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Business Formation

Bitcoin was the first decentralized digital currency to be introduced on the darknet by an unknown programmer using the pseudo name – ‘Satoshi Nakamoto’ in 2009 as an open-source software. The system works peer to peer & transactions take place among users directly without intermediary or brokers. Now, Bitcoin is one of the most popular virtual currencies in the world. Many countries including Russia, China, Japan, United States, Denmark, Sweden, South Korea, Netherlands, United Kingdom, France and Australia are among Bitcoin-friendly countries. In the last year, its return has been around 300%.

The funny thing about bitcoins is they don’t exist anywhere, even on a hard drive. One cannot even point to a digital file, and say “this is a bitcoin”. Instead, there are only records of transactions between different addresses, with balances that increase and decrease.

For its operation, Bitcoin makes use of the Blockchain Technology, a more or less incorruptible digital ledger that can be programmed to record details of financial and non-financial transactions. Blockchain works on the basis of client-server technology. Transactions are entered through the servers and client accomplishes the task of verifying and updating the records based on inputs from transactions. Blockchain technology ensures security by using encryption technology through public and private keys. It solves two most challenging problems of digital transactions- controlling the information and avoiding duplication.

Global Recognition of Bitcoin:

  • Bitcoin is legal and regulated in the USA.
  • The European Court of Justice has ruled that exchanging bitcoin should be exempt from value-added tax in the same way as traditional money.
  • Japan has officially recognized bitcoin as money or legal tender with effect from April 1, 2017.
  • Inland Revenue Authority of Singapore (IRAS) has issued tax guidelines for Bitcoins stating that businesses that choose to accept virtual currencies such as Bitcoins for their remuneration or revenue are subject to normal income tax rules.
  • In Switzerland, Zug becomes the first town in which you can pay city fees (taxes) in bitcoin. Swiss National Railway SBB sells bitcoins at all its offices.
  • The South Korean Central Bank recognizes Bitcoin as a commodity, making South Korea world’s third-largest market for cryptocurrency trading.
  • Bitcoins are illegal in Afghanistan, Bangladesh, Ecuador, Bolivia & Republic of Macedonia.

Current Use of Bitcoin in India

Despite the Reserve Bank of India’s repeated calls for caution against the use of virtual currencies, a domestic Bitcoin exchange reported in September 2017 that it was adding over 2,500 users a day and had reached five lakh downloads. This highlights the growing acceptance of Bitcoin as one of the most popular emerging asset class. People are buying bitcoins from digital currency exchanges by credit cards. In India, purchase of bitcoin is generally done through Zebpay exchange, which links bank account for quick transfer and requires users to submit their KYC forms. Unocoin is another exchange in India which allows people to trade in bitcoins. Other platforms include Coinsecure, Bitxoxo and Bitcoin India. became the first e-commerce site in India to exclusively accept bitcoins as a payment method. WERWIRED, a Bangalore-based geospatial, security, and entertainment consulting company offered bitcoins as a mode of payment for its customers. Castle Bloom, a salon in Chandigarh, became the first physical outlet to start accepting the digital currency., an online portal dealt in buying and selling of bitcoins in India. However, it was raided by the Enforcement Directorate. The preliminary investigations found it to be in violation of the foreign exchange laws.

Post demonetization, leading Bitcoin exchanges in India witnessed a rise in user base by up-to 250%. Zebpay alone witnessed a 25% surge in its revenue. People are jumping into trading of Bitcoins without clearly understanding its functioning mechanisms and related security risks.

Risks Involved

There are certain risks involved in the use of virtual currency. These are:

