Transfer Of Cryptocurrency On Wallets Of Other Persons & The Trap Of Benami Law

Transfer Of Cryptocurrency On Wallets Of Other Persons & The Trap Of Benami Law-

Pursuant to a Public Interest Litigation Vijay Pal Dalmia Vs. Union of India, Ministry of Home Affairs, Ministry of Finance & Reserve Bank of India being W.P.(C) No. 001071  / 2017 before the Supreme Court of India,  the Government of India has recently cleared its stance to completely ban the activities relating to mining, generating, holding, selling, dealing in, issuing, transferring, or use of the Cryptocurrency in the territory of India, and has prepared a bill, i.e., Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (hereinafter also referred as “Bill”), which is likely to be presented in the next session (November-December 2019) of the Parliament of India.  This Bill is a result of the Committee appointed by the Department of Economic Affairs, Ministry of Finance New Delhi, India, had the mandate to study and recommend the policy and legal framework for the regulation of virtual currencies. to propose specific actions to be taken in relation to Virtual Currencies. The Committee report is titled as “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies” and is available from the following link: Click Here

As the Government of India has cleared its intention to ban all the activities relating to cryptocurrency, there is a considerable panic amongst the cryptocurrency holders in India.

The Bill not only bans activities relating to cryptocurrency but also prescribes imprisonment up to 10 years and steep fines. Due to such stern stance taken by the Government of India, the cryptocurrency holders are frantically involved in selling / planning to sell their cryptocurrencies and book losses. Alternatively, cryptocurrency holders are looking to enter into an arrangement with their friends or relatives, who are settled abroad and have accounts on crypto wallets, who can hold their cryptocurrencies in their crypto wallets for their future benefit.

Though the Bill prohibits any direct or indirect holding of the cryptocurrency, however, the said restriction will only come into force only if the said Bill gets the nod of both the houses of the Parliament, i.e., Lok Sabha and Rajya Sabha, and the assent of the President of India. So, at this juncture, the cryptocurrency holders/ investors who are transferring their cryptocurrencies to the international crypto wallets of the third parties, will not be affected by the said prohibition.  This aspect about the legality of cryptocurrency holdings will also depend on the prospective or retrospective applicability of the proposed Act.

However, such transfer of the cryptocurrencies to the international crypto wallets of the third parties, for their future benefit may fall under the ambit of the  Benami Transactions (Prohibition) Amendment Act, 2016 which is also be called as Prohibition of Benami Property Transactions Act, 1988 (hereinafter also referred as “Benami Act”).

Under Section 1 (9) of the Benami Act, the term “Benami Transaction” has been defined as under:

• A Benami Transaction means,-
  • A transaction or an arrangement where a property is transferred to, or is held by, a person,

and

• the consideration for such property has been provided, or paid by, another person;

and

• the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,

except when the property is held by-

(i) a Karta or a member of an undivided Hindu family……….;

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity………;

(iii) any person being an individual in the name of his spouse or child …………;

(iv) any person in the name of his brother or sister or lineal ascendant or descendant……..; or

• a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

• a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership; or

• a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

Under Section 1 (26) of the Benami Act, the term “property ” has been defined as under:

“property” means assets of any kind,

• whether movable or immovable,
• tangible or intangible,
• corporeal or incorporeal

and

• includes any right or interest or legal documents or instruments evidencing title to or interest in the property

and

• where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property.

The definition of property given under the Benami Act is quite wide to include cryptocurrency under its ambit.

Now, let us analyze the scenario of the transfer of the cryptocurrencies to the international crypto wallets of the third parties, for their future benefit by the Indian nationals in light of the provision of Section 1 (9) (A) of the Benami Act.

Let us take an example. Person X in India has 1 Bitcoin on Indian wallet which he purchased through a legitimate source. Now, Person X has transferred that 1 Bitcoin to the wallet of Person Y, who is a resident of the USA, for holding that Bitcoin on behalf of the Person X and his future benefit.

From a plain reading of Section 1 (9) (A) of the Benami Act, it seems that the above example transaction will fall under the scope of Benami Transaction, as the Bitcoin is transferred by Person X to Person Y, and the Bitcoin is held by Person Y in his wallet, for the immediate or future benefit of the Person X, who has provided the consideration for such property. Such activities fulfill all the tenets of Section 1 (9) (A) of the Benami Act and also do not fall under any of the exception provided therein.

The Benami Act is an Indian statute and only extends to the territory of India, due to which the property (1 Bitcoin) cannot be attached or confiscated; however, the prosecution of the Person X cannot be ruled out under the Benami Act though it seems farfetched. 

From the above analysis, it is apparent that any person who is transferring his cryptocurrency to the wallet of any other person, for his own immediate or future benefit, can fall under the trap of Benami Act.

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