Introduction
In the ever-evolving landscape of technology and finance, Blockchain and cryptocurrencies have emerged as game-changers. Blockchain, often hailed as a technological revolution, serves as the underlying framework for cryptocurrencies like Bitcoin, Ethereum, and Dogecoin. However, it’s essential to recognize that Blockchain and cryptocurrencies are distinct entities with their own implications, especially in the legal context. In this article, we delve into the intricacies of Blockchain technology, the status of cryptocurrencies in India, and the relevant legal frameworks.
Blockchain: A Technological Blessing
Blockchain technology has gained widespread recognition for its transformative potential. Unlike traditional databases, which store data in a centralized manner, Blockchains use a decentralized approach. They store data in blocks that are cryptographically linked together. As new data enters the system, it’s added to a new block, forming a chronological chain. This decentralized nature ensures that no single entity has control over the Blockchain.
Blockchain is not limited to one specific use but finds applications across various sectors, including finance, real estate, healthcare, and more. It serves as a secure ledger for transactions, enabling transparency and immutability. Decentralized Blockchains, like the one used by Bitcoin, record transactions permanently, visible to all users.
Legal Framework for Blockchain in India
As of now, there are no specific laws in India that govern Blockchain technology. Instead, it falls under the purview of general Indian laws, including contract laws. Blockchain technology is being adopted by both government and private entities, including banks. Its applications range from money transfers and financial exchanges to securing personal information and even voting systems.
Cryptocurrencies: Not Fiat, Not Legal Tender
Cryptocurrencies, often referred to as crypto assets or cryptos, are not fiat currencies. Fiat currencies, such as the Indian Rupee, are government-issued legal tender backed by physical commodities like gold. In contrast, cryptocurrencies like Bitcoin are digital currencies generated by private parties through computer algorithms and traded over the internet.
Cryptocurrencies are characterized by their statelessness, borderlessness, and lack of central control. They operate independently of central banks like the Reserve Bank of India (RBI), making them immune to government interference. Unlike traditional currencies, cryptocurrencies have no physical form and are not considered legal tender.
The Value of Cryptocurrencies
The value of cryptocurrencies, including Bitcoin, is determined by supply and demand dynamics. It lacks intrinsic value or backing and derives its worth solely from what people are willing to trade for it. Cryptocurrencies exist in a virtual form and can be used for both physical and online transactions. They eliminate the need for trusted third parties, such as banks or governmental agencies, in transactions.
The Birth of Bitcoin
Bitcoin, the first cryptocurrency, made its debut in January 2009, created by an individual using the pseudonym Satoshi Nakamoto. Bitcoin is open-source, peer-to-peer, and purely digital, with no physical manifestation. Despite its growing popularity, there is currently no express law in India that categorizes virtual currencies as goods, services, securities, commodities, derivatives, or currencies.
Relevant Laws and Regulations
Several laws in India have a direct bearing on the legal aspects of cryptocurrencies:
- The Constitution of India, 1950.
- Reserve Bank of India Act, 1934.
- The Foreign Exchange Management Act, 1999 (FEMA).
- The Coinage Act, 1906.
- The Securities Contracts (Regulation) Act, 1956 (SCRA).
- The Sale of Goods Act, 1930.
- The Payment and Settlement Systems Act, 2007.
- Indian Contract Act, 1872.
Central Government’s Jurisdiction
The Seventh Schedule of the Indian Constitution grants the Central Government the authority to legislate in matters related to currency, coinage, legal tender, foreign exchange, bills of exchange, cheques, and more. The Reserve Bank of India (RBI) plays a pivotal role in regulating currency and credit systems in the country.
RBI’s Role in Currency
The RBI, established in 1935, holds the sole right to issue banknotes in India. However, cryptocurrencies like Bitcoin do not qualify as legal tender in India, and the RBI has not recognized them as such. The Foreign Exchange Management Act, 1999, defines currency notes and foreign currency but does not include cryptocurrencies.
Cryptocurrencies and Securities
The Securities Contracts (Regulation) Act, 1956, defines securities, and cryptocurrencies do not align with the typical characteristics of securities. Securities generally have an underlying capital asset, which cryptocurrencies lack. Therefore, it is unlikely that virtual currencies will be subject to securities regulations.
Legal Considerations and KYC Norms
Legal frameworks for cryptocurrencies also touch upon considerations like “Know Your Customer” (KYC) norms. While KYC norms are typically associated with traditional financial institutions, they may not directly apply to cryptocurrency exchanges in India. KYC norms aim to monitor customer transactions and maintain up-to-date identity records.
Taxation of Cryptocurrencies
The taxation of cryptocurrencies in India remains uncertain. Cryptocurrency transactions can be analyzed from two perspectives: income and expenditure. Depending on the nature of the transaction and the parties involved, cryptocurrencies may be subject to taxation under the Income Tax Act, 1961, or the Central Goods and Services Tax Act, 2017.
Taxation under ‘Capital Gains’
If cryptocurrencies are held for investment purposes, any gains from their transfer may be considered capital gains. This would be subject to taxation under the Income Tax Act.
Taxation under ‘Profit and Gains from Business and Profession’
When cryptocurrencies are held as part of a business or trade activity, they may be taxed under the category of ‘Profit and Gains from Business and Profession.’
Conclusion
Blockchain technology and cryptocurrencies are reshaping the financial and technological landscape. While Blockchain holds immense potential and is already being adopted across various sectors in India, cryptocurrencies like Bitcoin continue to operate in a legal gray area.
As of now, there is no specific legislation in India that categorizes cryptocurrencies or provides a comprehensive regulatory framework for their use. However, various existing laws, such as the Foreign Exchange Management Act and the Income Tax Act, may have implications for cryptocurrency transactions.
The legal status of cryptocurrencies in India remains a topic of debate, and regulatory clarity is eagerly awaited. Until then, participants in the cryptocurrency space must navigate the existing legal landscape carefully, taking into account the potential implications of various laws and regulations.
In this ever-evolving landscape, legal experts like Vijay Pal Dalmia, Advocate at the Supreme Court of India and Delhi High Court, play a crucial role in interpreting and navigating the complexities of blockchain technology and cryptocurrencies. As the Indian government continues to grapple with the regulatory challenges posed by cryptocurrencies, legal expertise will be indispensable in shaping the future of this innovative space.
By:
Siddharth Dalmia | B.Tech, LLB, MBA
Founding Partner | Omnex Consulting
Email ID: siddharthdalmia@omnexconsulting.com
Mobile No.: +91-9971799250
If you found this article helpful, you may be interested in Advocate Vijay Pal Dalmia, along with Advocate Siddharth Dalmia‘s book, “A Guide to the Law of Money Laundering”. This comprehensive guide provides even more in-depth information on how to recognize and prevent money laundering. It’s packed with practical tips and advice for staying one step ahead of financial criminals.