  1. Volatility risk: The value of the virtual currency is determined by the public’s interest in it and is based strictly on supply and demand. There is no official organization or mechanism controlling the volatility.
  2. Liquidity risk: It is difficult to trade virtual currency for money, i.e., legal tender. No official regulators or central bank oversees the trading platform.
  3. Technological and operational risk: Virtual currency may be exposed to hacking and theft. The security of digital wallets and virtual currency trading and transaction platforms is not guaranteed. Users may experience a total loss of assets as well. Stored in digital form, virtual currency is prone to losses due to hacking, loss of password, compromise of access credentials, malware attack etc.
  4. Legal risk: Virtual currencies are not regulated. There is also no legal framework to protect consumers who buy goods or services using virtual currency.
  5. Money Laundering & Dubious Crimes: There was a contention that black money hoarders may have restored to virtual currencies and bitcoins to launder their cash, during the demonetization drive in November 2016. A number of reports pointed out a surge in domestic bitcoin trade and moving from black economy to the Dark Internet. Bitcoin is also being used for dubious purposes such as arms, and narco/ drugs trafficking in India. The Supreme Court of India has demanded the government and the RBI to check bitcoin transactions so as to ensure they aren’t used for money laundering or terrorism funding.
  6. Tax Evasion: As awareness and adoption of bitcoins grow in India, the authorities are concerned about the potential for abuse by tax evaders and money launderers. Income tax authorities and the Enforcement Directorate, an economic law enforcement and intelligence agency, are especially looking into significant investments into buying the cryptocurrency.

Legal Status of Bitcoin

Bitcoins cannot be classified as regular financial instruments such as ‘currency’, ‘security’, ‘derivative’ or ‘negotiable instruments’ as these instruments are currently defined under Indian law. Likewise, virtual currency is unlikely to be classified as either a payment system or a pre-paid instrument, unless requisite changes are made by the parliament for this purpose.

However, Bitcoins can be considered to be the following:

  1. A “computer program” as defined under the Indian Copyright Act. The definition states that it is “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”.
  2. The General Clauses Act, 1897 defines the term movable property as property of every description, except immovable property. The immovable property has been defined to include land, benefits arising out of land or things attached to the earth or permanently fastened to anything attached to the earth. Therefore clearly, a computer program, and by logical extension, Bitcoins can be considered as movable property.
  3. Furthermore, Bitcoins can also be considered as goods according to the Forward Contracts (Regulation) Act, 1952 which defines goods to mean “every kind of movable property other than actionable claims, money, and securities”.

It is important to note that although Bitcoins can be reasonably classified as movable property and more specifically as computer software, this position has not been tested in a Court of law.

Being classified as ‘Goods’ may give rise to certain direct and indirect tax-related implications, such as the applicability of sales tax on the transfer of virtual currency, the applicability of services tax on mining of virtual currency, is considered a service, and applicability of income tax on income arising on sale of virtual currency. However, the taxability of virtual currency still remains a grey area, rendering the regulatory environment governing virtual currency even more uncertain.

RBI’s Stance

RBI has time and again stated that bitcoin and other cryptocurrencies are not legal tenders. In fact, they contain huge risks without any regulation and support. In this regard, RBI has issued multiple warnings to the public regarding the potential economic, financial, operational, and legal, customer protection and security related risks associated with dealing with them.

For instance, RBI in its Report dated June 27, 2013, stated that that virtual currencies 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 virtual currencies to determine potential risks associated with them. Similarly, RBI vides its Press Release Dated February 1, 2017, clearly stated that it has not given any license/authorization to any entity/company to operate such schemes or deal with any virtual currencies. Pursuant to the issuance of these advisories, the Enforcement Directorate even conducted raids against operators of trading platforms of virtual currencies in India, creating an atmosphere of regulatory uncertainty for the particular industry.

Virtual currency, as a medium of payment, is not recognized under Indian laws. While RBI has not declared dealing in virtual currency as illegal, it hasn’t introduced any regulatory framework governing it as well. RBI has also stated that it is examining the issues associated with the usage, holding and trading of virtual currencies under the existing legal and regulatory framework of India, including foreign exchange and payment systems laws and during such period, the user, holder, investor, trader, etc. dealing with virtual currency will be doing so at their own risk.

Therefore, while presently virtual currencies are not per se considered ‘illegal’ in India due to lack of any legislation, regulation or guideline prohibiting or governing its use/trading, it appears that dealing in virtual currencies is generally frowned upon by the regulatory authorities. Particularly with the linkage being drawn between cryptocurrency and breach of anti-money laundering laws, it is evident that the Government of India has a cautionary attitude towards dealing with virtual currency, thereby further increasing the risks attached with their operations in India. In fact during the Budget speech, 2018 the Government announced ‘that it would take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system.’

Bitcoins may have generated handsome returns but at the same time, it is associated with high risk and an uncertain future. It will be interesting to see whether Bitcoin and other such virtual currencies, will be classified as currency or commodity. If it is classified as a currency, RBI will regulate all its dealings, while if it is a commodity, SEBI will be the leading regulator.

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