[Sannat Chandna is a 5th year B.A., LL.B. (Hons.) student at Amity Law School, Delhi]
The year 2017 witnessed a tremendous growth in the stature and worth of cryptocurrencies. Such an increase has never earlier been witnessed in relation to trading in any currency or commodity of such a volatile nature.
India’s finance minister, while presenting the budget 2018, expressly stated that the Government does not consider cryptocurrency as legal tender. This statement has two facets attached to it. First, virtual currency is not legal tender and, thereby, when a person invests in the same, he does so at his own peril. Secondly, the usage of virtual currency is not barred but there is no right to seek redressal for matters involving cryptocurrency in India. Thus, it signifies that virtual currency cannot be used as a means of payment and settlement.
To evaluate the position of cryptocurrency under Indian law, it must be examined with regards to different subject matter as provided under various Indian statutes.
Position of cryptocurrency under different legislation
Payment & Settlement Systems Act, 2007
This legislation gives the Reserve Bank of India (RBI) the power to certify any kind of pre-paid payment instrument. The RBI defined ‘Pre-paid Payment Instrument’ as: “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.”
Now, upon comparison with cryptocurrency, it is seen that virtual currency is not stable and keeps changing on a regular basis. Further, it may or may not be accepted as a means to facilitate a purchase of goods and services. Since it does not fulfil the requisites of a ‘Prepaid Payment Instrument’, it cannot be categorized as such, under the purview of the Payment and Settlement Systems Act, 2007.
Negotiable Instruments Act, 1881
The Act defines a negotiable instrument under section 13 as “a promissory note, bill of exchange or a cheque payable either to order or to bearer.” On a careful interpretation of the instruments given under section 13, it is amply clear that a cryptocurrency does not have the characteristics to be included within a promissory note, bill of exchange and a cheque. And, thus, its specifications are not sufficient to be included under the ambit of the said Act.
Securities Contracts (Regulation) Act, 1955
After a close and critical analysis of the provisions under section 2(h), it is seen that cryptocurrencies do not fall within any of the sub-clauses mentioned under the section. The only means by which a cryptocurrency can be included within the term- “securities” is by using the sub-clause (ii)(a), which grants the Central Government the authority to declare certain instruments as securities. But, as the situation stands, the Central Government does not see it as legal tender nor has it been given any due recognition and, thus, cannot be used as a part of the aforesaid Act as well.
Reserve Bank of India Act, 1934 (RBI Act)
The only manner for inclusion of cryptocurrency within the sphere of the RBI Act, 1934 is upon its scrutiny with respect to the definition of “derivative”.
A cryptocurrency fulfils the first part of the definition, coming under the term instrument and having its value derived from a change in combination of several factors. But, the factors mentioned in the definition have no bearing upon the value of a cryptocurrency. Its value, i.e., its price goes higher upon greater demand for it, along with other factors such as its recognition; it being declared illegal will also affect its value. Hence, only if it is interpreted under the category of a variable of like nature, will the RBI Act deem to include cryptocurrency within its ambit under the definition of a “derivative”.
Foreign Exchange Management Act, 1999 (FEMA)
None of the Indian statutes interpret or define virtual currency and thus, to evaluate the status of cryptocurrency, the definition of “currency” is to be looked at. Section 2(h) of the Act defines the term “currency” as follows:
“Currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers 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.
On a careful perusal of the aforesaid, it is clear that cryptocurrencies do not fit within any of the instruments in the given definition, but it does not exclude the possibility of the same being notified as currency by the Reserve Bank. But, until that happens, the situation has to be viewed from the fact that Japan has declared Bitcoin as a legal tender in its country and thus, any currency other than the Indian one will have to be considered as “Foreign Currency” under the FEMA and will have to comply with the rules and guidelines set under it.
Copyright Act, 1957
The Copyright Act, can be co-related with cryptocurrency in the manner it defines a “Computer Programme”. As per section 2(ffc), a computer programme 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”.
If cryptocurrency is analyzed in a broad manner, then the definition stated above, which includes a set of instructions expressed in codes or any form will be sufficient enough to bring virtual currencies within its purview.
Information Technology Act, 2000 (IT)
The Information Technology Act has a term called asymmetric crypto system within its sphere. The term asymmetric crypto system has been defined under section 2(f) of the Act as a system of a secure key pair consisting of a private key for creating a digital signature and a public key to verify the digital signature.
Now, the system of cryptocurrencies functions through the issuance of a private key to each owner and holder of a cryptocurrency. Further, cryptocurrency can be categorized in two forms i.e.:
(1) A symmetric-key system which uses a single key that the sender and recipient both have. and
(2) A public-key system which uses two keys, i.e., a public key that is known to everyone and a private key which only the recipient of messages uses.
From the aforementioned, it is comprehensible that virtual currencies can be assessed and used as a part of the IT Act under the definition of the expression- “Asymmetric Crypto System”.
General Clauses Act, 1897
The General Clauses Act defines a movable property under Section 3(36). The section states the term to include a property of every description, except immovable property. Now, Immovable property has been defined under section 3(26) and shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.
As has been stated above, a cryptocurrency has the requisites to fit within the definition of a computer programme, but, the same cannot be categorized under the definition of an immovable property. But, at the same time, it clearly seems good enough to be included under the definition and be treated as a movable property within the General Clauses Act.
Scope of Cryptocurrency
To be able to consider a cryptocurrency within the scope of ‘money’, there is no need to look further than the ratio pronounced in the case of The Central Warehousing Corporation v. Central Bank of India Ltd. (1972), in which it was held that “money can be considered as a movable property under section 3(36) of General Clauses Act.” Hence, upon the usage of a mathematical equation where cryptocurrency comes within the definition of a movable property and money too, it can be considered to be a movable property. Hence, upon putting the two together, it can be concluded that cryptocurrency is a form of money.
Before concluding, it is imperative to look at the grey areas surrounding the use of cryptocurrency in India. Virtual currencies can be taken to be goods of intangible nature under the Sale of Goods Act, 1930 or may even be considered as an asset under the Wealth-Tax Act, 1957. Whichever manner in which a cryptocurrency is classified, the imposition of tax upon its transfer and applicability of the Income Tax Act, both as a short-term as well as a long-term capital gain is an area which remains in the dark as of now.
To sum up, the use of cryptocurrency in India is currently not illegal but is unregulated. To prohibit cryptocurrency would require a closer scrutiny. Cryptocurrency has a huge potential for growth and, as examined above, it does come under the terms “computer programme”, “movable property”, “foreign currency”, “money”, etc., but the same has not been pronounced or even adjudicated in any court of law within the country.
– Sannat Chandna