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BITCOIN: REGULATION OF A DEREGULATED CURRENCY BY: DEVAANG SAVLA
Introduction
It's an absolutely new method to make payments which behaves just like any other money. We are used to juggling in physical currencies like Indian Rupees, American Dollar, Japanese Yen or Thailand Baht; which indeed derives its value from basic demand and supply equation, issued and regulated by respective governmen go vernments. ts. Another notable emotion is that these currencies are traded between citizens, being inland or international, because they are accepted mode of payments. Supposedly, if an individual agrees to sell another, a diamond ring against 'monopoly' notes. Those 'monopoly' notes will start to gain value, becoming more precious and having a assigned value. Most importantly, it will start being accepted as a mode of payment. You could probably buy groceries against exchange of 'monopoly' notes. Similarly, Bitcoin is a virtual mode of payment, just like Paytm or OLAmoney. The likely difference differe nce is that Bitcoin is not regulated regu lated by a government go vernment agency, nor no r derives its it s value depending on another country's currency's demand and supply equation; but works between people who accept it as a mode of payment, giving it a certain value.
Jurisdiction
It's deregulated in most jurisdicti jurisdictions, ons, where India I ndia stands by Reserve Bank of India, which has identified disadvantages and made citizens aware about lack of trust upon such a virtual currency, via a notification. Nations like Poland, England and a few others have minute recognition of Bitcoin by concerning state financial agencies. Media reports also establish use of such virtual payments to aid terrorism and drug trafficking. Unregulated virtual currencies like darknet and Bitcoin are some of modes that are accepted against goods or service, which also can be availed via our normal bank notes.
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They are carried out just like any other internet transfer of funds; where the working analogy is complex and based on encryption software and private-public key. It is claimed to be highly secure by the Japanese inventor Satoshi Nakamoto, who developed it as an after math of the great American depression depression of o f 2008; dematerialising trust issue issuess between a bank and its lenders. But there have been recent instances where Bitfinex, the digital currency exchange in Hong Kong had report reported ed a bitcoin theft, amounting to a loss of USD U SD 63 6 3 Million, Mill ion, approximately.
The interesting question is, how do I get one?
The answer to this is three fold. First, you can buy them in exchange real physical money, like converting Indian rupee to American dollar; Indian rupee to 'x' amount of bitcoins. The approximate average opening of bitcoin in 2017 was Rs. 68,776 per coin. Second, you gain bitcoins in exchange of goods or services, like making a taxi payment via e-wallet. Third, the trickiest of all is by a process called 'mining', which is in lay terms can be explained as solving a mathematical equation based out of software and coding. If you are able
to
solve
it,
you
gain bitcoins.
These
solution
gainers
individuals
are
called Bitcoin miners. So the more problems you solve, the tougher the problem gets and more are the number of bitcoins that you gain. Hence, you could buy something in exchange of bitcoins, proportionally increasing Bitcoin users, who now are willing to accept it like any other currency. Why they want you to solve problems in exchange of bitcoins? Simply put, these math problems ensure the security of Bitcoin t ransactions. ransactions. Every software based math problem pro blem is a representation represent ation of a Bitcoin Bitco in transaction transact ion happening in some part of the world. wor ld. This math problem has a unique solution, which when derived by a Bitcoin miner certifies cert ifies the transaction to be authentic and executes the transaction thereafter. Notably, more people mine, more rewards they shall get, more transactions can be authenticated, more acceptable the currency becomes. It would not be completely untrue to say that economies over the globe run on a human emotional value called 'Trust'. Till the day we believe that a Rs. 10 (INR) note can buy us a packet of chips or Rs. 10,00,000 (INR) can buy us a car, we shall work to gain it. Until the day, undoubtedly, might not be far enough when we completely plunge our faith in virtual currencies and accept accept it to run national economies, economies, regularized regularized or de-regularized. de-regularized.
