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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 governments.

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 is that Bitcoin is not regulated by a government agency, nor derives its 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 jurisdictions, where India 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 of 2008; dematerialising trust issues between a bank and its
lenders. But there have been recent instances where Bitfinex, the digital currency exchange in
Hong Kong had reported a bitcoin theft, amounting to a loss of USD 63 Million,
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 transactions. Every software based math problem is a
representation of a Bitcoin transaction happening in some part of the world. This math
problem has a unique solution, which when derived by a Bitcoin miner certifies 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 it to run national economies, regularized or 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 be traced in section 2(h) of the Foreign
Exchange Management Act, 1999 (“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 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 securities as defined in section 2 (h) of the Securities Contracts (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 of any incorporated 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 secured or unsecured, risk
instrument or contract for 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,

(f) credit rating or credit index,

(g) price of gold or 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 of the parties in transaction? It would be difficult
to conclude that the legislative intent behind the above legislation was wide enough to
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 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 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 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 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, 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”, 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 procedure to execute implication of it as foreign contribution.

 Conclusion

Despite much speculation, the Indian user is not deterred at trying a hand at Bitcoin. Like,
‘buysellbit.co.in’ is an online portal that tendered sale and purchase of bitcoins in India and a
website ‘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 the first
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 cyber-
security and threats. The positive is, according to the Global Cyber-security Index (GCI),
India’s commitment to fight cyber-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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