Can Bitcoin Be Banned By The Indian Government? – Part I: CIS India


CIS LogoBitcoin is a cryptography based digital currency first described in a 2008 paper by a single or group of pseudonymous developer(s) by the name of Satoshi Nakamoto, who called it a “peer-to-peer, electronic cash system”. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each Bitcoin is subdivided down to eight decimal places, forming 100,000,000 smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution. The processing of Bitcoin transactions is secured by servers called Bitcoin “miners” which communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology, also known as the “blockchain”. The integrity and chronological order of the block chain is enforced with cryptography. In addition to archiving transactions, each new ledger update creates some newly-minted Bitcoins. The number of new Bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more Bitcoins will be added into circulation and the total number of Bitcoins will have reached a maximum of 21 million Bitcoins.

Each user of Bitcoin gets a digital wallet and a Bitcoin address which is the address from and to which Bitcoins can be transferred. A transaction or transfer of Bitcoins is a transfer of value between Bitcoin addresses that gets included in the block chain or the system log, ensuring that each transaction is valid and that nobody can use their Bitcoins more than once avoiding double spending. Bitcoin wallets keep a secret piece of data called a “private key” for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the owner of the addresses. The “signature” also prevents the transaction from being altered by anybody once it has been issued.

We shall now try to examine whether Bitcoins should be treated under Indian law as (i) currency, (ii) security, (iii) derivative, (iv) negotiable instrument, (v) prepaid payment instrument, or (vi) movable property.

Can Bitcoins be treated as currency?

Indian laws do not define digital currency or virtual currency, so we will have to look at the traditional definition of currency defined in section 2(h) of the Foreign Exchange Management Act, 1999 (“FEMA”), to see if Bitcoin falls in that definition.

The legislature has consciously made the definition capable of further expansion by making it inclusive and also by giving the Reserve Bank of India (“RBI”) the authority to notify other similar instruments. This means that if any instrument which is being used as a currency is not covered by the definition as it stands, then the RBI is free to notify it and include it in the definition of currency. All “currency” other than Indian currency is considered by the FEMA as “foreign currency” would have to then comply with various rules and regulations under FEMA and Bitcoin transactions would therefore have to comply with FEMA.

It is clear that Bitcoin is not really similar to any of the instruments mentioned in the definition because none of them are digital or virtual in nature. On May 3, 2000 the RBI notified “debit cards, ATM cards or any other instrument that can be used to create a financial liability” as “currency” under the FEMA. Since Bitcoin is not really backed by any institution and has no backing by any central bank or institution and because most of the transactions involving acceptance of Bitcoin are voluntary in nature, therefore it does not seem that Bitcoin is an instrument that can be used to create a financial liability.

However this does not mean that the RBI cannot regulate Bitcoins or transactions involving Bitcoins. The RBI can very well notify Bitcoins as “currency” and then come out with rules and regulations for Bitcoin transactions. Cynics may argue that this is not possible due to the peer to peer nature of Bitcoins and the Bitcoin network but it would be possible for them to target Bitcoin exchanges which is the entry point for most users of Bitcoin.

Can Bitcoins be considered as Securities?

The term “securities” is defined in section 2 (h) of the Securities Contracts (Regulation) Act, 1955 in the following manner. Bitcoin does not come within any of the parts of the definition of securities, other than possibly ‘derivative’. Apart from the term derivative, the only other way in which Bitcoins can be brought under the definition of ‘securities’ is if the Central Government notifies Bitcoins as such since the Central Government has the power to declare any instrument as a ‘security’. In such a scenario it will be the entire gamut of regulations governing securities including the various rules and regulations prescribed by the Securities and Exchange Board of India (SEBI). Another argument is that Bitcoin may fall under the definition of a “derivative”.

Can Bitcoins be considered as a Derivatives or a Negotiable Instruments?

