Background of Cryptocurrencies
1. The World of digitization has seen a long-drawn journey since its inception. Technology is not a new word or something belonging to recent centuries. In fact, technology has existed, ever since the time human race has existed on the planet.
'Crypto currency', as the word denotes, is a form of a digital currency, however, not a real currency, where the transactions happen on a crypto-graphical system which uses cryptographic protocols, meaning thereby that the units stored in, are encrypted and no-one can trace it so as to depute anonymous transactions. Crypto currency is not real money, however, it is merely a representation of value in money terms. The system is created in such a manner that no one can possibly break, duplicate or sham the currencies protected through the protocols.
Its Evolution worldwide
2. Introduction of crypto currency to the world is one of the most compelling innovations in money terms, so far the mankind has seen. Traces of crypto-currencies can be dated back to 1980s, when a person named David Chaum invented a 'blinding' algorithm, which can be treated as a basis for today's encryption systems that we have in hand. Following the footsteps of david Chaum, a person called Nick Szabo introduced to the world 'Bit Gold', an electronic currency system which required users to complete a proof of work (a protocol to discourage 'denial of service attacks') function, based on the blockchain technology.
Crypto currencies became famous only in the late 2007 and early 2008, when an anonymous group, tagged as 'Sakoshi Nakamoto', introduced 'bitcoin' to the world. It was the first decentralized crypto currency which was built on the structure of blockchain and peer-to-peer cryptographical system. The world saw a widespread change in the way people invest their money out of the formal economical system. It further paved the way for introduction of various other crypto currencies, a few of them being Ethereum, Ripple, Bitcoin, Litecoin, NEM, bbqcoins, dogecoins, etc.
By the end of the first half of the year 2017, we had at variety of exchanges and mobile applications which provide a platform for, trade in crypto currencies and some further services to attract more customers, such as digital wallets.
Current Status of crypto currency
3. Since these currencies are decentralized2 in nature, there have been no Governmental authorities responsible for any transaction, its success or failure. Quite recently, however, certain countries accepted crypto currencies as legal and tradable have subject to certain norms and disclosures by the exchanges and people dealing in them. By possessing such heterogeneous attributes, it becomes even more difficult to classify a crypto currency into a commodity, a currency, a coin, a security, a good or a service.
Regulation of crypto currencies in India
4.Crypto currencies in India have always held the 'grey area' status, there being no regulation or law so far. Even after investments being made at the speed of light, there seems to be no authoritative clarity on the same. The Government of India had invited suggestions on 22nd May, 2017 upto 30th July, 2017, whether to regulate, ban or self-regulate the crypto currencies. Though the timeline is long over now, there was no response from the Government on the survey of public.
RBI - the FEMA perspective
5. The Reserve Bank of India has till date issued three warnings in relation to 'virtual currencies'. The first press release came on 24th Dec, 2013, detailing out the attributes of such currencies and how those may have been or could be used for illicit or illegal activities. It listed out several risks that are associated with its usage and trade.
The second press release dated 1st Feb, 2017 was issued in reference to the earlier press release. The press release in form of a cautionary notice again spread a word of the risks that one is exposed to while trading in such currencies. The third press release has been issued recently on 5th Dec, 2017
The Minister of State, Ministry of Finance, Government of India, Arjun Ram Meghwal made a statement in the Rajya Sabha on 11th April, 2017, on virtual currencies and their risks, which was similar to the cautionary press releases of the RBI. An excerpt of the same read as follows:
"The absence of counter-parties in the usage of VCs including Bitcoins, for illicit and illegal activities in anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws"
While it is clear that the crypto currencies are not regulated, what remains unclear is its future in India. What the Government and the regulators are upto, remains unclear on the public front.
Currency under FEMA
6. "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 similar instruments, as may be notified by the Reserve Bank, as per Section 2(h) of the Foreign Exchange Management Act, 1999 ('FEMA')
A crypto currency is neither of the above items. Since it is not explicitly notified by the RBI, it cannot be termed as a 'Currency' in India.
Foreign Currency under FEMA
7. Section 2(m) defines ""foreign currency" as any currency other than Indian currency". Now what is Indian currency? FEMA (Section 2(q)) also defines Indian currency. Accordingly, '"Indian currency" means currency which is expressed or drawn in the Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934)'.
Since a crypto currency is not a currency in the first place, it cannot be termed as 'foreign currency' as well.
