Introduction
Technological advancements in the present-day society have led to significant modernization of business practices all over the world. Information technology has created effective ways for functioning of corporations. Block chain technology is an eye-catching sector that enables easier and cheaper ways of doing business. It mostly deals with virtual cryptocurrencies like Bitcoin that can be defined as a ‘peer-to-peer electronic cash system’[1] functioning in the absence of any server or controlling institution.
Cryptocurrency can be defined as, “any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes”.[2] In India, cryptocurrency is not a legal tender.[3]
In the past few years, virtual modes of transaction in India have risen at a significant pace. This advancement has not gone unnoticed by the legal and banking institutions of our country. In 2013, the Reserve Bank of India (“RBI”) took note of the usage of cryptocurrency in open markets for the first time. Since then it has not shied away from cautioning the traders of using this new form of “virtual currency”. Be it individuals or corporations. However, the RBI did not give any specific notification or clear guidelines as to the legality of this form at that time. In 2017, the RBI went on prohibiting institutions regulated by it from dealing in cryptocurrency. This was followed by shutting down of many businesses as a result of raids conducted by the Income Tax department. This was done on the contention that usage of cryptocurrency violated anti-money laundering, and foreign exchange regulations.
This paper entails the laws concerning currencies in India. Followed by an analysis as to whether cryptocurrency meets the definitions of such provisions or not. And the take of the RBI and the landmark judgement on the same.
Laws
To understand whether cryptocurrency can be accepted as a valid medium of exchange, it is crucial to understand the laws that define different mediums of exchange. And scrutinise as to whether this technology meets any of those requisites or not.
The Negotiable Instruments Act, 1881:
Section 13 of this Act defines a negotiable instrument as, “a promissory note, bill of exchange or a cheque payable either to order or to bearer”.[4] Cryptocurrency does not have the features to be considered as a promissory note, neither as a bill of exchange nor as a cheque.
Reserve Bank of India Act, 1934:
Cryptocurrency could be included within the scope of this Act, only if it meets the definition of “derivative”.[5] Cryptocurrency fails to fulfil the definition as its value is ascertained from a change in combination of various factors. It is highly dependent on factors like recognition of such currency, or its declaration as legal or illegal, its demand, etc.
Payment & Settlement Systems Act, 2007:
This Act empowers the RBI to validate and certify modes of pre-payment. As defined by the RBI, a pre-paid payment mode is, “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”.[6] Cryptocurrency is unstable and regularly fluctuating in terms of value. It is uncertain as to the fact that it would be accepted as a valid mode of payment or not.
The Coinage Act, 2011:
As defined under Section 2 of this Act, a coin is, “made of metal or any other material which is recognized as legal tender and stamped and issued by the Government or any authority empowered by the Government for this purpose which includes one-rupee note issued by Government and a commemorative coin.”[7] This definition rules out cryptocurrency completely from its ambit.
Information Technology Act, 2000:
Section 2 of the Information Technology Act, 2000 defines “Asymmetric Crypto System”.[8] Its ambit includes public key. However, cryptocurrency works on the issuance of a unique private key to every holder. Hence, it cannot be scrutinized under the IT Act and no other provision of this Act can be suited to be applicable on cryptocurrency.
General Clauses Act, 1897:
As per Section 3 (36) of this Act, a movable property can be defined as, “a property of every description, except immovable property”.[9] To understand this definition entirely, it is essential to understand what an immovable property means. As per Section 3 (26) of the same Act, an immovable property means, “immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.[10] Taking the two definitions into consideration, it can be said that cryptocurrency could be regarded as a form of movable property.
Thus, cryptocurrency cannot be considered as a negotiable instrument, or derivative as per the definition of the RBI, or valid pre-paid payment instrument, or coin. Additionally, it fails to find place in Information Technology Act, 2000. One legislation in the Indian legal scenario that can validly entail the concept of cryptocurrency is the General Clauses Act, 1897 that defines movable property.
India practises a common law system. In absence of any codified legislation entailing cryptocurrency in its ambit, it is important to study the judgements of Indian courts.
