Introduction
Cryptocurrency is digi-money which is supported by certain algorithms and math problems. The entry and exit of such currencies are not supervised by any regulatory authority. Emerging from scepticism and rejection worldwide it has attracted a lot of attention in the recent years. In other words, it is an abstract creation which is now experiencing rapid growth as a fundamentally innovative new technology.
There exist a range of Cryptocurrencies, but bitcoins are most hunted in the market, so much so that substituting Cryptocurrencies as bitcoins. It is developed on a peer-to-peer network basis. Trading in bitcoins is facilitated through bitcoin exchange which works in a similar fashion as that of a stock exchange platform. However, the control being decentralized the transactions are synchronized using blockchain mechanism. The bitcoin market shows high volatility since its value is not derived from any underlying asset but simply through the market driven forces i.e., demand and supply. The blockchain technology uses certain cryptographical functions which renders the entire working of Cryptocurrency fraud remote and tamper-proof.
However, this article seeks to walk through the scenario of legal recognition w.r.t bitcoins in India as well as across the globe.
Countries and legal status
Many countries across the globe have welcomed bitcoins recognizing them legally. However, some countries have banned them or their use. The reason behind banning such Cryptocurrencies haven't come out as clear. Some countries like, China Pakistan, Bangladesh etc. have banned Cryptocurrencies. On the other hand, there are some countries like the USA, UK, Europe, Japan, Germany, Hongkong etc who showed a green flag to Cryptocurrencies, rendering them legal. Legalizing them in no manner would mean that the countries have accepted them as legal tender which is to say Cryptocurrencies are yet to replace the paper notes in our wallets or balances in our e-wallets.
History in India
Bitcoins made its debut in India in the year 2012. Soon after its entry in the market RBI in its Financial Stability Report in the year 2013 warned the public against banking on bitcoins as they posed challenge to the economy in the form of regulatory, operational, and legal risks. However, bitcoins paved its way in the Indian market and almost immediately was the talk of the town. In next to no time RBI in its circular dating 6th April 2018 took the other way round and prohibited the entities regulated by it from dealing in/ providing any services w.r.t virtual currencies, with a 3-month ultimatum to those already engaged in such services. Following this, the Supreme Court was rained with writ petitions to annul the circular. After a long wait, the Hon'ble Supreme Court vide its judgement1 on 4th March 2020 revived the market of Cryptocurrencies holding them valid under the constitution.
However, the Court in its judgement nowhere justified or determined the legal status of Cryptocurrencies in India. It only struck down the circular on the basis that the central bank was unable to give any evidence proving the negative impact of Cryptocurrencies on the banking and credit sector in India.
Are bitcoins 'Money'?
As we are aware that goods/articles can be exchanged for Cryptocurrencies. So, do they serve the purpose of Money? Something to qualify as Money, they must satisfy the four functions of Money. To answer the question lets us understand and analyse these functions.
The universally accepted functions of Money can be enlisted as:
(a) A unit of account;(b) A medium of exchange; and(c) A store of value;
A unit of account:
It means expressing the value of something in a comprehensible manner and in a way where the value of one thing can be compared with another. Through this function money provides a common measure of the value of goods and services. Now considering Cryptocurrencies for example, there are 21 million bitcoins to exist ever and a bitcoin can be broken to 8 decimal places, which somehow enables to measure/value them. Thus, it can be said that Cryptocurrencies serve as a unit of account.
A store of value:
This means the value of something being able to be stored over a time period and still remain same. The fact that value of Cryptocurrencies sole depend on their demand and supply in the market gives sufficient evidence as regards to their volatile and risky nature. Whereas the value of money is derived from the underlying asset, gold. For instance, we consider having a bitcoin, the value of which at the moment is say 10, the very next moment due to the changes in demand it might be say 5. Thus, Cryptocurrencies are too volatile to serve as a store of value.
A medium of exchange:
One of the most common and important function of money is that it serves as a means to exchange goods and services which replaced the long prevalent barter system. Cryptocurrencies are inherited with high risk and volatility due to well known factors. To serve as a medium of exchange Cryptocurrencies will have to fritter away its speculative nature. Thus, Cryptocurrencies cannot as well be considered as a medium of exchange.
Until all the functions of money are served by Cryptocurrencies, they cannot replace money.
Are bitcoins really 'Coins'?
Coins in our understanding are small, flat, round piece of metal or plastic used primarily as a medium of exchange or legal tender. However, coins in India are governed by the Coinage Act,2011.