The definition of “derivative” under the SCRA. Bitcoin is not a security and therefore would not satisfy the first part of the definition of “derivative” within the SCRA. Further since Bitcoin is only a voluntary currency based on two parties, therefore Bitcoin can also not be described as a contract which derives its value from the prices or index of prices of underlying securities. Therefore it is clear that Bitcoin would not satisfy the requirements of being a derivative under the SCRA. Under Indian law, another definition of the term derivative is provided under the Reserve Bank of India Act, 1934 defines “derivative” in section 17(6A).

Since Bitcoins are used as currency because Bitcoin users think it has inherent and not because its value is derived from any other underlying thing or object, therefore Bitcoin cannot be said to fall under the definition of “derivative” under the Reserve Bank of India Act, 1934 either.

The term negotiable instrument on the other hand is defined in the Negotiable Instruments Act, 1881. Since the terms promissory note, bill of exchange or cheque are easily understood in trading parlance, it suffices to say that Bitcoins do not fall under the definitions of any of these terms under the Act.

Can Bitcoin be Classified as a Prepaid Payment Instrument?

In exercise of its powers under Section 18 of the Payment and Settlement Systems Act, 2007 the RBI on April 27, 2009 issued policy guidelines governing institutions issuing prepaid payment instruments such as mobile wallets, Paypal, etc. In these guidelines the term Prepaid Payment Instrument is defined.

Since Prepaid Payment Instruments have a definite value stored on them which is equal to the amount paid by the holders in cash or by debit or credit card, it seems that Bitcoins cannot be classified as Prepaid Payment Instruments since there is no static value stored in Bitcoins, rather they have an inherent value. In other words the amount of money that a person pays to buy Bitcoin does not represent the value of the Bitcoins that the person is buying, rather the value (or exchange rate) of Bitcoins keeps changing on a daily basis. Therefore Bitcoins cannot be classified as prepaid payment instruments.

What can Bitcoins be Classified As?

As discussed above, Bitcoins cannot be classified as regular financial instruments such as ‘currency’, ‘security’, ‘derivative’ or ‘negotiable instruments’ as these instruments are currently defined under Indian law. What therefore, should be the legal treatment of Bitcoins under Indian law? Bitcoins are essentially lines of code which create the system of transfer of Bitcoin currency from one account to another. The Indian Copyright Act defines the term “computer programme”. Based on this definition as well as the generally understood meaning of computer programme it would be fairly safe to say that Bitcoins would fall under the definition of the term “computer programme”. Now the General Clauses Act, 1897 defines the term movable property as property of every description, except immovable property. Immovable property has been defined to include land, benefits arising out of land or things attached to the earth or permanently fastened to anything attached to the earth. Clearly a computer programme would not fit into the definition of immovable property and therefore it can be said that a computer programme, and by logical extension, Bitcoins should be considered as movable property. Further the Forward Contracts (Regulation) Act, 1952 also defines goods. Bitcoins would also fulfill this condition and be generally defined as goods under Indian law.

A version of this post was published here

(c) Centre for Internet & Society. 

The Centre for Internet and Society is a non-profit research organization that works on policy issues relating to freedom of expression, privacy, accessibility for persons with disabilities, access to knowledge and IPR reform, and openness (including open government, FOSS, open standards, etc.), and engages in academic research on digital natives and digital humanities.


  • Vasu Nigam

    In Tata Consultancy Services v. State of Andhra Pradesh 271 ITR 401 (2004), the Supreme Court considered computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (Shrink-wrapped) or uncanned (customized), whether it comes as part of computer or independently , whether it is branded or unbranded, tangible or intangible; is a commodity capable of being transmitted, transferred, delivered, stored , processed , etc. and therefore as a ‘good’ liable To sale tax.

    The court stated that, ‘it would become goods provided it has the attributes thereof having regards to (a) its ability; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods.’

    In bitcoin transactions, there is no transfer of software, only a change in value in one account and addition of value in another. Unlike an eBook or a software actually being transferred, even though on a virtual platform.

    In this regard, bitcoin cannot be called a ‘good.’