Import/Export transactions in crypto currencies
8. Transactions in FEMA are categorized as 'Current account transactions' and 'Capital account transactions'. First we analyze current account transactions defined under FEMA (Section 2(j)). A "current account transaction" means "a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transactions include,—
(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;"
A capital account transaction, as defined under Section 2(e)), means "a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6"
In case a crypto currency is classified as 'goods', any import/export shall be classified as current account transaction. In case it is treated as an asset or property, the transaction shall be classified as capital account transaction and, accordingly, the implications will arise. In case, the transaction(s) is classified as capital account transaction, the same shall not be allowed, unless there is an explicit nod from the RBI.
9. Receipts and Payments
9.1 Making payment in a crypto currency - As per the Reserve Bank of India Act, 1934 ('RBI Act'), payments made in legal tender is a valid discharge of an obligation or debt one has towards a payee. The RBI Act, however, does not specifically exclude any other form of consideration. Therefore, any form of payment, other than legal tender in India, is allowed since it is not prohibited specifically, subject to the condition that there is consensus between the parties involved.
9.2 Receiving payment in a crypto currency - Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 clearly specify the modes of payments in different cases. Regulation 3(2) of these Regulations states the following:
"(a) In respect of an export from India, receipt shall be made in a currency appropriate to the place of final destination as mentioned in the declaration form irrespective of the country of residence of the buyer.(b) Any other mode of receipt of export proceeds for an export from India in accordance with the directions issued by the Reserve Bank of India to authorized dealers from time-to-time."
In case there is a crypto currency recognized as currency in the place of final destination, the receipts in such crypto currency would be possible
9.3Remit payment in crypto currency on import - Regulation 6(1) states that:
"(1) Notwithstanding anything contained in Regulation 5, a person resident in India may make payment for import of goods in foreign exchange through an international card held by him/in rupees from international credit card/debit card through the credit/debit card servicing bank in India against the charge slip signed by the importer/as prescribed by Reserve Bank from time to time."
What is "foreign exchange"? Section 2(n) of the FEMA defines foreign exchange as, "foreign exchange" means foreign currency and includes,— (i) deposits, credits and balances payable in any foreign currency, (ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency; "
A crypto currency cannot be foreign exchange in pursuance of the aforementioned definition, and, therefore, any remittance in such currency outside India does not seem to be possible.
10. SEBI
10.1 Classification as 'commodity derivative'
A Few crypto currencies such as Bitcoins are treated as 'commodities' in few foreign jurisdictions. In order to understand intricacies of such a currency as 'commodity derivative' in India one shall have to refer to the Securities Contracts Regulation Act, 1956.
Section 2 clause (bc) of the Act defines the expression as:
"commodity derivative" means a contract —
(i) for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, and which is not a ready delivery contract; or(ii) for differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, in consultation with the Board, but does not include securities as referred to in sub-clauses (A) and (B) of clause (ac);
To be covered by the above definition, the essential element is a contract. While as the definition of contract is dealt with by the Indian Contract Act, 1872, either of the above two purposes is a pre-requisite for a contract to be a commodity derivative contract. Essentially, a crypto currency cannot be 'goods', additionally it is also not something that has its value derived from an underlying goods or something else. In fact, the value of crypto currency fluctuates extensively on demand-supply phenomenon, rather than anything persistent.
It was reported a few months ago in July, 2017, that the US Commodity Futures Trading Commission granted LedgerX LLC, a cryptocurrency trading platform operator, registration as a clearing house for derivatives contracts settling in digital currencies. Consequently, people in the US could hedge in new asset class, bitcoin. The company aims to provide institutional investors the ability to hedge against price swings in digital currencies in the same way they protect against volatility in other assets.
Collective Investment Scheme ('CIS')
11. Collective Investment Scheme has been defined under Section 11AA (1) of the Securities and Exchange Board of India Act, 1992 ('SEBI Act'). Accordingly, sub-section 2 or 2A has to be referred to, which has a list of conditions that have to be fulfilled in order to fall under the definition of CIS. Interestingly, Sections cited above focuses on words or expressions such as 'collective', 'pooling of interest', 'contribution'. Looking at the concept of a crypto currency, it cannot be held that at any time the investor is collecting funds and then investing the money.
Concluding Remarks
12.Crypto currency space is a highly volatile space which sees changes on spur of the moment. The prices and volumes of trading have been at an all-time high for most of the aforementioned currencies. Many believe that crypto currencies are the future of money while as others suggest it to be very dicey one. Meanwhile, the Indian authorities, be it RBI or SEBI have failed to take any action to deal with the cardinal issue. With huge money into the game (crypto currency space), the authorities cannot remain silent, for if is a bubble consequences would become too negative to bear for authorities.
Reportedly, half way through Dec, 2017, many indirect and direct tax officials have started approaching crypto currency exchanges amidst assessment of the amount of tax such exchanges owe to the Government.
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