Team financial services division, (firstname.lastname@example.org)
What is a bitcoin?
A bitcoin is a virtual currency first introduced in the year 2008 by an untraceable group called Satoshi Nakamoto. It’s an open source peer-to-peer crypto-graphical system (direct connections without an intermediary) where transactions happen through a public ledger called blockchain, handling users’ data anonymously. The term is a combination of bit and coin where bit is the basic unit of computing and coin represents currency, combining to mean virtual currency.
Eight years since its introduction, bitcoin has gone through a lot. From receiving little support in the beginning in our country to now being the most widely used and accepted digital currency, we analyze its legal nature, its implications, and possible future scenarios.
Bitcoin is a refreshing concept in the traditional world of economy, bringing in a lot of debates, discussions and differences of opinions. For any issue to be handled legally, it becomes a prerequisite to first define it, see where it fits and then start working on it.
Defining bitcoin is tricky, especially in India where the legal and regulatory set up is rather a lot complex. Further, given no clarity as to its regulation yet, it becomes a more composite task.
Given its meaning and all the attributes it holds, bitcoin could be considered to be goods, currency, an instrument, consideration, money, value for money, property, etc.
Is bitcoin currency?
Currency  is generally defined as tokens used as money in a country. In addition to metal coins and paper bank notes, money orders, traveler’s checks, it also includes electronic money or digital cash.
- To fit in this definition which is not exhaustive,
- Either bitcoin has to be physical and movable, and fungible. It is movable and fungible but not physical.
- Electronic money or digital cash may include bitcoin but then it needs a legal backing from an entity, which is not the case in India as of now.
“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, as per Sec. 2(h) of Foreign Exchange Management Act, 1999 
- As is evident from the above definition, bitcoin doesn’t fit in any of the illustrative names, however if RBI wants, it can certainly notify it to be included in the above definition.
- RBI hasn’t notified bitcoin as legal tender in India and therefore it couldn’t be termed as real currency.
Are bitcoins even ‘coins’?
Provisions under law:
Coins in India are governed by the Coinage Act, 2011.
Section 2(a): “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; (b) “commemorative coin” means any coin stamped by the Government or any other authority empowered by the Government in this behalf to commemorate any specific occasion or event and expressed in Indian currency;
On study of above, bitcoin is certainly not metal or even any other material for that matter. Moreover, it’s not legal tender. If it was to become e-money in the near future, still it could not be coin as per the Coinage Act, since e-money is specifically excluded from the above definition. Consequently, bitcoins cannot be considered as coins now or in the days to come.
- Apart from traditional currency or real currency, there’s another kind called digital currency. On a broader level, it is an electronic based currency holding similar attributes of a real currency, involving prompt payment and transaction settlement.
- There are two forms of digital currency: Virtual currency and crypto currency.
Bitcoin: Virtual currency v. Crypto currency
Digital currency is largely backed and regulated by the Central Bank, more like electronic money. Virtual currency on the other hand is unregulated and decentralized. Financial Crimes Enforcement Network’s ruling on ‘Application of FinCen’s regulations to virtual currency mining operations ’ clarifies that virtual currency is a medium of exchange that operates like a currency in some environments but does not have all the attributes of a real currency. It does not hold any legal tender status anywhere. Similar view was expressed in European Central Bank’s publication, ‘Virtual Currency Schemes’ .
- Bitcoins could be termed as virtual currency as also categorized by ECB . They are decentralized, unregulated and have few attributes of a real currency.
Then there are crypto-currencies and non-crypto currencies. Since, bitcoin is purely based on crypto-graphical system, where you have a private and a public key, and each transaction getting recorded on the ledger, it is deemed to come under the definition of crypto-currency.
Decentralized currency 
Currency is further classified into centralized and decentralized. Those which are governed by a central repository or a designated entity for sake of trust over transactions taking place are termed as centralized currency. Bitcoin doesn’t work like that. Transactions in bitcoin happen on a decentralized P2P system, where all entities operate independently, and hold the entire risk of dealing in the same.
Is it convertible?
In the words of Internal Revenue Service (IRS) Virtual Currency Guidance: ‘Virtual currency that has an equivalent value in real currency or which acts as a substitute for a real currency is called ‘convertible’ virtual currency’. Bitcoin is convertible into fiat currency or legal tender. It is also fungible.
If it’s a virtual currency, could bitcoin be treated as property?
Bitcoin is not currency in general parlance but is treated as a virtual currency. 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 purposes6 . To apply the same concept India, first has to be examined the definition of property. 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 is an inclusive definition of property, where both movable and immovable properties are included. Bitcoin is movable and intangible thus it can be called a property as per this definition. However, any idea to levy tax on it as a property will require extensive reasoning and research.
Is it ‘Goods’?