As per section 2(a) of the coinage Act,2011 "Coin" means any coin which is made of any metal or any other material stamped by the Government or any other authority empowered by the Government in this behalf and which is a legal tender including commemorative coin and Government of India one rupee note.
Explanation. --For the removal of doubts, it is hereby clarified that a "Coin" does not include the credit card, debit card, postal order and e-money issued by any bank, post office or financial institution.
Going by the above statutory definition of coins bitcoins are not metal or any other material nor are they any other material. Moreover, Cryptocurrencies are not even legal tender. If in forthcoming future bitcoins are to be recognised as electronic money, they wouldn't fall under the category of coins as the definition explicitly excludes electronic money. Thus, Cryptocurrencies fail the test of being classified as coins.
Is conversion of Cryptocurrency into 'Currency' possible?
What is Currency?
In simple words Currency means tokens in any form of money used by public throughout a nation. It includes paper notes, metal coins, traveller's checks, electronic money etc. Considering this general definition of currency, Cryptocurrency may fall in the category of electronic money but further to qualify as electronic money it requires legal and regulatory backing.
As per section 2(h) of Foreign Exchange Management Act, 1999 "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.
Section 2(m)4 defines, "Foreign Currency" as any currency other than Indian currency, which means currency expressed or drawn in 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)
The above definitions even being inclusive in nature confers authority on RBI to notify any inclusion in the extant definition of Currency. Further, what is not a Currency cannot be a Foreign Currency under the same Act. Evidently as of now, Cryptocurrencies in India though constitutionally valid cannot be Currencies at any time without the central bank's backing.
Digital currency & Cryptocurrency
Digital currency is nothing but currency in electronic form with properties similar as that of physical Currency. It enables instant transfers and payments without the risk of being mishandled and theft. Digital currency can further be classified into Virtual currency and Cryptocurrency.
What is the difference between Virtual currencies and Cryptocurrencies?
RBI's Financial Stability Report of 2013 defines Virtual currencies as "a type of unregulated digital money, issued and controlled by its developers and used and accepted by the members of a specific virtual community."
Further, the Financial Action Task Force (FATF), in its report titled Virtual Currencies – Key Definitions and Potential AML/CFT Risks, defined virtual currency as a digital representation of value that can be traded digitally and functioning as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but not having a legal tender status.
Thus, Virtual currency is a representation of monetary value issued, managed, and controlled by their issuers for peer-to-peer transactions. They may be represented in terms of tokens and may be unregulated without a legal tender such as coins or banknotes. They are not transparent in the sense that one user of the system cannot view transactions other than its own- the information is confidential.
In the said report, the FATF also defined Cryptocurrencies to mean "a math-based, decentralized convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred."
Thus, Cryptocurrencies are decentralized and is not regulated by any body but only by people using the network. It is a transparent networking the sense that all members of the work can see all the transactions taking place, however without knowing persons involved in such transactions.
Can Cryptocurrency be considered as 'Property'?
Cryptocurrency though not currency are Virtual currencies. In a notice dated March 25, 2014, the Internal Revenue Service, Washington stated that Virtual currency is treated as property for U.S. federal tax purposes. To apply the same concept in India, first the definition of property has to be examined.
Property in general sense can be understood as anything physical or virtual owned by a person. Property is defined under several legal statutes in India.
As per Section 29(c) of Benami Transactions (Prohibitions) Act 1988, Property means property of any kind, whether movable or immovable, tangible, or intangible, and includes any right or interest in such Property.
This definition is a blanket definition which leaves scope to include any property which has any one of the characteristics. Cryptocurrencies are both movable and intangible. So, going by the above definition they can be considered as Property in India.
The Supreme Court of India in Vikas Sales Corpn. v. CCT AIR 1996 SC 2082 discussed the expression 'Property' in detail. 'Property' is said to be understood in a vast and expansive manner. To start with, one can say that Property includes everything that has an extendable value. It includes the item in question and all rights and liabilities associated with it. An element which is material to the expression is 'ownership'. While the property has all interests in it, it is the ownership that lets the owner exercise such interest, where the interest extends to doing everything, an owner is capable of doing to exercise his right in the property.
The above explanation by the Hon'ble Supreme court renders it clear that there are two essential drivers namely, ownership and the interest that is created from such ownership in the property. Thus, Cryptocurrencies are eligible to fall under the category of Properties in India.
Cryptocurrencies or Goods?
