Legality of Bitcoin in India

Digital assets takes its shape in various forms. One such digital asset is cryptocurrency wherein an individual coin ownership is created and is stored as a record in a digital ledger using strong cryptography protocols.

The cryptocurrency is designed to work as a medium of exchange that uses cryptography to control its creation and management rather than to relay on a central authority. In other words it is also a form of transacting digital money but on an independent note with no human interference.

Let’s say Mr. A wants to send 2 bitcoins to Mr. B and let’s assume both have Bitcoin accounts. Just like a typical bank transfer wherein the amount gets debited from the sender’s account and gets deposited in the beneficiary’s account, The balance of Bitcoins Mr. A holds gets reduced and the Balance of bitcoins Mr. B increases which usually works through an app in the mobile or through a web application. Further cryptocurrency can also be converted into fiat money(Liquid cash).

Now this may raise a question on security of such transactions because If a third person can generate the same message with the same signature it will be easy to steal from my Bitcoin balance and transfer to his account?

As already said Bitcoin or any cryptocurrency for that matter uses a strong encryption codes. So, each letter/ word/ any component of the language can be mapped to arbitrary characters, letters, pixels and numbers so that it is not readable without the proper key. When X sent the message to Bitcoin network, Bitcoin account has two keys, i.e. private key and public key. So, the message sent uses both private and the public key. The ledger comprises both the public key and the encrypted information from the X’s side. Every transaction uses a different encrypted code and it is a payment system which operates through a peer-to-peer technology so the name is rightly termed cryptocurrency.

A currency is an accepted form of money in a particular country regulated by the constitution of the particular country. But with respect to cryptocurrency encryptions are the only regulations that controls the operations.

The Indian constitutional laws has nowhere mentioned about the cryptocurrency being recognized as a valid currency across India be it in the Coinage Act, 2011 or FEMA 1999 etc there is no mention on cryptocurrency a recognized medium of exchange in India. Also it is interesting to note that the constitution has nowhere mentioned that Bitcoin trading is illegal in any form.
The Reserve bank of India (RBI) had issued the ban on banks dealing with cryptocurrencies but the same was quashed by the supreme court as RBI failed to prove that cryptocurrencies will fail the functioning of financial institutions.

The Internet and Mobile Association of India has challenged the order in the supreme court of India on the notification issued by the Reserved Bank of India imposing a ban on cryptocurrency issued back in April 2018. The court while deciding the matter looked upon the draft bill proposed by the legislature namely Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 which focused on banning cryptocurrency and imposing criminal liabilities on the users of cryptocurrencies and bringing in the concept of its own Digital Currency by the RBI. Also the Crypto Regulation Bill, 2018 recommended by the Inter-Ministerial Committee shows that the committee was absolutely okay with the sale and purchase of a digital crypto asset at recognized exchanges thereby making the legislature’s stand on cryptocurrency unclear.

The RBI contended that introduction of cryptocurrencies might disturb the traditional financial institution which has been in operations from time beyond but failed since empirical data about the degree of harm suffered by the regulated entities was not clear thereby questioning the authenticity of the circular released. The court while emphasizing the doctrine of proportionality which includes:

• Justifying the objective of the measure
• If the measure is rationally correct to the objective or not
• Working on alternatives keeping in mind the achievements of the object
• Whether, balancing the severity of the measure’s effects on the rights of the persons to whom it applies against the importance of the objective, to the extent that the measure will contribute to its achievement, the former outweighs the latter.

The court held that the RBI needs to consider these points and assess if there are any actual damages arising out of cryptocurrency. Since the RBI could not produce any data relating to these and the unclear stand by the legislature which has advocated on banning the cryptocurrencies which questions the authenticity of the order passed by the RBI, the supreme court quashed the order inciting the ban on the cryptocurrencies.

The Reserve bank of India in its press release has clearly stated that though Bitcoin trading is not branded as an illegal act, the RBI has clarified that it has not given any authorization to any entity or company to operate such virtual currency. Further it was also clearly stated that such operations are to be carried out at the investor/ traders own risk and the government shall not be responsible in case any loss incurred by such investor/ trader
Also Bitcoin though considered as an asset any gain arising on the transfer of such asset may be treated as an income or capital gain under the Income tax act making it a taxable affair.

Even as India faces its worst economic crisis in the three decades, Crypto trading has started to see its boom thanks to the supreme court lifting the two year ban on March just before lockdown. These are some crypto currency apps that have re-launched anticipating a good market share

• Coinbase
• Binance
• WazirX
• Unocoin
• Zebpay
• Bitbns

Note: These information on the apps were collected based on the data and internet surveys available in the public domain and we have not personally performed any test on the efficiency of running these apps. We are not responsible in case of any financial loss incurred by the readers investing using these apps based on these information.

In the Indian context cryptocurrency has a long way to go as regulations do not favor the use of cryptocurrency though not explicitly said. Digitalization has made the world a smaller place to live in. Keeping in mind that cryptocurrencies has the potential to defy the law of traditional medium of exchange it is now upon the Indian Government to implement regulatory frameworks for the smooth operation of cryptocurrencies also considering the fact that the operations of traditional financial institutions should not be hampered.