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Legal Implications under Indian Legislations:
As evidently said, there is no legislation that currently regulates this non-governmental controlled currency, but all in contemplation the following statutes and laws could be focus areas if the Indian government chooses to regulate it one day. [1] Foreign Exchange Management Act, 1999
The traditional definition of currency could could be traced in section 2(h) 2(h) of the Foreign Exchange Management Act, 1999 199 9 (“FEMA”) 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. The scope of the definition is large and it devices enough power on The Reserve Bank of India to incorporate other instruments and recognise them as currency. Currently, India has taken a precautionary stand where other jurisdictions are taking lead and progressing pr ogressing forward to draft legislations for the same. Notably, a federal judge in the United States ruled that Bitcoins are real money and can be regulated under that country’s law while ruling on a case related to ponzi scheme in United States of America. [2] Securities Contracts (Regulation) Act, 1955
Considering Considering securities as defined de fined in section 2 (h) ( h) of the Securities Contracts Contr acts (Regulation) Act, 1955 could extend to incorporate bitcoin legislation in India, where the term “securities” include; “(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or o f any incorporated company company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
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(id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities;” It is evidently clear that the current legislative reading holds no ground for regulating bitcoin in India. The Central Government under the said statute has the power to include any such instrument by notification to be a security. This possible scenario could have a progressive effect, putting in garb other subsequent legislations, which would potentially influence regulation of bitcoin in the Indian jurisdiction. The Securities Exchange Board of India (SEBI) too can frame and tighten regulation helping to curb possible dangers of unregulated currency. Exploring further by narrowing down the ambit of the definition, the term “derivative” is defined as follows; “(ac) “derivative” includes— (A) a security derived from a debt instrument, share, loan, whether whether secured or unsecured, risk instrument or contract for differences differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;” Accurately enough, as bitcoin transactions are voluntary decided values in form of a contract but it does not derive its value from the prices or index of prices if they were described to be securities. Hence, other ambits of derivatives could enlarge the scope to incorporate bitcoin. [3] Reserve Bank of India Act, 1934
Under Section 17(6A) of the Reserve Bank of India Act, 1934 the terminology “derivative” means; an instrument, to be settled at a future date, whose value is derived from change in one or a combination of more than one of the following underlying, namely; (a) interest rate,
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(b) price of securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government, (c) price of foreign securities, (d) foreign exchange rate, (e) index of rates or prices, prices, (f) credit rating or credit index, (g) price of gold or silver silver coins, or gold or silver bullion, or (h) any other variable of similar nature. Such a definition expands the scope of derivatives and leaves an open ended determination of instruments’ value to be dependent on any other variable. Could such variable possible include undetermined and yearning decision decision o f the parties in transaction? t ransaction? It would be difficult to conclude that the legislative intent behind the above legislation was wide enough to accommodate accommodate such virtual and de-regulated currencies like bitcoin. [4] Payment and Settlement Systems Act, 2007
This legislation has the objective to bring the payment systems involved in the issuance of prepaid payment instruments under the regulatory jurisdiction of the RBI. The act authorises regulation and issuing of policy making guidelines that would govern instruments like, Apple wallet, PayPal, Mobi-wallets etc. The relevant Section 18 of the said act reads as follows, “Without “ Without prejudice to the provisions of the foregoing, the Reserve Bank may, if it is satisfied that for the purpose of enabling it to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest, it is necessary so to do, lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment systems affecting domestic transactions and give such directions in writing as it may consider necessary to system providers or the system participants or any other person either generally or to any such agency and in particular, pertaining to the conduct of business relating to payment systems. ”
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The policy draft issued under the power of Section 18 touches on the element of exploring new options where the value is to be determined by the value stored on the instrument. In quotes the policy is worded as, “Pre-paid “ Pre-paid payment instruments are 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 .” In wide interpretation the side policy making power could well be utilized to incorporate un-regulated currencies. That challenge would be to subsequently incorporate provisions in parallel legislations for smoother functioning thereof. [5] Negotiable Instruments Act, 1881
A prolific regulation of bitcoin could be incorporated in the term negotiable instrument, where the term is defined in the Negotiable Instruments Act, 1881 as a “promissory note, bill of exchange or cheque payable either to order or to bearer”. Undoubtedly , the term bitcoin is in no context included under promissory note, bill of exchange or cheque. They are way beyond beyond the scope in class of regulated instruments and similar securities; it is sufficient to say that bitcoins do not qualify under the definitions of any of these terms under the act. The scope of the act remains limited as of date. [6] The Indian Copyright Act, 1957
Section 2 (ffc) of The Indian Copyright Act, 1957 defines the term “computer programme” 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”. Considering the process of bitcoin generation to its transactional use, it could be reasonably concluded that bitcoin is a computer programme. A computer programme when be attempted to be classified as a property, the General Clauses Act, 1897 and Forward Contracts (Regulation) Act, 1952 could be considered. Both the statutes define movable property and inlays incessant boundary with respect to properties that will fall under the garb of movable property. A lenient view could let bitcoin be framed as a movable property and considering it as an option, the applicability of Section 2 (7) of The Sale of Goods Act, 1930 would not be faulty in interpretation.