Under the Indian law, Sale of Goods Act, 1939 define ‘goods’ u/s 2(7). Accordingly, “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. To answer whether bitcoin is a good or not, first, we shall answer the following questions:
- Is it a movable property? Well, Sale of Goods Act does not define movable property. It is however defined in the General Clauses Act, 1897. As per which, movable property shall mean property of every description, except immovable property. Bitcoin is not immovable as it is neither permanent nor it is dealt so. So, yes. It may be called movable.
- Is it actionable claim or money? No. 10 It does not impose a claim on anybody, so it is not an actionable claim. And, precisely, since it is not legal tender, it’s not money however it does represent value in money.
- There seems to exist enough rationale to consider bitcoin as goods, subject to the condition it does get accepted that way. However, if it is used as consideration to buy goods, it should have money element and in that case, Sale of Goods Act doesn’t apply.
- It could however be enough consideration as per the Indian Contract Act, 1956.
One important aspect for any item to be a good is that it should have an intrinsic value in itself. Here, bitcoin might fall under the term ‘goods’ as per Sale of Goods Act, 1930 but it does not seem to have any value in itself, in other words it does not have such a value which could be the reason why people would buy it, if they do. People would also not buy bitcoin to store value but to trade and earn profits. It is not bitcoin that has fundamental value, but the transactions in it which help earn something. Therefore, to categorise bitcoin as ‘goods’ will be an incorrect stance to take.
Can it be ‘Digital goods’?
Similar to Digital currency and virtual currency, we have digital goods and virtual goods respectively. Digital goods are goods existing in electronic format. Examples could be e-books, e-newspapers, internet coupons, online traded instruments, e-tickets, downloadable software, mobile apps, etc. Virtual goods on a narrower level, is more particularly money (not real money) purchased for use in online communities and games basically acting as virtual money. For bitcoin to become a digital good, it has to have the respective features. If we analyze, we find that bitcoin is being used to buy digital goods, in that way it becomes a medium of exchange to purchase digital goods rather than being a digital good itself.
Under Foreign Exchange Management Act, 1999 (‘FEMA’)
Given its attributes, the closest we could define bitcoin as is ‘virtual currency’ or more particularly ‘cryptocurrency’. As far as FEMA is considered, there can be two possible scenarios:
- When there is no regulatory framework: Section 2(h) 2 of the Act defines ‘currency’. RBI hasn’t declared bitcoin under that definition. Then there’s ‘foreign currency’. Section 2(m) 2 defines, ““foreign currency” means any currency other than Indian currency”. Now what is Indian currency? FEMA (Section 2(q)) 2 also defines Indian currency. Accordingly, ‘“Indian currency” means currency which is 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)’.
- When there is a regulatory framework: However, bitcoin could be currency if declared by RBI; in that case, by virtue of being a currency, it would fall under the definition of foreign currency and be dealt accordingly.
However, the present situation is such where bitcoin doesn’t fall in any of the above definitions. So, it is no currency as per FEMA, although it does hold the tag of being a ‘crypto-currency’.
Online transaction in bitcoin and FEMA
If one transacts into export/import transactions in bitcoin, the provisions of FEMA will get attracted. Transactions in FEMA are categorized as ‘Current account transaction’ and ‘Capital account transaction’. First we analyze current account transaction defined under FEMA (Section 2(j)) 2. Accordingly, “current account transaction” means “a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,—
(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;”
Highlighting ‘a transaction other than a capital account transaction’ from the above definition, capital account transaction (Section 2(e)) 2 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 2; Section 6(3) of FEMA lists out the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease exceeding five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred—
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.”
- Whether foreign trade in bitcoin will be treated as a current account transaction or a capital account transaction depends on assessment of whether bitcoin is a ‘good’ or an ‘asset’.
- As already discussed, we prefer not to call bitcoin a good. If it is not a good, then foreign transactions in bitcoin shall be treated as capital account transactions. Thus, not allowed. But is it an asset then? Bitcoin and its properties make it very clear, that it is neither a real asset nor a real good. It however could be termed as digital asset or a digital good. Opinions have been divided and there’s no clear lead to this issue.
Receipts and Payments in Bitcoins:
Considering the fact that bitcoins are not legal tender in India, receipts and payments in this Virtual Currency in a domestic transaction as well as in imports/exports is a separate issue.
As far as receipts and payments in bitcoins is concerned, following are the possible questions that need to be answered:
- Is it possible to buy goods or services in India and make payment in bitcoins? Certain companies in India are accepting bitcoins as payment against purchase of goods or services. Even if as per the Reserve Bank of India Act, 1934 (“the Act”), payment made in legal tender is a valid discharge of an obligation or debt one has towards a payee, the Act however does not specifically exclude any other form of consideration. Meaning thereby that 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 sufficient consensus between the parties involved. And therefore, any party, be it an individual or other which is accepting bitcoins as payment, can certainly do so as far as there is a mutual understanding between the buyer and the seller or the payer and the payee, as the case may be.
- Is it possible to export and receive payment in bitcoins? Any international transaction which involves payment or receipt shall attract the provisions of FEMA and rules made there under. If one was to export outside the Indian territory and receive payment in bitcoin, one shall first examine what bitcoins shall be treated as, for that matter. Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 clearly specify the modes of payment in different cases.