Landmark Judgement on Cryptocurrency
The ban imposed by the RBI on cryptocurrencies in 2018 led to the filing of many writ petitions before the apex court. In the landmark case of Internet and Mobile Association of India v. Reserve Bank of India[11] the Supreme Court struck down the circular deliberated by the RBI.
It was challenged as a violation of the constitutional right “to practise any profession, or to carry on any occupation, trade or business”.[12] On this contention, the Supreme Court divided the individuals dealing in cryptocurrency into three categories. First were those who adopted the practice of trading in cryptocurrency as a side hobby. The SC laid down that the claims made by this category are invalid as the ambit of Article 19(1)(g) does not cover such activities. Second were those citizens who carried out trades in cryptocurrency. The absolute shutting down of their business was not a consequence of the bans imposed by the RBI. Also, they could still trade in crypto to crypto and realize the value of the cryptocurrency held by them. Or by entering into transactions with entities willing to accept them, be it in India or any another nation. Third were those who would be absolutely disconnected from the banking framework and their businesses would face a survival crisis due to such circular. This category of people was considered as sufferers by the court.
Along with this segregation, the role of RBI in the Indian economy was analysed in this case. This was grounded on the fact that RBI is the central bank. It is the objective of this bank to handle currency, supply of money and interest rates in the country. Laying its premise on the same, the Supreme Court held that cryptocurrency could be accepted as a valid mode of transactions. The RBI is empowered to regulate its usage. Moreover, the RBI was held to be within its powers while deliberating the objective to safeguard the “public interest, interests of depositors and interests of the banking policy”.[13] The RBI can regulate or prohibit anything that it deems to pose a threat on the financial and economic infrastructure of the country. However, despite stating that the RBI was within its powers to issue the circular banning cryptocurrency, the Supreme Court struck it down. On the premise that there was significant lack of proof as to “proportional damage” suffered by the entities regulated by the RBI dealing in cryptocurrencies. The RBI also failed to explore the alternatives and smoother measures like regulating the exchanges dealing with cryptocurrencies.
Conclusion
Cryptocurrency is a technological phenomenon introduced as an alternative to the traditional modes of payment. There is no governing authority that could be accounted for in issues arising out of transactions dealing in cryptocurrency. And, despite its evident growth and prominence in the global market, many governments decide not to consider it as a valid legal tender.
Considering all the laws that govern the economic and banking sector of the country, cryptocurrency fails to fit the definition of any such law properly. For the governments to validate cryptocurrency and declare it as an accepted legal tender, a proper legislation dealing with such currencies would be needful. It would avoid misinterpretations and minimize disputes.
The judgement laid down by the Supreme Court on cryptocurrency, succeeded in providing a temporary relief. But in the absence of any codified legislation, financial institutions and other banking sectors would avoid making investments in it.
Hence, there is no specific legislation or guidelines that clarify the stance of cryptocurrency in India. However, the ‘Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019’[14], aiming to impose absolute ban on private cryptocurrency, has been proposed.
The article is authored by Hardik Batra (NUJS Kolkata, 2024)
Footnotes
[1] Satoshi Nakamoto, Bitcoin: “A Peer-to-Peer Electronic Cash System”, available at: http://Bitcoin.org/Bitcoin.pdf (Last visited on August 9, 2020).
[2] Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, February 28, 2019, available at: https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IMC%20on%20VCs%2028%20Feb%202019.pdf (Last visited on August 9, 2020).
[3] Ibid.
[4] The Negotiable Instruments Act, 1881, Section 13.
[5] The Reserve Bank of India Act, 1934, Section 45V.
[6] Clear Tax, Prepaid Payment Instruments, 24 April, 2020, available at:
https://cleartax.in/s/prepaid-payment-instruments (Last visited on August 10, 2020).
[7] The Coinage Act, 2011, Section 2 (a).
[8] Information Technology Act, 2000, Section 2 (1) (f).
[9] The General Clauses Act, 1897, Section 3 (36).
[10]The General Clauses Act, 1897, Section 3 (26).
[11] Internet and Mobile Association of India v. Reserve Bank of India
[12] The Constitution of India, Art. 19 (1) (g).
[13] Supra, note 11.
[14] Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, available at https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currency-bill-2019, (Last visited on August 12, 2020).