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[7] The Sale of Goods Act, 1930
The definition of goods under Section 2 (7) of The Sale of Goods Act, 1930 is, ““goods” means 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 ”. Considering the scenario where bitcoin qualifies to be a good, would bitcoin transactions in sale could be regulated under the said act. The nature of transaction is based on random determination of value towards a good or service rendered. Hence, the nature is more a barter transaction and fails to comply with Section 4 of o f the said act. [8] Foreign Contributions Regulation Act, 2010
Unlike, Section 2(1)(h) of the Foreign Contributions Regulation Act, 2010 which codes "foreign contribution" thereby defining it as, “means the donation, delivery or transfer made by any foreign source,- (i) of any article, art icle, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift, is not more than such sum as may be specified from time to time, by the Central Government by the rules made by it in this behalf; (ii) of any currency, whether Indian or foreign; (iii) of any security as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of the Foreign Exchange Management Act, 1999 1999””, no other regulation walks as close to sanction legal liability on bitcoin. The interpretation of transfer with sub-clause (i) as any article would extend to deregulated and virtual currency like bitcoin and similar. But subsequently, there is no established established procedure to execute execute implication of it as foreign contribution. contribution.
Conclusion
Despite much speculation, the Indian user is not deterred at trying a hand at Bitcoin. Like, ‘buysellbit.co.in ‘buysellbit.co.in’’ is an online portal that tender ed ed sale and purchase of bitcoins in India and a website ‘highhart ‘highhart’’ became the first e-commerce site in India which accepts payments in bitcoins. A Bangaluru based consulting company, Werwired, which offered bitcoins as a mode of payment for its customers and Castle Bloom, a salon in Chandigarh, became became the first f irst physical outlet to start accepting the digital currency. It would be difficult to say whether Indian markets have advanced enough and financial laws are well placed to be ready for this
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cashless infrastructure. Every citizen might truly believe in digital India but at the same time are we sure about out executive strength and infrastructure being in place. Cyber Security (Information Technology Act, 2000)
Cyber Security issues have no boundaries; it is a fight more technical in nature rather than legal. No country in the world is devoid of the same. India being no exception is currently and continuously spotting itself in the world’s most vulnerable states when it comes to cybersecurity and threats. The positive is, according to the Global Cyber-security Index (GCI), India’s commitment to fight cyber -threat -threat ranks 5 in the world. There are other jurisdiction states like Estonia, Germany, Japan, Republic of Korea and United Kingdom, who share the same ranking. The strength of legal framework and intent to execute established laws against disrupting cyber economy, India ranks amongst the top three in Asia-Pacific. Bitcoin is a plunge of faith for the future and Indian legislature should consider deeper regulation of virtual currencies. If an accepted virtual currency is completely left unregulated, it could pose a threat to the nation in future.
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