.jpg)
7 April, 2017
INTRODUCTION.
Unlike the traditional form of currencies issued by government/banking authorities, virtual currencies (“VCs”) such as Bitcoin are a form of cryptocurrency/digital currency, ‘issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’1, and which relies on cryptography for its creation and management.
In this digital age, trading and transacting in VCs such as Bitcoins has reached an alarming proportion and the question of recognition and regulation of VCs is therefore a question that governments have been grappling with over the last few years. India is no different, and this newsletter is an attempt to provide a brief overview of the legal status of VCs in India.
CATEGORIZATION OF VCs UNDER INDIAN LAWS.
VC’s have not been recognized by the Reserve Bank of India (“RBI”), as a ‘currency’ in India, although RBI does have the power to include VCs within the definition of ‘currency’. Currently, creation, trading or usage of VCs, as a medium of payment is not authorized by RBI or any other monetary authority in India.
That said, given its nature, VCs can fall under the definition of a ‘computer programme’, which has been defined under the Indian Copyright Act, 1957, 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.’ Further, VCs can arguably be classified as ‘Goods’ of intangible nature (akin to a computer programme or software) under Sale of Goods Act, 1930. Being classified as ‘Goods’ may also give rise to certain direct and indirect tax related implications, such as applicability of sales tax on transfer of VCs, applicability of services tax (if mining of VCs is viewed as an act of providing service) and applicability of income tax on income arising on sale of VCs. However, the taxability of VCs still remains a grey area, rendering the regulatory environment governing VCs even more uncertain.
From the perspective of foreign exchange control laws, purchase of VCs by an Indian resident, can be viewed as import of a software/computer programme into India, requiring compliance with applicable foreign exchange control laws including RBI’s Master Direction on import of goods and services into India, with respect to imports being made in non-physical form.
RBI also regulates ‘payment systems’ and ‘prepaid instruments’, which require prior authorization of RBI and compliance with the regulations/directions issued by RBI in relation thereto. However, given that VCs are not recognized payment systems that enables settlement of payments between the payer and beneficiary, and in view of the continuous fluctuation in the value of VCs, VCs are unlikely to be classified as either a payment system or a pre-paid instrument.
Use and trading of VCs, may however, raise privacy concerns, including of protection of information/sensitive personal data and information of every individual dealing with such VCs requiring the use of VCs, to adhere to the rules and regulation prescribed under the data protection laws of India, primarily the Information Technology Act, 2000 read with the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011.
RBI’S ADVISORY/CAUTIONARY ISSUED REGARDING VCs.
As mentioned above, RBI has currently not regulated VCs and has not yet given legal validity or specified any restrictions/guidelines for the usage of VCs in India. In fact, RBI has time and again raised concerns over the usage of such VCs and the potential risks associated with them.
For instance, RBI in its Report dated June 27, 2013 (“Report”), while discussing the VCs Schemes, made its observations, inter alia, that VCs schemes provide a financial incentive for virtual community users to continue to participate, and are able to generate ‘float’ revenue for their owners and also provide a high level of flexibility regarding the business model and business strategy for the virtual community. In view of the observations made in the Report, it was stated that the regulators are studying the impact of online payment options and VCs to determine potential risks associated with them.
In a similar vein, RBI, in its Press Release Dated December 24, 2013 (“PR 2013”) cautioned the users, holders and traders of VCs, including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to. RBI further clarified that creation, trading or usage of VCs, as a medium for payment are not authorized by any central bank or monetary authority. RBI accordingly highlighted various risks arising from VCs in PR 2013. It referred to several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions, and that absence of information of counterparties in such peer-to-peer anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws. RBI also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including foreign exchange and payment systems laws and regulations.
Soon after issuance of PR 2013 by RBI, as per media reports, Enforcement Directorate (“ED”) reportedly conducted raids against VCs (such as Bitcoin) operators/vendors/entities operating trading platforms of VCs, inter alia on the grounds of violation of foreign exchange control laws. The details of the status of these investigations, are however, not available.
In furtherance to the earlier issued PR 2013 (cautioning the users, holders, traders of VCs), RBI vide its Press Release Dated February 1, 2017, clearly stated that it has not given any licence/authorization to any entity/company to operate such schemes or deal with any VCs. RBI also added, that the user, holder, investor, trader, etc. dealing with VCs will be doing so at their own risk.
CONCLUSION.
VCs, as a medium of payment, are not recognized under Indian laws, and no specific regulation governing VCs has been introduced in India. RBI has not declared dealing in VCs as illegal nor has it introduced any regulatory framework governing VCs. There are also a few entities in India which are operating Bitcoin exchange/trading platforms dealing in buying, selling, storing, using and accepting Bitcoins such as Zebpay, Unocoin and Coinsecure.
However, RBI, has, from time to time, issued cautionary advisories to the public stating that creation, trading or usage of VCs, as a medium of payment is not authorized by it and no regulatory approvals, registration or authorization have been obtained by the entities carrying on such activities. RBI has also stated that it is examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of India, including foreign exchange and payment systems laws and regulations and during such period, the user, holder, investor, trader, etc. dealing with VCs will be doing so at their own risk.
Therefore, while presently VCs are not per se considered ‘illegal’ in India under the extant regulatory regime due to lack of any legislation, regulation or guideline prohibiting or governing its use/trading, it appears that the use, creation, trading or dealing in VCs is frowned upon by regulatory authorities and ED has initiated investigations against some of these entities. Even recently, the Union Minister of State for Finance, in a written reply in Rajya Sabha, made a statement that the absence of counter parties in usage of VCs (including Bitcoins) for illicit and illegal activities in anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws. This statement, particularly the linkage being drawn to breach of anti-money laundering laws, is demonstrative of the cautionary view of the Government of India towards VCs, thereby further increasing the risks attached with their operations in India.
Endnote:
1As defined by European Central Bank in its Report on Virtual Currency Schemes, October 2012.
For further information, please contact:
Seema Jhingan, Partner, Lex Counsel Law Offices
sjhingan@lexcounsel.in