We can buy Cryptocurrency using our fiat money so are Cryptocurrency goods or not is a valid point for discussion. Goods in common parlance are things we buy which satisfy our wants and needs. However, law defines Goods differently. Section 2 (7)7 of the Sale of Goods Act, 1939, "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"
Hence, to answer whether crypto-currencies can be categorised as Goods or not, we must note the following-
(a) As per the General Clauses Act, 18978, a movable property shall mean property of every description, except immovable property i.e., which can be moved freely without damage. As such, Cryptocurrencies are movable. (b) Considering that Cryptocurrency do not impose a claim on anybody, it does not tantamount to an "actionable claim"
While there may be sufficient reason to classify Cryptocurrencies as goods, in light of the fact that the Cryptocurrencies do not have an "intrinsic value" or "speculative value" of its own, it does not completely fit into the definition of Goods either. However, in the said pretext, we can hold forth that the nature of Cryptocurrencies is more inclined towards Goods rather than Money.
Digital currency also digital goods?
Resembling digital currency there exists digital goods as well which are virtual and electronically present amongst us. For example, e-books, e- newspapers, internet coupons, online traded instruments, e-tickets, downloadable software, mobile apps, etc. Analysing the characteristic of Cryptocurrencies and the way they are being used in the market, Cryptocurrencies are themselves used to purchase digital goods. This renders them as a medium of exchange to purchase digital goods rather than they are being digital goods themselves.
Exploring the avenues of Commodity derivatives
It may be interesting to note that in countries like USA, Cryptocurrencies have been categorised as 'Commodity'. The Commodity Futures Trading Commission, USA, stated that Section 1a of the US Commodity Exchange Act defines "commodity" to include, among other things, "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.". In such light the definition of a "Commodity" is broad and hence, bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.
Further in India, in the matter of Internet & Mobile Association v. RBI [2020], it was also contended that Cryptocurrencies, more specifically bitcoins, are nothing but commodities under the Securities and Exchange Board of India, which could be traded. The same must be substantiated by law, delving into the provisions of law we find that,
Section 2 clause (bc)9 of the Securities Contract Regulation Act, 1956 provides that-
"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 able to be covered by the above definition, the essential element is a contract. While the definition of contract is dealt 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, Cryptocurrencies are not goods as already explained in the preceding sections, additionally they are also not something that has its value derived from an underlying good or something else as their value is dependent on demand-supply phenomenon rather than anything persistent. Conclusively, Cryptocurrencies cannot be treated either as Commodity or Commodity derivative.
Cryptocurrency liable to taxation?
Given the fact that several countries across the globe have recognised Cryptocurrencies legal, it is inevitable that the same attracts taxation consequences too. In the United States, bitcoins are recognized as 'property' for the purpose of taxation by the Internal Revenue Services. Whereas in Canada and Australia, bitcoins are treated as 'asset' for capital gains tax purpose.
On the other hand, in the European Union, bitcoins are exempt from value-added tax (VAT) in all European Union (EU) member states; and in Finland the Central Board of Taxes, too has given Bitcoins VAT exemption by classifying it as a financial service.
Direct and Indirect Tax implications in India
In the budget 2018, our Finance Minister, Mr Arun Jaitley, has stated in the budget speech, "112. Distributed ledger system or the blockchain technology allows the organisation of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The Government will explore use of blockchain technology proactively for ushering in digital economy."
Taxation laws being silent on the taxation purview in India, we can assume the possibilities. Cases where we import Cryptocurrencies, Customs Duty may be applicable. As per Central Excise and Customs Act, 1944, customs duty is levied on import of software subject to the condition that the software imported in a physical form. Therefore, software imported online is not chargeable to Customs duty. Similarly, if Cryptocurrency is treated as software, no duty shall apply. Further, section 55 of the Income Tax Act, 1961 deals with self-generated capital gains and does not recognize Cryptocurrencies it is thus assumed that any profit on sale of Cryptocurrencies could be subject to taxation under tax laws in India either as capital gains or as income from other sources.
The applicability of GST on Cryptocurrencies will essentially be subject to its nature- i.e., what is Cryptocurrency treated as- a computer programme, a Property, Goods, or Money. While money is kept outside the purview of GST, if treated as computer programmes, GST shall be applicable at 18% shall be applicable.
Final note
At this juncture even after being upheld as constitutionally valid by the apex court, the laws in India do not recognize Cryptocurrencies to exist. The nature of these Virtual currencies can only be assumed from the various provisions in extant laws. Cryptocurrencies in India have a long way to go. They are surely not a threat to the economy and can bring India in the global economic frame. The major arguments around Cryptocurrencies have been due to it attractiveness to illegitimate use due to its decentralized nature. Regulations governing virtual currencies would clear the air regarding their legal status which could potentially change the way financial transactions are carried out in the nation.
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