared that the RBI is competent to enact policy and regulate directions for implementation, such provisions and rules are supporting legislation and thus, are a supplement to the Act itself.
THE TEST OF PROPORTIONALITY
The test of proportionality can be well understood by the concept of reasonable restriction explained under Article 19 of Part III of the Constitution of India. The IMA had raised question upon the Article 19(1)(g) that the banning of the virtual trading infringes their right to trade. According to check the reasonability of the RBI Circular, we go through the fourfold test of proportionality mentioned in the case of Modern Dental College and Research Centre v. State of Madhya Pradesh, (2016) 7 SCC 353 (India), which highlights- (i) measure is designated for a proper purpose, (ii) measures are rationally connected to the fulfillment of the purpose, (iii) there should be proper relation between the importance of achieving the aim and the importance of achieving the aim and the importance of limiting the right, and (iv) that there are no alternative less invasive measures.
Accordingly it was examined that the first three conditions were fulfilled by the RBI Circular and not emphasizing on the last point of less invasion measures, RBI has said that it has not banned virtual currencies and secondly, the suggestion of the Inter-Ministerial Committee on the crypt-token Regulation Bill and on taking administrative measure. Appropriately, the Inter-Ministerial Committee did not recommend implementing a blanket ban on the usage of virtual currency in India.
Further court favored IMA on two grounds- firstly, the RBI had not banned virtual currencies and the RBI does not power to make law, on which there is absence of the law made by legislature. Secondly, in spite of the power of RBI to regulate pre-emptive rights on being satisfied, the RBI felt unsuccessful to display any genuine suffering or trauma directly or indirectly suffered by the entities regulated by it on account of their interaction with the virtual currency exchanges. [Maharashtra v. Indian Hotel and Restaurants Association, (2013) 8 SCC 519 (India)].
LEGAL STATUS OF BITCOIN WORLDWIDE
The legal status of Bitcoin or virtual currency varies from country to country. In many places, the countries do not ban the usage of Bitcoin itself, its status varies with different conditions and regulatory implications. Some states have still allowed the usage the Bitcoin and have not declared it illegal. Every government entity, organization has treated Bitcoin differently.
The European Union has not passed any specific legislature on the usage of Bitcoin as a currency but has regulated that VAT/GST will be applied to the conversion of fiat currency and Bitcoin. The countries where Bitcoin is legally valid are United States, France, Ireland, Russia, Switzerland, Singapore, Norway, Germany, South Africa, Costa Rica, Jamaica, Venezuela, Brazil, Argentina, Chile, Italy, Greece, Malta, Portugal, Spain, Belgium, Luxemburg, Netherlands, Philippines, Israel, Lebanon, Turkey, Hong Kong, Czech Republic, Kyrgyzstan and Uzbekistan.
The countries where Bitcoin is totally banned are Nepal, China, Pakistan, Taiwan, Cambodia, Indonesia, Bangladesh, Iran, Saudi Arabia, Colombia, Ecuador, Bolivia, Egypt, Morocco and Algeria.
There is one more situation where Bitcoin is not illegal but there is banking bank imposed on countries like India, Canada, Jordan, Vietnam and Thailand.
Bitcoins got availability in India in 2012 and on February, 2018, the Finance Minister stated that the government will find every possible out to cease the use of Bitcoin and other virtual currencies for criminal uses.
The IMA case or popularly known as the “Crypocurrency Judgment” was remarked as the landmark case in the field of virtual currency which however made a balance between the fundamental rights of the citizens and issues of national security which was the need for the time as virtual currency became eye catchy for everyone.
So far, there is no prescribed definition for Virtual Currency written anywhere. Once, it was proposed in the European Parliament in its study of cryptocurrency and blockchain after fulfilling its drawbacks in its existing EU Cryptocurrency framework which can be considered as a fair statement for defining the nature and scope of virtual currency and proposing it into legislation. If defining virtual currency in a Layman’s language then it can be said that virtual currency is a digital representation of the currency, decentralized without a legal tender, digitally transferable and tradable means of exchange.
The primarily concerns regarding virtual currency can be money laundering, terror financing, and tax compliance errors. Accordingly there is a need to look through the advantages and disadvantages of the blockchain technology closely. The basic requirement is that the transfer of payments must be tracked by various regulators. However, due to the absence of a central authority, the requirement cannot be fulfilled without fixing it with one of the stakeholders in the market for virtual currency. There can be one possible way to achieve the objective of regulating crypto assets, by licensing or registering the said entities.
After licensing and registering the entities the next task will be to register them into the ambit of the Prevention of Money Laundering Act, 2002. Then the next step would be to bring the virtual currency exchanges and wallet providers within the scope of obliged entities under the Anti-Money Laundering Directives5. Lastly, after settling the wallet providers and currency exchanges under the ambit of reporting entities under Section 12 of the will effectively address the issue of genuine and non-genuine in the virtual currencies.
After registering and reporting all the details to the reporting entities to the authorities under PMLA which can also be forwarded to the tax authorities by which tax evasion can be reduced. Furthermore, the liability of tax on the sale of virtual currencies can also be brought under the purview of income from capital profits and other resources under the Income Tax Act, 1961, thereby fulfilling the loop-holes regarding the tax evasion relating to the income generating through virtual currencies.
Dr. Anil Kumar V.V and Swathy.P, 2019. “A Study on Opportunities and Challenges of Crypyocurrency in India with Special Reference to Bitcoin.” International Journal of Research and Analytical Recviews.
Internet Mobile Association v. Reserve Bank of India, SC W.P. (Civil) No. 528 of 2018 (India) (hereinafter, “Cryptocurrency Judgement”).
The Banking Regulation Act, No. 10 of 1949, INDIA CODE (hereinafter, “Banking Act”).
The Reserve Bank of India Act, No. 2 of 1934, INDIA CODE (hereinafter, “RBI Act”).
The Payment and Settlement Systems Act, No. 51 of 2007, INDIA CODE (hereinafter, “PSSA”).
Godawat Pan Masala Products IP Ltd. & Anr. V. Union of India, (2004) 7 SCC 68 (India).
Star India Pvt. Ltd. v. Dept. of Industrial Policy and Promotions and Ors., (2019) 2 SCC 104 (India).
Dr. Mohan Kumar, 2018. “Bitcoins in India: A Study of Legal and Economic Aspects.” IOSR Journal of Buisness and Management (IOSR-JBM).
Prevention of Money Laundering Act, No. 15 of 2003, INDIA CODE (hereinafter,”PMLA”).
The Income Tax Act, No. 43 of 19, INDIA CODE.
Written by- Aishwarya Bhatia, student of BA.LLB. (III) Year from Mody University of Science and Technology, Sikar, Rajasthan.