Regulation 3(2) of these Regulations state 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.”
Bitcoins are not legal tender in India or even elsewhere in the world, by virtue of this they are not recognised as real currency anywhere. Also, RBI hasn’t directed anything pertaining to receipt of bitcoins for such transactions.
Clearly, this concludes that anyone cannot receive bitcoins as a manner of receipt for any exports made outside India.
- Is it possible to import and remit payment in bitcoins? 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 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; ”
Examining the above, it’s conclusive that bitcoin does not conform to the above definition and thus it is certainly not foreign exchange.
It is hereby inferred that in exchange of any imports made by any person in India, it is manifestly impossible to remit payment in bitcoins in the ambit of law.
Coming to the matter of taxation in bitcoin transaction, particularly in a case where we import bitcoin, following may apply:
- Customs Duty: 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 bitcoin is treated as software, no duty shall apply.
- VAT: VAT is an issue complex, vast and debatable. There’s no ruling in India regarding VAT and its applicability on bitcoins. For that matter, we can take support of foreign rulings and authoritative affirmations.
- VAT is applicable on goods. Bitcoin may not be termed as goods but it is virtual currency. Having said that, VAT may apply given the fact that virtual currencies are not real currencies. It’s however possible to especially exempt virtual currencies from the ambit of VAT. Court of Justice for European Union in a press release dated 22 October, 2015 declared bitcoin transactions as exempt from VAT applicability. The ruling covers all the transactions, per se including foreign transactions in bitcoin.
- Similar approach was adopted in Norway which recently released a statement in February, 2017, changing its earlier stance and exempting bitcoin transactions from VAT.
- This could be further supported by a Policy Paper issued by HM Revenue and Customs Department of Govt. of UK titled, “Revenue and Customs Brief 9 (2014): Bitcoin and cryptocurrencies” dated 3 March 2014 and a declaration made by Finnish Central Board, which says that exchanges providing bitcoin services are ‘banking services’, making them VAT exempt.
As said by the Central bank, bitcoin in India is neither banned nor regulated, but is legal as of now and being traded under observation. So far, bitcoin could be termed as grey currency of India.
Regulations Applicable in India 
Given, its modality and attributes, following is a non-exhaustive list of regulations which could be applicable on bitcoin:
- The Constitution of India, 1950
- The Foreign Exchange Management Act, 1999
- The Reserve Bank of India Act, 1934
- The Coinage Act, 1906
- The Securities Contracts (Regulation) Act, 1956
- The Sale of Goods Act, 1930
- The Payment and Settlement Systems Act, 2007
- The Indian Contract Act, 1872
Legal Challenges, Risks and Issues
- Since the system is unregulated, there are more chances of fraud, illicit usage and issues like money laundering.
- As already cautioned by RBI through a press release, none of the entities are authorized and transaction involves high amount of risks.
- Absence of appropriate legal grievance redressal system exposes Indian consumers to transactional and informative risks. 
- Absence of awareness among people could lend them into unwanted troubles. There’s a need to spread sufficient awareness since even today people have little or no idea about technicalities involved in bitcoin transactions. 
- Market Volatility is another factor which makes the system less reliable. Prices are demand based and keep on changing. Given the price bubbles and price swings, bitcoin may even become worthless at some point.
Should Bitcoin be regulated?
As quoted in British Primer for policymakers, “Bitcoin is an exciting innovation that has the potential to greatly improve human welfare and jump-start beneficial and potentially revolutionary developments in payments, communications, and business. Bitcoin’s clever use of public-key encryption and peer-to-peer networking solves the double-spending problem that had previously made decentralized digital currencies impossible. These properties combine to create a payment system that could lower transactions costs in business and remittances, alleviate poverty, provide an escape from capital controls and monetary mismanagement, allow for legitimate financial privacy online, and spur new financial innovations. On the other hand, as“digital cash,” Bitcoin can be used for money laundering and illicit trade. Banning Bitcoin is not the solution to ending money laundering and illicit trade, just as banning cash is not a solution to these same ills. Bitcoin could ultimately fail as an experimental digital currency and payment system. An unanticipated problem could arise and undermine the Bitcoin economy. A superior cryptocurrency could outcompete and replace Bitcoin. It could simply fizzle out as a fad. The possibilities for failure are endless, but one reason for failure should not be that policymakers did not understand its workings and potential. We are ultimately advocating not for Bitcoin, but for innovation. It is important that policymakers allow this experimentation to continue. Policymakers should work to clarify how Bitcoin is regulated and to normalize its regulation so that we have the opportunity to learn just how innovative Bitcoin can be” 
https://www.fincen.gov/resources/statutes-regulations/administrative-rulings/application-fincens-regulations-virtual-0 Application of FinCEN’s Regulations to Virtual Currency Mining Operations
http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf Opinion on Virtual Currencies